As filed with the Securities and Exchange Commission on December 21, 2004
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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) |
Lisa Snow, Esquire |
Teachers Insurance and Annuity Association of America |
730 Third Avenue |
New York, New York 10017-3206 |
(212) 490-9000 |
(Name, address, including zip code, and telephone number, |
including area code, of agent for service) |
Copy to:
Steven B. Boehm, Esquire
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of the registration statement.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, 333-59778, 333-83964 and 333-113602.
Title of each class of | Amount to be | Proposed maximum | Proposed maximum | Amount of | |||
securities to be | registered | offering price per | offering price | registration fee | |||
registered | unit | ||||||
Accumulation units | * | * | $6,000,000,000** | $706,200** | |||
in TIAA REAL | |||||||
ESTATE | |||||||
ACCOUNT | |||||||
* The securities are not issued in predetermined amounts or units, and the maximum aggregate offering price is estimated solely for purposes of determining the registration fee pursuant to Rule 457(o) under the Securities Act.
** The difference between the $300,000,000, $1,000,000,000, $5,000,000,000, $500,000,000, $2,000,000,000 and $1,275,000,000 of securities registered on Securities Act registration statements Nos. 33-92990, 333-13477, 333-22809, 333-59778, 333-83964 and 333-113602 (for which registration fees of $103,448.28, $303,031.31, $1,515,151.52, $125,000, and $161,542.50, respectively, were paid therewith) and the dollar amount of securities sold thereunder is being carried forward on this registration statement pursuant to Rule 429 under the Securities Act.
Prospectus - December 22, 2004
TIAA Real Estate Account
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 9.
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 0.600%.
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:
- • RA and GRAs (Retirement and Group Retirement Annuities), Retirement Select contracts and Retirement Select Plus contracts
• SRAs (Supplemental Retirement Annuities)
• GSRAs (Group Supplemental Retirement Annuities)
• Classic and Roth IRAs (Individual Retirement Annuities)
• GAs (Group Annuities) and Institutionally-Owned GSRAs
• Keoghs
• ATRAs (After-Tax Retirement Annuities)
Note that state regulatory approval is pending for certain of these contracts and they may not currently be available in your state.
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.
Table of Contents
About the Real Estate Account and TIAA | 3 | |
The Account’s Investment Objective and Strategy | 3 | |
About the Account’s Investments — In General | 4 | |
General Investment and Operating Policies | 6 | |
Risks | 9 | |
Establishing and Managing the Account — The Role of TIAA | 13 | |
Description of Properties | 17 | |
Selected Financial Data | 31 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 34 | |
Quantitative and Qualitative Disclosures About Market Risk | 46 | |
Valuing the Account’s Assets | 47 | |
Expense Deductions | 50 | |
The Contracts | 52 | |
How to Transfer and Withdraw Your Money | 56 | |
Receiving Annuity Income | 59 | |
Death Benefits | 64 | |
Taxes | 65 | |
General Matters | 69 | |
Distribution | 70 | |
State Regulation | 71 | |
Legal Matters | 71 | |
Experts | 71 | |
Additional Information | 72 | |
Financial Statements | 73 | |
Additional Developments | 73 | |
Index to Financial Statements | 75 | |
Appendix A — Management of TIAA | 138 | |
Appendix B — Special Terms | 140 |
Please see Appendix B for definitions of certain special terms used in this prospectus.
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.
2 | Prospectus TIAA Real Estate Account
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 September 30, 2004, TIAA’s general account had a mortgage and real property portfolio of approximately $24.8 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 3.2 million people at over 15,000 institutions. As of September 30, 2004, TIAA’s assets were approximately $163.3 billion; the combined assets for TIAA and CREF totaled approximately $326.3 billion.
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 mortgage-backed securities.
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
TIAA Real Estate Account Prospectus | 3
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 September 30, 2004, the Account had approximately 87.0 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 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 (i.e., principal is paid over the course of the loan), or may provide for interest-only payments, with a balloon payment at maturity.
4 | Prospectus TIAA Real Estate Account
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 income 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:
• | renegotiating and restructuring the terms of a mortgage loan | |
• | extending the maturity of any mortgage loan made by the Account | |
• | consenting to a sale of the property subject to a mortgage loan | |
• | financing the purchase of a property by making a new mortgage loan in connection with the sale | |
• | 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 maximize 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 at least 90% of their taxable income 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 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.
Mortgage-Backed Securities: The Account can invest in mortgage-backed securities and other mortgage-related or asset-backed instruments, including commercial mortgage-backed securities (CMBSs), residential mortgage-backed securities, mortgage-backed securities issued or guaranteed by agencies or instrumentalities of the U.S. Government, non-agency mortgage instruments, and collateralized mortgage obligations that are fully collateralized by a portfolio of mortgages or mortgage-related securities. Mortgage-backed securities are instruments that directly or indirectly represent a participation in, or are secured by and payable from, one or more mortgage loans secured by real estate. In most cases, mortgage-backed securities distribute principal and interest payments on the mortgages to investors. Interest rates on these instruments can be fixed or variable. Some classes of mortgage-backed securities may be entitled to receive mortgage prepayments before other classes do. Therefore, the prepayment risk for a particular instrument may be different than for other mortgage-related securities.
TIAA Real Estate Account Prospectus | 5
Investment Vehicles Involved in Real Estate Activities: The Account can hold interests in limited partnerships, funds, and other commingled investment vehicles involved in real estate-related activities, including owning, financing, managing, or developing real estate.
Non-Real Estate-Related Investments
The Account can also invest in:
• | U.S. government or government agency securities | |
• | 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. | |
• | 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) | |
• | 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:
• | the location, condition, and use of the underlying property | |
• | its operating history, and its future income-producing capacity | |
• | 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.
6 | Prospectus TIAA Real Estate Account
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.
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. In addition, TIAA’s appraisal staff will perform a valuation of each real estate property on a quarterly basis. 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:
• | The Account may borrow money when it buys a property that is already subject to existing mortgage loans | ||
• | The Account may take out a mortgage on a property with a joint venture partner | ||
• | 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 | ||
• | To meet short-term cash needs, the Account may obtain a line of credit whose terms require that the Account secure loans under the line of credit 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
TIAA Real Estate Account Prospectus | 7
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 TIAA 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 9.
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 policies on its properties 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.
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
8 | Prospectus TIAA Real Estate Account
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. 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:
• | 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. | |
• | A property may be unable to attract and retain tenants, which means that rental income would decline. | |
• | 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. | |
• | 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:
• | The sale price of an Account property might differ from its estimated or appraised value, leading to losses or reduced profits to the Account. | |
• | 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. | |
• | 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:
TIAA Real Estate Account Prospectus | 9
• | 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. | |
• | 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. | |
• | 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:
• | In 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. |
10 | Prospectus TIAA Real Estate Account
• | 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. | |
• | 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.
• | The co-venturer may have interests or goals inconsistent with those of the Account. | |
• | If a co-venturer doesn’t follow the Account’s instructions or adhere to the Account’s policies, the jointly-owned properties, and consequently the Account, might be exposed to greater liabilities than expected. | |
• | A co-venturer 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. | |
• | 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:
• | The borrower may default, requiring that the Account foreclose on the underlying property to protect the value of its mortgage loan. Since its mortgage loans are usually non-recourse, the Account must rely solely on the value of a property for its security. The larger the mortgage loan compared to the value of the property securing it, the greater the loan’s risk. Upon default, the Account may not be able to sell the property for its estimated or appraised value. Also, certain liens on the property, such as mechanic’s or tax liens, may have priority over the Account’s security interest. |
TIAA Real Estate Account Prospectus | 11
• | A deterioration in the financial condition of tenants, or the bankruptcy or insolvency of a major tenant, may adversely affect the income of a property, which could increase the likelihood that the borrower will default under its obligations. | |
• | 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. | |
• | 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:
• | The participation element might generate insufficient returns to make up for the higher interest rate the loan would have obtained without the participation feature. | |
• | 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 Mortgage-Backed Securities
Mortgage-backed securities are subject to many of the same general risks inherent in real estate investing, making mortgage loans and investing in debt securities. In particular, these types of investments may be subject to prepayment risk — i.e., the risk that borrowers will repay the loans early. If the underlying mortgage assets experience greater than anticipated payments of principal, the Account could fail to recoup some or all of its initial investment in these securities, since the original price paid by the Account is based in part on assumptions regarding the receipt of interest payments. The rate of prepayments depends on a variety of geographic, social and other functions, including prevailing market interest rates and general economic factors.
12 | Prospectus TIAA Real Estate Account
The market value of these securities is also highly sensitive to changes in interest rates. Note that the potential for appreciation, which could otherwise be expected to result from a decline in interest rates, may be limited by any increased prepayments.
These securities may be harder to sell than other securities.
Risks of Liquid Investments
The Account’s investments in securities and other liquid investments may be subject to:
• | 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. | |
• | market risk — price volatility due to changing conditions in the financial markets and, particularly for debt securities, changes in overall interest rates. | |
• | interest rate volatility, which may affect current income from an investment. |
Risks of Foreign Investments
Foreign investments present the following special risks:
• | Foreign real estate markets may have different liquidity and volatility attributes than U.S. markets. | |
• | 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. | |
• | 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. | |
• | 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,
TIAA Real Estate Account Prospectus | 13
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:
• | identifying, recommending and purchasing appropriate real estate-related and other investments | |
• | providing all portfolio accounting, custodial, and related services for the Account | |
• | 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” on page 50.
You don’t have the right to vote for TIAA Trustees directly. See “Voting Rights” page 69. For information about the Trustees and principal executive officers of TIAA, see Appendix A of this prospectus.
TIAA’s ERISA Fiduciary Status. To the extent that assets of a plan subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA) are allocated to the Account, TIAA will be acting as an “investment manager” and a fiduciary under ERISA with respect to those assets.
Liquidity Guarantee
TIAA provides the Account with a liquidity guarantee — TIAA ensures that the Account has funds available to meet participant transfer or cash withdrawal requests. If the Account can’t fund participant requests from the Account, TIAA’s general account will fund them by purchasing Account accumulation units (liquidity units). TIAA guarantees that you can redeem your accumulation units at their then current daily net asset value. Of course, you can make a cash withdrawal only if allowed by the terms of your plan. The Account pays TIAA for the liquidity guarantee through a daily deduction from net assets. See “Expense Deductions,” page 50.
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.
14 | Prospectus TIAA Real Estate Account
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 and investments managed by Teachers Advisors, Inc. (“Advisors”), an indirect, wholly-owned subsidiary of TIAA. It may therefore at times face various conflicts of interest.
For example, TIAA’s general account and the TIAA-CREF Asset Management Core Property Fund LP, (the “Core Property Fund”) managed by Advisors, may sometimes compete with the Real Estate Account in the purchase or sale of investments. (Each of TIAA’s general account, the Real Estate Account and the Core Property Fund are herein referred to as an “account.”) A special TIAA Allocation Committee will seek to resolve any conflict by considering which account has the relative cash available as a percentage of the account’s total gross value to make the purchase, the effect the purchase or sale will have on the diversification of each account’s portfolio, the investment strategy fit for a particular account, 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 and the Core Property Fund may compete for tenants with the Real Estate 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 the Real Estate Account, the general account, and the Core Property Fund 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, to the extent permitted by law, 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.
TIAA Real Estate Account Prospectus | 15
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:
• | reviewing and approving the Account’s investment guidelines and monitoring whether the Account’s investments comply with those guidelines | |
• | reviewing and approving valuation procedures | |
• | 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 | |
• | reviewing and approving how we value accumulation and annuity units | |
• | approving the appointment of all independent appraisers | |
• | reviewing the purchase and sale of units by TIAA to ensure that we use the correct unit values | |
• | 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:
• | 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 | |
• | approving any adjustment of TIAA’s interest in the Account and requiring an adjustment if TIAA’s investment reaches the trigger point | |
• | 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, for a new three-year term, starting March 1, 2003. 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
16 | Prospectus TIAA Real Estate Account
acknowledging that you approve and accept The Townsend Group or any successor to serve as the Account’s independent fiduciary.
Description of Properties |
The Properties—In General
As of September 30, 2004, the Account owned a total of 101 real estate properties, whose value on that date represented approximately 81.5% of the Account’s total investment portfolio. This real estate portfolio includes 40 office properties (five of which are held in consolidated joint ventures and two of which are held in unconsolidated joint ventures), 28 industrial properties, 22 apartment complexes, 10 retail properties (including three unconsolidated joint ventures, each owning a regional mall, in which the Account owns a 50% partnership interest), and a 75% consolidated joint venture partnership interest in a portfolio of storage facilities.
In the table on the next page you will find general information about each of the Account’s portfolio properties as of September 30, 2004.
TIAA Real Estate Account Prospectus | 17
Properties (continued)
Annual Avg. | ||||||||||||||
Year | Year | Rentable Area | Percent | Base Rent per | ||||||||||
Property | Location | Built | Purchased | (sq. ft.)(1) | Leased | Leased Sq. Ft.(2) | Market Value(3) | |||||||
OFFICE PROPERTIES | ||||||||||||||
Mellon Financial Center at One Boston Place(4) | Boston, MA | 1970 | (5) | 2002 | 782,241 | 90 | % | $35.89 | $275,000,000 | |||||
Four Oaks Place | Houston,TX | 1983 | 2004 | 1,762,616 | 89 | % | $21.61 | $255,357,238 | ||||||
Colorado Center(6) | Santa Monica, CA | 1984 | 2004 | 1,082,952 | 83 | % | $32.27 | $223,435,699 | ||||||
161 North Clark Street(7) | Chicago, IL | 1992 | 2003 | 1,010,520 | 98 | % | $15.14 | $210,357,385 | ||||||
780 Third Avenue | New York, NY | 1984 | 1999 | 487,501 | 87 | % | $43.96 | $190,000,000 | ||||||
701 Brickell | Miami, FL | 1986 | (5) | 2002 | 677,667 | 92 | % | $24.44 | $174,040,353 | |||||
Ten & Twenty Westport Road | Wilton, CT | 1974 | (5); 2001 | 2001 | 538,840 | 100 | % | $25.15 | $148,005,670 | |||||
Treat Towers(7) | Walnut Creek, CA | 1999 | 2003 | 367,313 | 100 | % | $32.14 | $119,519,868 | ||||||
Prominence in Buckhead(7) | Atlanta, GA | 1999 | 2003 | 424,309 | 95 | % | $26.37 | $105,478,853 | ||||||
Morris Corporate Center III | Parsippany, NJ | 1990 | 2000 | 525,154 | 88 | % | $21.65 | $85,400,000 | ||||||
Corporate Boulevard | Rockville, MD | 1984-1989 | 2002 | 339,786 | 90 | % | $22.08 | $70,000,000 | ||||||
Oak Brook Regency Towers | Oakbrook, IL | 1977 | (5) | 2002 | 402,318 | 76 | % | $14.20 | $68,100,000 | |||||
Centerside I | San Diego, CA | 1982 | 2004 | 205,137 | 90 | % | $28.80 | $65,000,000 | ||||||
88 Kearny Street | San Francisco, CA | 1986 | 1999 | 228,470 | 79 | % | $32.77 | $64,077,351 | ||||||
1015 15th Street | Washington, DC | 1978 | (5) | 2001 | 184,825 | 90 | % | $30.44 | $60,000,000 | |||||
Sawgrass Office Portfolio | Sunrise, FL | 1997-2000 | 1997, | 344,009 | 91 | % | $13.19 | $50,501,250 | ||||||
1999-2000 | ||||||||||||||
West Lake North Business Park | Westlake Village,CA | 2000 | 2004 | 198,558 | 91 | % | $27.84 | $49,500,000 | ||||||
Parkview Plaza(8) | Oakbrook, IL | 1990 | 1997 | 266,020 | 96 | % | $19.24 | $48,000,000 | ||||||
The Farragut Building | Washington, DC | 1962 | (5) | 2002 | 146,792 | 56 | % | $25.64 | $46,500,000 | |||||
One Virginia Square | Arlington,VA | 1999 | 2004 | 117,967 | 100 | % | $31.68 | $42,428,275 | ||||||
Capitol Place | Sacramento, CA | 1988 | (5) | 2003 | 151,803 | 93 | % | $24.87 | $42,418,500 | |||||
The Pointe on Tampa Bay | Tampa, FL | 1982 | (5) | 2002 | 249,215 | 88 | % | $20.15 | $40,577,392 | |||||
3 Hutton Centre | Santa Ana, CA | 1985 | (5) | 2003 | 197,817 | 92 | % | $22.36 | $40,423,955 | |||||
Monument Place | Fairfax, VA | 1990 | 1999 | 221,538 | 97 | % | $17.89 | $37,000,000 | ||||||
Maitland Promenade One | Maitland, FL | 1999 | 2000 | 227,814 | 94 | % | $19.21 | $36,017,751 | ||||||
BISYS Fund Services Building(9) | Eaton, OH | 1995;2002 | 1999; 2002 | 155,964 | 100 | % | $14.64 | $35,700,000 | ||||||
4200 West Cypress Street | Tampa, FL | 1989 | 2003 | 220,579 | 99 | % | $17.80 | $32,528,132 |
18 | Prospectus TIAA Real Estate Account
Biltmore Commerce Center | Phoenix, AZ | 1985 | 1999 | 259,792 | 88 | % | $18.21 | $31,502,060 | |||
Columbia Centre III | Rosemont, IL | 1989 | 1997 | 238,696 | 69 | % | $15.95 | $30,100,000 | |||
Fairgate at Ballston(8) | Arlington, VA | 1988 | 1997 | 137,117 | 50 | % | $14.85 | $28,500,000 | |||
Tysons Executive Plaza II(10) | McLean, VA | 1988 | 2000 | 252,552 | 88 | % | $22.74 | $27,140,804 | |||
10 Waterview Boulevard | Parsippany, NJ | 1984 | 1999 | 209,553 | 64 | % | $14.29 | $27,000,000 | |||
9 Hutton Centre | Santa Ana, CA | 1990 | 2001 | 148,265 | 82 | % | $14.27 | $22,321,856 | |||
Columbus Portfolio | 259,626 | 73 | % | $9.23 | $21,500,000 | ||||||
Metro South Building | Dublin, OH | 1997 | 1999 | 90,726 | 67 | % | |||||
Vision Service Plan Building | Eaton, OH | 1997 | 1999 | 50,000 | 100 | % | |||||
One Metro Place | Dublin, OH | 1998 | 2001 | 118,900 | 66 | % | |||||
Longview Executive Park(8) | Hunt Valley, MD | 1988 | 1997 | 258,999 | 10 | % | $3.25 | $19,500,000 | |||
Five Centerpointe(8) | Lake Oswego, OR | 1988 | 1997 | 113,910 | 88 | % | $18.55 | $14,000,000 | |||
Needham Corporate Center | Needham, MA | 1987 | 2001 | 138,684 | 100 | % | $23.50 | $11,640,984 | |||
Batterymarch Park II | Quincy, MA | 1986 | 2001 | 104,718 | 69 | % | $18.68 | $10,700,000 | |||
371 Hoes Lane | Piscataway, NJ | 1986 | 1997 | 139,670 | 78 | % | $6.65 | $10,700,000 | |||
Northmark Business Center(8) | Blue Ash, OH | 1985 | 1997 | 108,561 | 0 | %(12) | $2.93 | $5,200,000 | |||
Subtotal—Office Properties | $2,875,173,376 | ||||||||||
INDUSTRIAL PROPERTIES | |||||||||||
Dallas Industrial Portfolio | Dallas and Coppell, TX | 1997-2001 | 2000-2002 | 3,763,886 | 80 | % | $2.98 | $140,000,000 | |||
(formerly Parkwest Center) | |||||||||||
Ontario Industrial Portfolio | 3,584,769 | 100 | % | $3.57 | $179,337,691 | (11) |
(1) | The square footage is an approximate measure and is subject to periodic remeasurement. |
(2) | Based on total contractual rent on leases existing as of September 30, 2004. For those properties purchased in third quarter of 2004, the rent is based on the existing leases as of the date of purchase. |
(3) | Market value reflects the value determined in accordance with the procedures described in theAccount’s prospectus and as stated in the Consolidated Statement of Investments. |
(4) | The Account purchased a 50.25% interest in a private REIT, which owns this property. A 49.70% interest is owned by Societe Immobiler Trans-Quebec, and .05% is owned by 100individuals. |
(5) | Undergone extensive renovations since original construction. |
(6) | Property held in 50%/50% joint venture with Equity Office Portfolio Trust. Market value shown reflects the value of the Account’s interest in the property. |
(7) | Property held in a 75%/25% joint venture with Equity Office Properties. |
(8) | Purchased through Light Street Partners, L.P. (now 100% owned by the Account). |
(9) | Property held in 96%/4% joint venture with Georgetown BISYS Phase II LLC. Phase II was purchased in 2002. |
(10) | 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. |
(11) | Market value shown represents the Account’s interest before debt. |
(12) | Property was sold on November 23, 2004. |
TIAA Real Estate Account Prospectus | 19
Properties (continued)
Annual Avg. | ||||||||||||||
Year | Year | Rentable Area | Percent | Base Rent per | ||||||||||
Property | Location | Built | Purchased | (sq. ft.)(1) | Leased | Leased Sq. Ft.(2) | Market Value(3) | |||||||
INDUSTRIAL PROPERTIES (CONTINUED) | ||||||||||||||
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 | ||||||||||
Harrell Street | Mira Loma, CA | 1998 | 2004 | 886,052 | ||||||||||
RREEF America Southern California Portfolio | Los Angeles, CA | 1982 | 2004 | 920,028 | 96 | % | $6.92 | $88,832,725 | ||||||
Chicago Industrial Portfolio | Chicago and Joliet, IL | 1997-2000 | 1998; 2000 | 1,325,134 | 90 | % | $3.44 | $69,840,912 | ||||||
(consolidation of Rockrun, | ||||||||||||||
Glen Pointe and | ||||||||||||||
Woodcreek Business Parks) | ||||||||||||||
RREEF America Northern California Portfolio | Oakland,CA | 1981 | 2004 | 741,456 | 97 | % | $5.20 | $59,040,654 | ||||||
Cabot Industrial Portfolio | Rancho Cucamonga, CA | 2000-2002 | 2000; 2001; 2002 | 1,214,475 | 100 | % | $3.44 | $57,800,000 | ||||||
Rainier Corporate Park | Fife, WA | 1991-1997 | 2003 | 1,104,646 | 99 | % | $3.56 | $54,000,000 | ||||||
IDI Kentucky Portfolio | ||||||||||||||
(formerly, Parkwest Int’l) | 1,437,022 | 100 | % | $3.44 | $48,842,583 | |||||||||
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 | ||||||||||
Memphis CALEast Industrial Portfolio | Memphis, TN | 1996-1997 | 2003 | 1,600,232 | 83 | % | $1.79 | $46,100,000 | ||||||
Northpointe Commerce Center | Fullerton, CA | 1990-1994 | 2000 | 612,023 | 76 | % | $4.50 | $42,700,000 | ||||||
Chicago CALEast Industrial Portfolio | Chicago, IL | 1974-1999 | 2003 | 834,549 | 96 | % | $3.88 | $41,400,000 | ||||||
New Jersey CALEast Industrial Portfolio | Cranbury, NJ | 1982-1989 | 2003 | 807,773 | 100 | % | $4.40 | $39,300,000 | ||||||
Atlanta Industrial Portfolio | Lawrenceville, GA | 1996-99 | 2000 | 1,145,693 | 76 | % | $2.33 | $38,000,000 | ||||||
RREEF America Northeast Portfolio | Boston,MA | 2000 | 2004 | 384,000 | 100 | % | $6.50 | $33,077,653 | ||||||
South River Road Industrial | Cranbury, NJ | 1999 | 2001 | 626,071 | 100 | % | $3.18 | $33,000,000 | ||||||
RREEF America EN Central Portfolio | Chicago,IL | 1978 | 2004 | 612,756 | 81 | % | $3.99 | $23,661,072 |
20 | Prospectus TIAA Real Estate Account
Summit Distribution Center | Memphis, TN | 2002 | 2003 | 708,532 | 100 | % | $2.52 | $23,300,000 | ||||
Konica Photo Imaging Headquarters | Mahwah, NJ | 1999 | 1999 | 168,000 | 100 | % | $10.30 | $21,000,000 | ||||
RREEF America Northwest Portfolio | Seattle, WA | 1996 | 2004 | 312,321 | 100 | % | $4.54 | $19,412,990 | ||||
Eastgate Distribution Center | San Diego, CA | 1996 | 1997 | 200,000 | 100 | % | $6.58 | $18,300,000 | ||||
RREEF America Mideast Portfolio | Wilmington, DE | 1989 | 2004 | 266,141 | 82 | % | $5.65 | $16,518,688 | ||||
UPS Distribution Facility | Fernley, NV | 1998 | 1998 | 256,000 | 100 | % | $4.07 | $12,900,000 | ||||
Landmark at Salt Lake City Building #4 | Salt Lake City, UT | 2000 | 2000 | 328,508 | 100 | % | $3.98 | $12,500,000 | ||||
FEDEX Distribution Facility | Crofton, MD | 1998 | 1998 | 111,191 | 100 | % | $7.18 | $8,100,000 | ||||
Interstate Crossing | Eagan, MN | 1995 | 1996 | 131,380 | 88 | % | $4.44 | $6,525,088 | ||||
RREEF America Mountain Portfolio | Phoenix, AZ | 1989 | 2004 | 136,704 | 67 | % | $3.46 | $5,504,662 | ||||
Butterfield Industrial Park | El Paso, TX | 1980-81 | 1995 | 183,510 | 100 | % | $2.69 | $4,600,000 | ||||
River Road Distribution Center | Fridley, MN | 1995 | 1995 | 100,456 | 100 | % | $4.23 | $4,150,000 | ||||
SUBTOTAL—INDUSTRIAL PROPERTIES | $1,147,744,718 | |||||||||||
RETAIL PROPERTIES | ||||||||||||
The Florida Mall(4) | Orlando, FL | 1986 | (5) | 2002 | 921,370 | (6) | 98 | % | $36.72 | $158,315,354 | (7) | |
West Town Mall(4) | Knoxville, TN | 1972 | (5) | 2002 | 684,777 | (6) | 98 | % | $19.81 | $105,577,622 | (7) | |
Mazza Gallerie | Chevy Chase, MD | 1975 | 2004 | 293,935 | 94 | % | $35.85 | $80,000,000 | ||||
Westwood Marketplace | Los Angeles, CA | 1950 | (8) | 2002 | 202,201 | 100 | % | $26.97 | $77,000,000 | |||
Miami International Mall(4) | Miami, FL | 1982 | (5) | 2002 | 290,299 | (6) | 95 | % | $31.49 | $60,357,331 | (7) | |
The Market at Southpark | Littleton,CO | 1988 | 2004 | 190,080 | 95 | % | $17.37 | $33,429,560 |
(1) | The square footage is an approximate measure and is subject to periodic remeasurement. | ||
(2) | Based on total contractual rent on leases existing as of September 30, 2004. For those properties purchased in third quarter of 2004, the rent is based on the existing leases as of the date of purchase. | ||
(3) | Market value reflects the value determined in accordance with the procedures described in the Account’s prospectus and as stated in the Consolidated Statement of Investments. | ||
(4) | The property is held in a 50%/50% joint venture with the Simon Property Group. | ||
(5) | Undergone extensive renovations since original construction. | ||
(6) | Reflects the square footage owned by the joint venture. | ||
(7) | Market value shown represents the Account’s proportionate interest after debt. | ||
(8) | Total renovation completed in 2001. |
TIAA Real Estate Account Prospectus | 21
Properties (continued)
Annual Avg. | ||||||||||||||
Year | Year | Rentable Area | Percent | Base Rent per | ||||||||||
Property | Location | Built | Purchased | (sq. ft.)(1) | Leased | Leased Sq. Ft.(2) | Market Value(3) | |||||||
RETAIL PROPERTIES (CONTINUED) | ||||||||||||||
Rolling Meadows | Rolling Meadows, IL | 1957 | (4) | 1997 | 130,909 | 99 | % | $10.95 | $14,800,000 | |||||
Plantation Grove | Ocoee, FL | 1995 | 1995 | 73,655 | 100 | % | $11.02 | $10,700,000 | ||||||
The Lynnwood Collection | Raleigh, NC | 1988 | 1996 | 86,362 | 100 | % | $9.45 | $8,400,000 | ||||||
The Millbrook Collection | Raleigh, NC | 1988 | 1996 | 102,221 | 72 | % | $6.00 | $6,100,000 | ||||||
SUBTOTAL—RETAIL PROPERTIES | $554,679,867 | |||||||||||||
SUBTOTAL—COMMERCIAL PROPERTIES | $4,577,597,961 | |||||||||||||
RESIDENTIAL PROPERTIES(5) | ||||||||||||||
The Legacy at Westwood Apartments | Los Angeles, CA | 2001 | 2002 | NA | 97 | % | NA | $86,500,000 | ||||||
Longwood Towers | Brookline, MA | 1926 | (4) | 2002 | NA | 95 | % | NA | $78,000,000 | |||||
Ashford Meadows Apartments | Herndon, VA | 1998 | 2000 | NA | 98 | % | NA | $67,000,228 | ||||||
The Colorado | New York, NY | 1987 | 1999 | NA | 100 | % | NA | $58,073,061 | ||||||
Larkspur Courts | Larkspur, CA | 1991 | 1999 | NA | 97 | % | NA | $57,100,000 | ||||||
Regents Court Apartments | San Diego, CA | 2001 | 2002 | NA | 99 | % | NA | $56,500,000 | ||||||
Doral Pointe Apartments | Miami, FL | 1990 | 2001 | NA | 95 | % | NA | $55,011,883 | ||||||
South Florida Apartment Portfolio | Boca Raton and Plantation, FL | 1986 | 2001 | NA | 98 | % | NA | $48,000,000 | ||||||
Alexan Buckhead | Atlanta, GA | 2002 | 2002 | NA | 97 | % | NA | $37,500,000 | ||||||
The Lodge at Willow Creek | Denver, CO | 1997 | 1997 | NA | 91 | % | NA | $32,200,000 | ||||||
Golfview Apartments | Lake Mary, FL | 1998 | 1998 | NA | 99 | % | NA | $27,765,787 | ||||||
Lincoln Woods Apartments | Lafayette Hill, PA | 1991 | 1997 | NA | 98 | % | NA | $27,301,678 | ||||||
The Legends at Chase Oaks | Plano, TX | 1997 | 1998 | NA | 96 | % | NA | $26,999,927 | ||||||
Kenwood Mews Apartments | Burbank, CA | 1991 | 2001 | NA | 97 | % | NA | $25,592,033 | ||||||
Westcreek Apartments | Westlake Village, CA | 1988 | 1997 | NA | 95 | % | NA | $25,513,821 | ||||||
Monte Vista | Littleton, CO | 1995 | 1996 | NA | 92 | % | NA | $22,306,264 | ||||||
Quiet Waters at Coquina Lakes | Deerfield Beach, FL | 1995 | 2001 | NA | 97 | % | NA | $19,415,000 | ||||||
Royal St. George | W. Palm Beach, FL | 1995 | 1996 | NA | 96 | % | NA | $19,400,000 | ||||||
Indian Creek Apartments | Farmington Hills, MI | 1988 | 1998 | NA | 97 | % | NA | $18,000,000 |
22 | Prospectus TIAA Real Estate Account
The Fairways of Carolina | Margate, FL | 1993 | 2001 | NA | 96 | % | NA | $17,900,000 | |||||
The Greens at Metrowest Apartments | Orlando, FL | 1990 | 1995 | NA | 97 | % | NA | $14,300,000 | |||||
Bent Tree Apartments | Columbus, OH | 1987 | 1998 | NA | 95 | % | NA | $13,300,000 | |||||
SUBTOTAL—RESIDENTIAL PROPERTIES | $833,679,682 | ||||||||||||
OTHER COMMERCIAL PROPERTIES | |||||||||||||
Storage Portfolio I, LLC(6) | Various, U.S. | 1972-1990 | 2003 | 2,230,743 | 80 | % | $12.64 | $177,079,181 | |||||
TOTAL—ALL PROPERTIES | $5,588,356,824 | ||||||||||||
(1) | The square footage is an approximate measure and is subject to periodic remeasurement. |
(2) | Based on total contractual rent on leases existing as of September 30, 2004. For thoseproperties purchased in third quarter of 2004, the rent is based on the existing leases as of the date of purchase. |
(3) | Market value reflects the value determined in accordance with the procedures described in theAccount’s prospectus and as stated in the Consolidated Statement of Investments. |
(4) | Undergone extensive renovations since original construction. |
(5) | For the average unit size and annual and annual average rent per unit for each residential property,see “Residential Properties” below. |
(6) | Property held in 75%/25% joint venture with Storage USA. |
TIAA Real Estate Account Prospectus | 23
COMMERCIAL (NON-RESIDENTIAL) PROPERTIES
In General.As of September 30, 2004, the Account held 79 commercial (non-residential) properties in its portfolio. Eleven of these properties are held through joint ventures, five of which are subject to mortgages. 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.
The Account’s portfolio is well diversified by property type and geographic location. As of September 30, 2004 the portfolio consisted of 40 office properties containing approximately 14.0 million square feet located in 14 states and the District of Columbia; 28 industrial properties containing 23.6 million square feet located in 14 states; and 10 retail properties containing approximately 3.1 million square feet located in 6 states and the District of Columbia. In addition, the Account has a 75% interest in a portfolio of storage facilities located throughout the United States.
As of September 30, 2004, the overall occupancy rate of Account’s commercial real estate portfolio was 90% on a weighted average basis. Office properties were 86% leased, industrial properties were 92% leased, and retail properties were 97% leased.
Major Tenants:The following table lists the Account’s major commercial tenants based on the total space they occupied as of June 30, 2004 in the Account’s properties.
Percentage of | |||||
Percentage of | Total Rentable | ||||
Total Rentable | Area of Account’s | ||||
Occupied | Area of Account’s | Non-Residential | |||
Square Feet | Office Properties | Properties | |||
MAJOR OFFICE TENANTS | |||||
Accenture | 400,264 | 3.7 | % | 1.2 | % |
The Boston Company | 409,892 | 3.8 | % | 1.2 | % |
Chicago Title & Trust | 264,775 | 2.5 | % | 0.8 | % |
VanKampen | 235,717 | 2.2 | % | 0.7 | % |
BISYS Fund Services | 227,869 | 2.1 | % | 0.7 | % |
Cadbury Adams | 173,788 | 1.6 | % | 0.5 | % |
Marsh USA, Inc. | 172,104 | 1.6 | % | 0.5 | % |
Nortel | 161,811 | 1.4 | % | 0.5 | % |
Ameritech | 151,620 | 1.4 | % | 0.5 | % |
Deloitte & Touche | 137,475 | 1.3 | % | 0.4 | % |
24 | Prospectus TIAA Real Estate Account
Percentage of | |||||
Percentage of | Total Rentable | ||||
Total Rentable | Area of Account’s | ||||
Occupied | Area of Account’s | Non-Residential | |||
Square Feet | Industrial Properties | Properties | |||
MAJOR INDUSTRIAL TENANTS | |||||
Walmart | 1,099,112 | 5.7 | % | 3.3 | % |
The Gap, Inc. | 1,045,000 | 5.4 | % | 3.2 | % |
Hewlett-Packard Company | 708,532 | 3.7 | % | 2.1 | % |
Kaz | 700,000 | 3.6 | % | 2.1 | % |
Wickes Furniture | 573,000 | 3.0 | % | 1.7 | % |
Meiko America | 557,500 | 2.9 | % | 1.7 | % |
New Breed Transfer Corp | 537,900 | 2.8 | % | 1.6 | % |
UPS Worldwide | 523,872 | 2.7 | % | 1.6 | % |
Carrier | 500,000 | 2.6 | % | 1.5 | % |
Cooper Tires & Rubber Co. | 401,226 | 2.1 | % | 1.2 | % |
Percentage of | |||||
Percentage of | Total Rentable | ||||
Total Rentable | Area of Account’s | ||||
Occupied | Area of Account’s | Non-Residential | |||
Square Feet | Retail Properties | Properties | |||
MAJOR RETAIL TENANTS | |||||
JC Penney | 196,931 | 6.9 | % | 0.6 | % |
Proffits | 162,501 | 5.7 | % | 0.5 | % |
Parisian | 143,278 | 5.0 | % | 0.4 | % |
Saks Fifth Avenue | 127,727 | 4.5 | % | 0.4 | % |
Neiman Marcus | 124,314 | 4.3 | % | 0.4 | % |
Kroger | 104,674 | 3.7 | % | 0.3 | % |
Home Depot Expo Design | 98,350 | 3.4 | % | 0.3 | % |
Regal Cinema | 76,580 | 2.7 | % | 0.2 | % |
Jewel-Osco | 62,230 | 2.2 | % | 0.2 | % |
Old Navy | 57,076 | 2.0 | % | 0.2 | % |
Lease Expirations:The following charts provide lease expiration information for theAccount’s commercial properties, categorized by property type as of September 30, 2004. While many of the leases contain renewal options with varying terms, these charts assume that none of the tenants exercise their renewal options.
TIAA Real Estate Account Prospectus | 25
Percentage of Total | ||||
Rentable Area of | ||||
Rentable Area Subject | Account’s Office | |||
to Expiring Leases | Properties Represented | |||
Year of Lease Expiration | (sq. ft.) | by Expiring Leases | ||
OFFICE PROPERTIES | ||||
2004 | 1,219,791 | 8.7 | % | |
2005 | 1,518,344 | 10.9 | % | |
2006 | 1,357,575 | 9.7 | % | |
2007 | 1,595,930 | 11.4 | % | |
2008 | 1,857,257 | 13.3 | % | |
2009 and thereafter | 5,194,040 | 37.2 | % | |
Total | 12,742,937 | 91.2 | % | |
Percentage of Total | ||||
Rentable Area of | ||||
Rentable Area Subject | Account’s Industrial | |||
to Expiring Leases | Properties Represented | |||
Year of Lease Expiration | (sq. ft.) | by Expiring Leases | ||
INDUSTRIAL PROPERTIES | ||||
2004 | 2,051,447 | 8.7 | % | |
2005 | 2,772,907 | 11.7 | % | |
2006 | 3,331,619 | 14.1 | % | |
2007 | 2,327,550 | 9.9 | % | |
2008 | 5,526,784 | 23.4 | % | |
2009 and thereafter | 7,350,838 | 31.1 | % | |
Total | 23,361,145 | 98.9 | % | |
Percentage of Total | ||||
Rentable Area of | ||||
Rentable Area Subject | Account’s Retail | |||
to Expiring Leases | Properties Represented | |||
Year of Lease Expiration | (sq. ft.) | by Expiring Leases | ||
RETAIL PROPERTIES | ||||
2004 | 125,636 | 4.1 | % | |
2005 | 202,587 | 6.6 | % | |
2006 | 159,642 | 5.2 | % | |
2007 | 278,564 | 9.1 | % | |
2008 | 334,263 | 11.0 | % | |
2009 and thereafter | 1,873,602 | 61.4 | % | |
Total | 2,974,294 | 97.4 | % | |
26 | Prospectus TIAA Real Estate Account
RESIDENTIAL PROPERTIES
The Account’s residential property portfolio currently consists of 22 first class or luxury multi-family garden apartment complexes, mid-rise and high rise apartment buildings. The portfolio contains approximately 5,796 units located in 11 states, with an overall occupancy rate of 96%. None of the residential 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 additional information regarding the residential properties in the Account’s portfolio as of September 30, 2004.
Avg. Rent | |||||
Number | Avg. Unit Size | Per Unit/(1) | |||
Property | Location | Of Units | (Square Feet) | Per Month | |
The Legacy at Westwood Apartments | Los Angeles, CA | 187 | 1,180 | $3,852.00 | |
Longwood Towers | Brookline, MA | 268 | 938 | $2,300.00 | |
Ashford Meadows | Herndon, VA | 440 | 1,050 | $1,411.00 | |
The Colorado | New York, NY | 254 | 622 | $2,382.00 | |
Larkspur Courts | Larkspur, CA | 248 | 1,001 | $1,844.00 | |
Regents Court Apartments | San Diego, CA | 251 | 886 | $1,490.00 | |
South Florida Apartment Portfolio | Boca Raton, Plantation, FL | 550 | 889 | $976.00 | |
Alexan Buckhead | Atlanta, GA | 231 | 990 | $1,014.00 | |
Doral Pointe Apartments | Miami, FL | 440 | 1,150 | $1,144.00 | |
The Lodge at Willow Creek | Denver, CO | 316 | 996 | $1,021.00 | |
Golfview Apartments | Lake Mary, FL | 277 | 1,134 | $1,147.00 | |
The Legends at Chase Oaks | Plano, TX | 346 | 972 | $852.00 | |
Lincoln Woods Apartments | Lafayette Hill, PA | 216 | 774 | $1,234.00 | |
Kenwood Mews Apartments | Burbank, CA | 141 | 942 | $1,495.00 | |
Monte Vista | Littleton, CO | 219 | 888 | $1,010.00 | |
Westcreek Apartments | Westlake Village, CA | 126 | 951 | $1,672.00 | |
Indian Creek Apartments | Farmington Hills, MI | 196 | 1,139 | $916.00 | |
Quiet Waters at Coquina Lakes | Deerfield Beach, FL | 200 | 1,048 | $1,095.00 | |
Royal St. George | West Palm Beach, FL | 224 | 870 | $961.00 | |
The Fairways of Carolina | Margate, FL | 208 | 1,026 | $989.00 | |
The Greens at Metrowest Apartments | Orlando, FL | 200 | 920 | $918.00 | |
Bent Tree Apartments | Columbus, OH | 256 | 928 | $643.00 | |
(1) Average Rent per unit represents the average inplace rents at the properties as of September 30, 2004.
TIAA Real Estate Account Prospectus | 27
RECENT PROPERTY PURCHASES AND SALES
The following describes properties purchased or expected to be purchased by the Account after September 30, 2004.
1900 K Street — Washington, D.C.
On or about December 20, 2004, the Account expects to purchase a thirteen -story, Class A office building in Washington, D.C. for approximately $219.5 million. 1900 K Street, built 1996, contains a total of 342,884 net rentable square feet and is 100% leased. The three largest tenants are Mckenna, Long & Alderidge (121,526 square feet), Hunton & Williams (103,970 square feet) and PriceWaterhouseCoopers (49,202 square feet). Rental rates average $37.19 per square foot, which is slightly below the current average market rent for comparable properties. The property is in the Washington D.C. Central Business District office submarket, which had approximately 32.4 million square feet with vacancy rate of 7.3% at the time of purchase.
1001 Pennsylvania Avenue — Washington, D.C.
On or about December 20, 2004, the Account expects to purchase a fourteen -story, Class A office building in Washington, D.C., subject to debt, for approximately $256.7 million. At closing, the Account will assume a mortgage loan on the property of $210 million in favor of New York State Teachers’ Retirement System. 1001 Pennsylvania Avenue, built 1987, contains a total of 802,390 net rentable square feet and is 99% leased. The three largest tenants are Crowell & Mooring (234,078 square feet), Fried, Frank & Harris (154,880 square feet) and The Carlyle Group (136,334 square feet). Rental rates average $33.26 per square foot, which is below the current average market rent for comparable properties. The property is in the Washington D.C. East End office submarket, which had approximately 29.7 million square feet with vacancy rate of 10.9% at the time of purchase.
50 Freemont — San Francisco, CA
On or about December 20, 2004, the Account expects to purchase three, Class A buildings, consisting of a forty-two story office tower and two single-story retail buildings in San Francisco, California, subject to debt, for approximately $199.9 million. At closing, the Account will assume a mortgage loan on the property of $135 million in favor of New York State Teachers’ Retirement System. 50 Freemont Street, built 1983, contains a total of 817,412 net rentable square feet and is 90% leased. The three largest tenants are Deloitte & Touche USA LLP (285,448 square feet), Pillsbury Madison and Sutro, LLP (225,233 square feet) and Drinker Biddle & Reath LLP (44,890 square feet). Rental rates average $41.11 per square foot, which is above the current average market rent for comparable properties. The property is in the South Financial District office submarket, which had approximately 17.1 million square feet with vacancy rate of 14.1% at the time of purchase.
28 | Prospectus TIAA Real Estate Account
IDX Tower — Seattle, WA
On or about December 20, 2004, the Account expects to purchase a thirty-nine -story, Class A office building in Seattle, Washington, subject to debt, for approximately $203.1 million. At closing, the Account will assume a mortgage loan on the property of $145 million in favor of New York State Teachers’ Retirement System. IDX Tower, built 2002, contains a total of 845,533 net rentable square feet and is 95% leased. The three largest tenants are IDX Systems Corporation (284,630 square feet), Preston Gates & Ellis (248,982 square feet) and Deloitte & Touche USA LLP (99,589 square feet). Rental rates average $34.51 per square foot, which is below the current average market rent for comparable properties. The property is in the Seattle Central Business District office submarket, which had approximately 23 million square feet with vacancy rate of 12.3% at the time of purchase.
IDI Nationwide Industrial Portfolio — Chicago, IL, Memphis, TN, Atlanta, GA and Fort Lauderdale, FL.
On December 10, 2004, the Account purchased a 60% interest in a joint venture partnership which owns an industrial portfolio consisting of 12 warehouse distribution properties totaling 3,655,671 square feet located in Chicago, Illinois, Memphis, Tennessee, Atlanta, Georgia and Fort Lauderdale, Florida, subject to debt, for a total net equity investment of $63.4 million. Industrial Development International (“IDI”) owns the remaining 40% of the joint venture. At closing, the joint venture assumed a mortgage loan on the properties in the amount of $70 million in favor of New York Life.
The Chicago, Illinois properties, located in four Chicago industrial submarkets, consists of 5 buildings, built between 1999 and 2004, with one building scheduled to be completed in 2005, contains a total of 1,114,117 rentable square feet and is 99% leased to 7 tenants. The three largest tenants are Dal-Tile Corporation BTS (228,480 square feet), Sportcraft, Ltd. (174,310 square feet) and Menlo Logistics, Inc. (173,331 square feet). Rental rates average $2.50 per square foot, below the average market rent for comparable properties. The Chicago industrial submarket had approximately 1Billion square feet, with vacancy rate of 12% at the time of purchase.
The Memphis, Tennessee properties, located in three Memphis/Mississippi industrial submarkets, consists of 3 buildings, built between 2003 and 2004, contain a total of 1,286,518 rentable square feet and are 87% leased to 4 tenants. The three largest tenants are Flextronics Logistics USA, Inc. (437,940 square feet), Priority Fulfillment Services, Inc. (434,900 square feet) and Wireless Retail, Inc. (177,039 square feet). Rental rates average $2.55 per square foot, are market rents for comparable properties. The Memphis industrial market had approximately 96.3 Million square feet, with vacancy rate of 21% at the time of purchase.
The Atlanta, Georgia properties, located in three Atlanta industrial submarkets, consists of 3 buildings, built between 1999 and 2001, contain a total of 965,736 rentable square feet and are 100% leased to 6 tenants. The three largest tenants are Ozark Automotive Distributors (358,360 square feet), GES Exposition Services, Inc. (199,505 square feet) and Heads & Threads International (123,481 square feet). Rental rates average $2.36 per square foot, substantially
TIAA Real Estate Account Prospectus | 29
below the average for comparable properties. The Atlanta industrial market had approximately 502 million square feet, with vacancy rate of 16% at the time of purchase.
The Fort Lauderdale, Florida property, located in the Southeast Broward County industrial submarket, consists of one building, built in 2002, contains 289,300 rentable square feet and is 22.1% leased to 1 tenant, Delta Apparel, Inc. (63,800 square feet). This property is being actively marketed and is expected to be substantially leased in a short time. In addition, IDI will provide the Account with a preferred return of 8.58% until the earlier of 12 months after closing or until the vacant space is leased. Rental rates average $5.56 per square foot, substantially below the average for comparable properties. The Fort Lauderdale industrial market had approximately 92 million square feet, with vacancy rate of 9% at the time of purchase.
Centre Pointe & Valley View — Carson, CA and La Mirada, CA.
On December 2, 2004, the Account purchased four industrial buildings in Los Angeles County, California for approximately $25.3 million. The buildings were built between 1965 and 1989, contain a total of 307,685 net rentable square feet and are 97% leased to 19 tenants. The three largest tenants are Paradise Printing (97,078 square feet), Numark Industries (34,603 square feet), and Prima Lighting (17,280 square feet). Rental rates average $5.97 per square foot which is below the average market rent for comparable properties. One building is located in the Carson industrial submarket which had approximately 34.9 million square feet with vacancy rate of 3.7% at time of purchase, and three are located in La Mirada industrial submarket which had approximately 13 million square feet with a vacancy rate of 8.3% at the time of purchase.
The following describes real estate property sales by the Account since September 30, 2004. 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 December 3, 2004 the Account sold a retail property (The Lynnwood Collection) located in Raleigh, North Carolina for approximately $10.2 million. The Account had purchased the property in March,1996 for an original purchase price of approximately $6.7 million. At the time of sale, this property was 100% leased and had a market value of $8.4 million in the records of the Account.
On November 23, 2004 the Account sold an office building (Northmark Business Center III) located in Cincinnati (Blue Ash), Ohio for approximately $5.9 million. The Account had purchased the property in April,1997 for an original purchase price of approximately $8.8Million. At the time of sale, this property was 100% vacant and had a market value of $5.2 million in the records of the Account.
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 transactions made by the Account after the date of this prospectus will be described in supplements to the prospectus, as appropriate.
30 | Prospectus TIAA Real Estate Account
Selected Financial Data |
The following selected financial data should be considered in conjunction with the Account’s consolidated financial statements and notes provided in thisreport. Effective January 1, 2002, the Account adopted a new accounting standard that requires the net real estate income, change in unrealized gains/losses and realized gains/losses associated with real estate properties sold after that date and real estate properties held for sale at the reporting date to be classified as discontinued operations. The standard also requires that such amounts in prior periods associated with those properties be reclassified to discontinued operations on a comparable basis. Net real estate income, change in unrealized gains/losses and realized gains/losses associated with real estate properties sold before January 1, 2002 continue to be reported as part of net increase in net assets resulting from continuing operations.
For the | ||||||||||||||
Nine Months Ended | ||||||||||||||
September 30, 2004 | For the Years Ended December 31, | |||||||||||||
(Unaudited) | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||
Investment income: | ||||||||||||||
Real estate income, net: | ||||||||||||||
Rental income | $372,054,340 | $ 381,687,320 | $ 274,855,449 | $ 225,601,964 | $ 173,124,018 | $ 122,224,733 | ||||||||
Real estate property level | ||||||||||||||
expenses and taxes: | ||||||||||||||
Operating expenses | 94,086,733 | 92,474,277 | 60,716,734 | 46,928,471 | 36,410,517 | 25,901,775 | ||||||||
Real estate taxes | 53,955,456 | 52,019,197 | 34,402,652 | 27,293,171 | 21,100,326 | 15,117,060 | ||||||||
Interest Expense | 2,695,856 | — | — | — | — | — | ||||||||
Total real estate property | ||||||||||||||
level expenses and taxes | 150,738,045 | 144,493,474 | 95,119,386 | 74,221,642 | 57,510,843 | 41,018,835 | ||||||||
Real estate income, net | 221,316,295 | 237,193,846 | 179,736,063 | 151,380,322 | 115,613,175 | 81,205,898 | ||||||||
Income from real estate | ||||||||||||||
joint ventures | 12,443,808 | 19,492,494 | 14,125,306 | 2,392,594 | 756,133 | — | ||||||||
Dividends and interest | 24,527,777 | 19,461,931 | 26,437,901 | 33,687,343 | 31,334,291 | 24,932,733 | ||||||||
Total investment income | 258,287,880 | 276,148,271 | 220,299,270 | 187,460,259 | 147,703,599 | 106,138,631 | ||||||||
Expenses | 25,574,516 | 31,654,065 | 23,304,336 | 17,191,929 | 13,424,566 | 9,278,410 | ||||||||
Investment income, net | 232,713,364 | 244,494,206 | 196,994,934 | 170,268,330 | 134,279,033 | 96,860,221 | ||||||||
Net realized and unrealized | ||||||||||||||
gain (loss) on investments | 274,082,980 | 42,356,297 | (101,712,690) | (29,609,560) | 54,539,847 | 8,637,920 | ||||||||
TIAA Real Estate Account Prospectus | 31
Selected Financial Data (continued)
For the | ||||||||||||||
Nine Months Ended | ||||||||||||||
September 30, 2004 | For the Years Ended December 31, | |||||||||||||
(Unaudited) | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||
Net increase in net assets | ||||||||||||||
resulting from continuing | ||||||||||||||
operations before minority | ||||||||||||||
interest and discontinued | ||||||||||||||
operations | 506,796,344 | 286,850,503 | 95,282,244 | 140,658,770 | 188,818,880 | 105,498,141 | ||||||||
Minority interest | (30,157,854 | ) | (6,655,183 | ) | (1,484,585 | ) | (811,789 | ) | — | 1,364,619 | ||||
Discontinued operations | 10,151,915 | 23,377,566 | 22,444,379 | 29,372,004 | 16,623,814 | 9,081,007 | ||||||||
Participant transactions | 1,197,891,433 | 813,860,715 | 346,079,345 | 657,326,121 | 486,196,949 | 383,171,774 | ||||||||
Net increase in net assets | $1,684,681,838 | $1,117,433,601 | $ 462,321,383 | $ 826,545,106 | $ 691,639,643 | $ 499,115,541 | ||||||||
Total assets | $6,986,127,421 | $5,165,683,386 | $3,870,532,278 | $3,270,384,450 | $2,423,100,402 | $1,719,457,715 | ||||||||
Total liabilities and | ||||||||||||||
minority interest | 508,023,422 | 372,261,225 | 194,543,718 | 56,717,273 | 35,978,331 | 23,975,287 | ||||||||
Total net assets | $6,478,103,999 | $4,793,422,161 | $3,675,988,560 | $3,213,667,177 | $2,387,122,071 | $1,695,482,428 | ||||||||
Accumulation units | ||||||||||||||
outstanding | 30,760,870 | 24,724,183 | 20,346,696 | 18,456,445 | 14,604,673 | 11,487,360 | ||||||||
Accumulation unit value | $203.57 | $186.94 | $173.90 | $168.16 | $158.21 | $142.97 | ||||||||
Mortgage notes payable | $124,521,077 | — | — | — | — | — | ||||||||
32 | Prospectus TIAA Real Estate Account
Quarterly Selected Financial Information (Unaudited) |
The following selected financial data for each full quarter of 2003 and 2002 are derived from the audited consolidated financial statements of the Account for the years ended December 31, 2003 and 2002. The financial data for the three month periods ended March 31, June 30, and September 30, 2004 are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which TIAA management considers necessary for a fair presentation of the financial position and the results of operations for these periods.
Operating results for the three months ended March 31, June 30, and September 30, 2004 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2004. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein.
2004 | 2003 | 2002 | ||||||||||||||||||||
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||
March 31 | June 30 | September 30 | March 31 | June 30 | September 30 | December 31 | March 31 | June 30 | September 30 | December 31 | ||||||||||||
Investment income, net | $73,134,318 | $79,738,360 | $79,840,686 | $58,165,695 | $59,829,007 | $60,602,879 | $65,896,625 | $41,971,854 | $48,839,668 | $49,741,303 | $56,442,109 | |||||||||||
Net realized gain (loss) on | ||||||||||||||||||||||
investments | 13,957,043 | 7,012,352 | 11,975,878 | (396,673 | ) | (441,873 | ) | 40,568 | 8,490,244 | 4,320,393 | 3,091,947 | 1,428,243 | (1,914,498 | ) | ||||||||
Net unrealized appreciation (depreciation) | ||||||||||||||||||||||
on investments | 26,194,963 | 39,296,642 | 175,646,102 | (7,865,681 | ) | (23,390,673 | ) | 51,329,061 | 14,591,324 | (25,621,180 | ) | (17,668,539 | ) | (36,579,746 | ) | (28,769,310 | ) | |||||
Minority interest | (5,871,212 | ) | (11,119,092 | ) | (13,167,550 | ) | (2,688,475 | ) | 1,059,606 | (2,893,330 | ) | (2,132,984 | ) | (119,166 | ) | (521,681 | ) | 42,020 | (885,758 | ) | ||
Discontinued operations | (7,792,879 | ) | 3,405,833 | 14,538,961 | 4,342,023 | 30,932,663 | 2,022,187 | (13,919,307 | ) | 4,555,338 | 4,975,908 | 11,765,125 | 1,148,008 | |||||||||
Net increase in net assets | ||||||||||||||||||||||
resulting from operations | $99,622,233 | $118,334,095 | $268,834,077 | $51,556,889 | $67,988,730 | $111,101,365 | $72,925,902 | $25,107,239 | $38,717,303 | $26,396,945 | $26,020,551 | |||||||||||
Total return | 2.01 | % | 2.21 | % | 4.68 | % | 1.38 | % | 1.74 | % | 2.71 | % | 1.67 | % | 0.77 | % | 1.14 | % | 0.76 | % | 0.74 | % |
TIAA Real Estate Account Prospectus | 33
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and notes contained in this prospectus.
Overview
As of September 30, 2004, the TIAA Real Estate Account had total net assets in the amount of $6,478,103,999, a 44.76% increase over the total net assets as of September 30, 2003, and a 35.15% increase over the 2003 year end total net assets. The Account closed eighteen transactions during the nine months ended September 30, 2004 in the total net amount of $1.0 billion. It purchased fifteen properties: five office properties, including one unconsolidated joint venture, eight industrial properties and two retail properties for a total of $1.0 billion. Additional transactions included: the purchase of 100% joint partner’s interest in an existing joint venture (a total amount of $11.2 million), and a commitment to purchase interests in two real estate-related funds totaling $60 million.
As of September 30, 2004, the Account owned a total of 101 real estate properties (five of which are held in unconsolidated joint ventures), representing 81.53% of the Account’s total investment portfolio. This real estate portfolio includes 40 office properties (five of which are held in consolidated joint ventures and two of which are held in unconsolidated joint ventures), 28 industrial properties, 22 apartment complexes, 10 retail properties (including three unconsolidated joint ventures, each owning a regional mall, in which the Account owns a 50% partnership interest), and a 75% consolidated joint venture partnership interest in a portfolio of storage facilities.
Subsequent to September 30, 2004, the Account has closed or expects to close shortly on eight transactions: the purchase of one industrial property for a total of $25.3 million, the purchase of a 60% interest in a joint venture which owns an industrial property which is subject to debt for a net equity investment of $63.4 million, the purchase of four office properties (three of which were subject to leverage) for a total net investment of $879.2 million, the sale of one retail property for the approximate sale price of $10.2 million and the sale of one office property for the approximate sale price of $5.9 million. In addition, the Account has entered into commitments to sell one retail, one office and one apartment properties for a total amount of approximately $96.6 million.
The two charts below reflect the diversification of the Account’s real estate assets by region and property type as well as its ten largest holdings. All information is based on the value of each property as stated in the consolidated financial statements as of September 30, 2004.
34 | Prospectus TIAA Real Estate Account
Real Estate Assets Diversification by Market Value
East (30) | West (30) | South (25) | Midwest (15) | Various (1) | TOTAL (101) | |||||||
Office (40) | 19.49 | % | 12.12 | % | 12.43 | % | 7.50 | % | 0.00 | % | 51.54 | % |
Apartment (22) | 4.12 | % | 5.47 | % | 4.76 | % | 0.56 | % | 0.00 | % | 14.91 | % |
Industrial (28) | 3.57 | % | 9.84 | % | 4.51 | % | 2.60 | % | 0.00 | % | 20.52 | % |
Retail (10) | 1.69 | % | 1.98 | % | 5.93 | % | 0.26 | % | 0.00 | % | 9.86 | % |
Other* (1) | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 3.17 | % | 3.17 | % |
TOTAL (101) | 28.87 | % | 29.41 | % | 27.63 | % | 10.92 | % | 3.17 | % | 100.0 | % |
( ) Number of properties in parentheses.
* Represents a portfolio of storage facilities located in various regions across the U.S.
% of Total | ||||||||||
Property | Value | % of Total | Real Estate | |||||||
Property Name | State | Type | (000,000) | Investments | Portfolio | |||||
Mellon Financial Center at | ||||||||||
One Boston Place | MA | Office | $275.0 | (1)(2) | 4.01 | % | 4.92 | % | ||
Four Oaks Place | TX | Office | $255.4 | 3.73 | % | 4.57 | % | |||
Colorado Center | CA | Office | $223.4 | (3) | 3.26 | % | 4.00 | % | ||
161 North Clark Street | IL | Office | $210.4 | (1)(4) | 3.07 | % | 3.76 | % | ||
780 Third Avenue | NY | Office | $190.0 | 2.77 | % | 3.40 | % | |||
Ontario Industrial Portfolio | CA | Industrial | $179.3 | (5) | 2.62 | % | 3.21 | % | ||
Storage Portfolio | Various | Other | ||||||||
—Commercial | $177.1 | (1)(6) | 2.58 | % | 3.17 | % | ||||
701 Brickell | FL | Office | $174.0 | 2.54 | % | 3.12 | % | |||
The Florida Mall | FL | Retail | $158.3 | (7) | 2.31 | % | 2.83 | % | ||
Ten & Twenty Westport Road | CT | Office | $148.0 | 2.16 | % | 2.65 | % | |||
(1) | This amount represents the value as reported in the September 30, 2004 Consolidated Statement of Investments, which includes minority interests. |
(2) | The value of the Account’s interest in the property is $138.2 million, representing 2.02% of Total Investments and 2.47% of the Total Real Estate Portfolio. |
(3) | The value represents the Account’s joint venture interest in the property. |
(4) | The value of the Account’s interest in the property is $157.8 million, representing 2.30% of Total Investments and 2.82% of the Total Real Estate Portfolio. |
(5) | This property is subject to debt. The value of the Account’s interest less the leverage is $169.8 million, representing 2.48% of Total Investments and 3.04% of the Total Real Estate Portfolio. |
(6) | This property is subject to debt. The value of the Account’s joint venture interest less the leverage is $46.6 million, representing 0.68% of Total Investments and 0.84% of the Total Real Estate Portfolio. |
(7) | This property is held in an unconsolidated joint venture and is subject to debt. The value represents the Account’s Joint Venture interest in the property and is net of leverage. |
As of September 30, 2004, the Account also held investments in real estate limited partnerships representing 0.64% of the portfolio, real estate investment trusts (REITs)
TIAA Real Estate Account Prospectus | 35
representing 4.09% of the portfolio, commercial mortgage backed securities (CMBS) representing 0.72% of the portfolio, commercial paper representing 5.86% of the portfolio, and government agency bonds representing 7.16% of the portfolio.
Real Estate Market Outlook in General
Alan Greenspan noted in his September 2004 testimony to the U.S. House of Representatives that the U.S. economy hit a "soft patch" in the third quarter 2004. The softness was borne out by payroll employment data as the Bureau of Labor Statistics (BLS) reported that nonfarm payroll employment rose by 96,000 in September and by 103,000 on average during the third quarter 2004 as compared to an average of 295,000 during the March-May period. The softness was attributed largely to the steep increase in energy prices and manifested in part by a slowdown in consumer spending. Nonetheless, the twelve Federal Reserve Banks in the September 2004 "Beige Book" indicated that while economic activity had slowed in several districts since their July 2004 reports, most districts still reported modest or moderate growth.
The modest growth in payroll employment was reflected by incremental improvement in the office and industrial real estate markets. Office market vacancies declined for the fifth consecutive quarter with third quarter 2004 vacancies averaging 15.9% compared with 16.2% in the second quarter 2004. Industrial market vacancies declined to 11.2% in the third quarter 2004 compared with 11.4% in the second quarter 2004.
Apartment markets also showed modest improvement. M/PF Research reported that vacancy rates in institutional grade apartments averaged 6.4% in second quarter 2004 compared with 6.6% in second quarter 2003. (third quarter 2004 data are not yet available. Because of seasonality in leasing, it is best to compare available data with data for the same quarter in the prior year.) Rents increased slightly by 0.7%, and concessions to attract new tenants, such as a month’s free rent and/or free internet service were still necessary though less generous.
Retail sales picked up modestly during the third quarter 2004. Excluding automobile sales, which often swing wildly from month to month, retail sales rose by a brisk 0.6% in September, up from 0.2% in August, and better than the 0.4% increase that some economists were expecting. Retail markets saw vacancies decline and rents edge up during the second quarter 2004. (Market data for the third quarter 2004 are not yet available.) Reis, Inc. reported that, while vacancies in regional malls fell to 5.6% as of the second quarter 2004 compared with 5.8% in the first quarter 2004, rents increased by 0.4%. Vacancies in neighborhood and community centers decreased to 6.9% in the second quarter 2004 compared to 7.0% in the first quarter 2004, while rents increased 0.6%.
Near-term fluctuations in the U.S. economy are not predictable, but most economists expect stronger growth in the coming months. The consensus of 44 top economists surveyed by the "Blue Chip Financial Forecasts" is that U.S. Gross Domestic Product (GDP) will grow in the fourth quarter 2004. As Alan Greenspan observed in his September 2004 testimony, "the most recent data suggest that...the expansion has regained some traction." The Blue Chip Financial Forecasts does not provide a consensus forecast of employment growth, but the projected growth
36 | Prospectus TIAA Real Estate Account
in GDP may provide a strong impetus for firms to increase hiring. Nonetheless, the near-term outlook for commercial real estate markets remains murky since space demand often lags employment growth by several quarters.
Results of Operations
When reviewing this discussion, it is important to note that when the Account owns a controlling interest (over 50%) in a joint venture, consistent with generally accepted accounting principles (GAAP), the Account’s consolidated financial statements and all financial data discussed in the report reflect 100% of the market value of the joint venture’s assets. The interests of the other joint venture partners are reflected as minority interests in the Account’s consolidated financial statements. When the Account does not have a controlling interest in a joint venture, then only the Account’s net investment in the joint venture is recorded by the Account.
Note also that all of the Account’s properties are appraised and revalued on a quarterly basis, in accordance with the valuation policies described in Note 1 to the Consolidated Financial Statements. Until a property is sold, these changes in property values are recorded as unrealized gains or losses. Upon the sale of a property, the difference between the Account’s then current cost for the property (original purchase price plus the cost of any capital improvements made) and the sale price is recorded as a realized gain or loss on discontinued operations
Note also that in accordance with the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144 (SFAS No. 144), the income and gains from properties sold or held for sale during the periods covered were removed from continuing operations in the accompanying consolidated financial statements and were reclassified as discontinued operations. For more details, see “Results from Discontinued Operations” below.
TIAA Real Estate Account Prospectus | 37
Nine Months Ended September 30, 2004 Compared to
Nine Months Ended September 30, 2003
Results from Continuing Operations
Performance
The Account’s total net return was 8.90% for the nine months ended September 30, 2004 and 5.83% for the nine months ended September 30, 2003. This increase in the Account’s total return was primarily due to substantial increases in the market value of the Account’s real estate holdings.
The Account’s net investment income after deduction of all expenses was 30% higher for the nine months ended September 30, 2004 compared to the same period in 2003. This increase was primarily due to a 45% increase in total net assets and the 64% increase in real estate holdings over the same period.
The Account’s real estate holdings, including unconsolidated joint venture investments, generated approximately 91% and 94% of the Account’s total investment income (before deducting Account level expenses) during the nine months ended September 30, 2004 and 2003, respectively. The remaining portion of the Account’s total investment income was generated by marketable securities investments.
Gross real estate rental income increased approximately 32% in the nine months ended September 30, 2004, as compared to the same period in 2003. This increase was due to the increased number of properties owned by the Account as of September 30, 2004 as compared with September 30, 2003. Income from unconsolidated real estate joint ventures was $12,443,808 for the nine months ended September 30, 2004, as compared with $14,620,644 for the same period in 2003. This decrease in unconsolidated joint venture income was partially due to the increase in leverage on one of the regional malls. Interest income on the Account’s marketable securities investments increased to $9,319,462 for the nine months ended September 30, 2004 from $4,402,372 for the nine months ended September 30, 2003 due to the increase in the amount of non-real estate assets held by the Account. Dividend income on the Account’s REIT investments increased to $15,208,315 for the nine months ended September 30, 2004 from $7,499,103 for the nine months ended September 30, 2003. The increase was primarily due to the strong performance by the Account’s REIT holdings.
Total property level expenses for the nine months ended September 30, 2004 and 2003 were $150,738,045 and $107,046,155, respectively. This 41% increase in property level expenses reflected the increased number of investments in real estate by the Account (76 properties as of September 30, 2003 compared to 101 properties as of September 30, 2004). In addition, during the nine months ended September 30, 2004, the Account incurred interest expense of $2,695,856 related to the mortgages on a portfolio of storage facilities in which the Account has a 75% joint venture interest and an industrial property purchased in the third quarter 2004.
38 | Prospectus TIAA Real Estate Account
The Account also incurred expenses for the nine months ended September 30, 2004 and 2003 of $10,225,925 and $9,370,775 respectively, for investment advisory services, $11,166,357 and $11,087,140, respectively, for administrative and distribution services and $4,182,234 and $2,916,020, respectively, for the mortality, expense risk and liquidity guarantee charges. Such expenses increased primarily as a result of the larger net asset base in the Account and increased costs associated with managing and administering the Account.
The Account had net realized and unrealized gains on investments of $274,082,980 for the nine months ended September 30, 2004, as compared with net realized and unrealized gains on investments of $33,488,062 for the nine months ended September 30, 2003. The increase in net realized and unrealized gains is primarily due to the substantial net unrealized gain on the Account’s real estate properties of $131,871,469 for the nine months ended September 30, 2004 as compared to net unrealized losses for the nine months ended September 30, 2003 of $13,695,618. In addition, the Account had an unrealized gain on its unconsolidated joint venture holdings of $113,240,871 for the nine months ended September 30, 2004 as compared to unrealized gain of $26,675,169 for the nine months ended September 30, 2003. The substantial net gains in the nine month period ending September 30, 2004 are due to the increase in market value of several real estate properties, including the value of three regional malls in which the Account owns an unconsolidated joint venture interest. The Account’s marketable securities for the nine months ended September 30, 2004 had net realized and unrealized gains totaling $28,970,640, as compared with net realized and unrealized gains of $20,508,511, for the nine months ended September 30, 2003.
Results from Discontinued Operations
During the nine months ended September 30, 2004, the Account did not sell any properties but moved five properties to the held for sale category. During the nine months ended September 30, 2003, the Account sold two properties and retroactively moved five properties to the held for sale category. The investment income and unrealized gains for the nine months ended September 30, 2004 related to the properties held for sale, as well as the investment income and unrealized and realized gains and losses for the properties sold or held for sale during 2003, were removed from continuing operations in the accompanying consolidated financial statements and were classified as discontinued operations. The net investment income for the nine months ended September 30, 2004 from the properties held for sale during 2004, consisted of rental income of $6,374,458 less operating expenses and real estate taxes of $3,937,105, resulting in a net investment income of $2,437,353. The net investment income for the nine months ended September 30, 2003 from the property sold during 2003 and the properties held for sale during 2003, consisted of rental income of $22,641,742 less operating expenses and real estate taxes of $8,655,224, resulting in net investment income of $13,986,518. The net realized and unrealized gain from discontinued operations for the nine month period ended September 30, 2004 and 2003 was $7,714,562 and $9,040,768, respectively. At the time of sale, the properties sold during the nine months ended September 30, 2003 had a cost of $154,626,452 and the proceeds of sale were $187,225,000, resulting in a net realized gain of $32,598,548.
TIAA Real Estate Account Prospectus | 39
Year Ended December 31, 2003 Compared to
Year Ended December 31, 2002
Results from Continuing Operations
Performance
The Account’s total return was 7.50% for the year ended December 31, 2003 and 3.41% for 2002. The substantial increase in the Account’s overall performance on a year-to-year basis reflects the strong performance of the Account’s real estate properties and REIT holdings. The 2003 total return on the Account’s real estate holdings was significantly higher than the 2002 annual total return. Many of the Account’s real estate properties increased in value in 2003, as compared to the substantial declines in value experienced by the Account’s real estate assets in 2002, which enhanced its strong income returns. This difference can be attributed to the strength of the institutional investors’ interest in real estate as an asset class, notwithstanding the challenges to the underlying fundamentals posed by the overall economic conditions. The strong performance of the Account’s REIT holdings also added to the total return.
Income and Expenses
The Account’s net investment income after deduction of all expenses was 24.1% higher for the year ended December 31, 2003 compared to the same period in 2002 primarily due to a 30.4% increase in total net assets, which included a 21.19% increase in the Account’s real estate holdings, including joint ventures.
The Account’s real estate holdings, including joint venture investments, generated approximately 93% and 88% of the Account’s total investment income (before deducting Account level expenses) during 2003 and 2002, respectively. The remaining portion of the Account’s total investment income was generated by marketable securities investments.
Gross real estate rental income increased approximately 38.9% in the year ended December 31, 2003 as compared to the same period in 2002. This was primarily due to the increased number of properties owned by the Account from 77 properties (including joint ventures) as of December 31, 2002 to 87 properties (including joint ventures) as of December 31, 2003. Income from real estate joint ventures was $19,492,494 as of December 31, 2003 as compared with $14,125,306 as of December 31, 2002. The increase in joint venture income was due to the increase in number of joint ventures from 2002 to 2003, as well as the positive effect of re-financing the debt on one of the Account’s leveraged properties. Interest income on the Account’s marketable securities investments decreased from $13,546,694 in 2002 to $7,221,765 in 2003 due to a decline in short-term rates from 2002 to 2003. Dividend income on the Account’s REIT investments decreased from $12,891,207 for the year ended December 31, 2002, to $12,240,166 for the year ended December 31, 2003.
Total property level expenses for the year ended December 31, 2003 and 2002 were $144,493,474, and $95,119,386, respectively. In both years ended 2003 and 2002, 64% of the total expenses represented operating expenses and 36% represented real estate taxes. The 51.9% increase in
40 | Prospectus TIAA Real Estate Account
property level expenses during 2003 reflected the increased number of properties in the Account, as well as an increase in certain operating expenses including insurance and security costs.
The Account also incurred expenses for the years ended December 31, 2003 and 2002 of $12,751,191 and $9,495,736 respectively, for investment advisory services, $14,786,580 and $10,390,705 respectively, for administrative and distribution services, and $4,116,294 and $3,417,895 respectively, for the mortality, expense risk and liquidity guarantee charges. The overall 36% increase in expenses is a result of the larger net asset base in the Account, and the increased costs associated with managing and administering the Account.
Net Realized and Unrealized Gains and Losses on Investments
Including the net gains and losses realized by the Account for properties sold (see details under “Results from Discontinued Operations”), the Account had a 161% increase in net assets resulting from operations ($303,572,886 in December 2003 as compared to $116,242,038 in December 2002). The increase is due to the realization of substantial gains on the two properties sold in 2003, as well as substantial realized and unrealized gains on the Account’s marketable securities and joint venture properties. The strong 2003 performance can also be attributed to the decrease in the magnitude of unrealized losses on the Account’s real estate holdings in 2003 as compared to 2002.
The Account had unrealized gains on its other real estate-related holdings of $29,401,727 during the year ended December 31, 2003, as compared with losses of $5,781,360 during the same period in 2002, which can be attributed primarily to the increase in value of three regional malls in which the Account owns a joint venture interest. The decrease in unrealized losses on the Account’s real estate holdings can be attributed to a decrease in the number of properties affected by declines in value during the year ended December 31, 2003, as compared with the same period in 2002. The Account’s marketable securities for the year ended December 31, 2003 had net realized and unrealized gains totaling $39,963,920 as compared with net realized and unrealized losses of $6,195,855 for the year ended December 31, 2002. The net gains on the Account’s marketable securities for the year ended December 31, 2003 was due primarily to the strong performance of the REIT markets during the period.
Results from Discontinued Operations
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Account adopted SFAS No. 144 as of January 1, 2002. During both the year ended December 31, 2003 and the year ended December 31, 2002, two real estate properties were sold (four properties in total). Additionally in 2004, five properties were moved from the held for investment category to the held for sale category. In accordance with SFAS No. 144, the investment income and realized gain for the years ended December 31, 2003 and 2002 related to
TIAA Real Estate Account Prospectus | 41
each of these properties was removed from continuing operations in the accompanying consolidated financial statements and was classified as discontinued operations. The net investment income from such properties in the year ended December 31, 2003, consisted of rental income of $26,025,523 less operating expenses of $7,055,402 and real estate taxes of $3,064,241, resulting in net investment income of $15,905,880. The net investment income from such properties in the year ended December 31, 2002 consisted of rental income of $34,736,339 less operating expenses of $6,955,562 and real estate taxes of $4,081,804 resulting in net investment income of $23,698,973. At the time of sale, the properties sold in 2003 had a cost of $154,626,452 and the proceeds of sale were $187,225,000, resulting in a net realized gain of $32,598,548. The net realized and unrealized gain from discontinued operations for the years ended December 31, 2003 and 2002 were a $7,471,686 gain and a $1,254,594 loss, respectively. The properties sold in 2002 had a cost of $22,592,804 and the proceeds of sale were $26,050,000, resulting in a net realized gain of $3,457,196.
Year Ended December 31, 2002 Compared to
Year Ended December 31, 2001
Results from Continuing Operations
Performance
The Account’s total net return was 3.41% for the year ended December 31, 2002 and 6.29% for 2001. The substantial decline in the Account’s overall performance on a year-to-year basis reflected the effects of the economic recession, which began in early 2001, and persisted throughout 2002. The decline in value of the real estate properties owned by the Account reflecting the effects of the deteriorating market conditions was the primary reason for the decline in its total return. The negative impact of the recessionary economy was reflected in lower market rental rates, higher vacancies, and increased leasing costs and tenant concessions. In 2002, the Account’s real estate properties continued to produce strong income returns, and at year end 2002, the non-residential property portfolio was 92% occupied overall with only 10% of the non-residential property portfolio’s square footage up for renewal or re-leasing in 2003.
The modest returns produced by the REIT markets in 2002, as well as the low interest rates earned by its short-term holdings, also negatively affected the Account’s overall performance.
Income and Expenses
The Account’s net investment income after deduction of all expenses was 15.7% higher for the year ended December 31, 2002 compared to the same period in 2001 primarily due to a 14.39% increase in total net assets and an 49.04% increase in the Account’s real estate holdings, including joint ventures.
The Account’s real estate holdings, including joint venture investments, generated approximately 88% and 82% of the Account’s total investment income (before deducting Account level expenses) during 2002 and 2001, respectively. The remaining portion of the Account’s total investment income was generated by marketable securities investments.
42 | Prospectus TIAA Real Estate Account
Gross real estate rental income increased approximately 21.8% in the year ended December 31, 2002 over the same period in 2001. This was primarily due to the increase in the number of properties owned by the Account from 65 properties (including joint ventures) as of December 31, 2001 to 77 properties (including joint ventures) as of December 31, 2002. Income from real estate joint ventures increased by 490% for the same periods due to an increase in the number of joint venture partnership interests owned by the Account in the year ended December 31, 2002. Interest income on the Account’s marketable securities investments decreased from $24,490,376 for 2001 to $13,546,694 for 2002 due to the decline in short-term rates from 2001 to 2002 and the decrease in the amount of non-real estate assets held by the Account. Dividend income on the Account’s REIT investments increased from $9,196,967 for the year ended December 31, 2001 to $12,891,207 for the year ended December 31, 2002.
Total property level expenses for the year ended December 31, 2002 and 2001 were $95,119,386, and $74,221,642, respectively. In the year ended 2002, 64% of the total expenses represented operating expenses and 36% represented real estate taxes. In the year ended 2001, 63% of the total expenses represented operating expenses and 37% represented real estate taxes. The 28% increase in property level expenses during 2002 reflected the increased number of properties in the Account, as well as an increase in operating expenses.
The Account also incurred expenses for the years ended December 31, 2002 and 2001 of $9,495,736 and $5,896,729, respectively, for investment advisory services, $10,390,705 and $8,470,496, respectively, for administrative and distribution services, and $3,417,895 and $2,824,704, respectively, for the mortality and expense risk charges and the liquidity guarantee charges. Such expenses increased primarily as a result of the larger net asset base in the Account and increased costs associated with managing and administering a larger account. The expenses for investment advisory services for the year ended December 31, 2001 also were substantially lower than those in 2002 since they included adjustments related to fourth quarter 2000 expenses.
Net Realized and Unrealized Gains and Losses on Investments
Including the net gains and losses realized by the Account for the properties sold (see details under “Results from Discontinued Operations”), the Account had a 31% decline in net assets resulting from operations ($116,242,038 in December 2002 vs. $169,218,985 in December 2001). The decrease was due to the substantial unrealized losses on each of the Account’s asset types. The Account’s real estate had net unrealized losses from continuing operations of $89,735,475 in 2002 as compared to net losses of $32,735,012 in 2001. The Account’s marketable securities in the year ended December 31, 2002 had net realized and unrealized losses totaling $6,195,855 and net realized and unrealized gains of $5,231,736 for the year ended December 31, 2001. The Account’s investments in joint ventures had net unrealized losses of $5,781,360 in 2002 as compared to net unrealized gains of $2,002,837 in 2001 on its investments in other real estate-related investments.
Results from Discontinued Operations
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
TIAA Real Estate Account Prospectus | 43
(“SFAS No. 144”). The Account adopted SFAS No. 144 as of January 1, 2002. During the year ended December 31, 2002, the Account sold two real estate properties. Additionally in 2004, five properties were moved from the held for investment category to the held for sale category. In accordance with SFAS No. 144, the investment income for the years ended December 31, 2002 and 2001 relating to those properties were removed from continuing operations in the accompanying financial statements and classified as discontinued operations. The net investment income from such properties in the year ended December 31, 2002 consisted of rental income of $34,736,339 less operating expenses of $6,955,562 and real estate taxes of $4,081,804, resulting in net investment income of $23,698,973. The net investment income from such properties in the year ended December 31, 2001 consisted of rental income of $31,153,351 less operating expenses of $5,528,008 and real estate taxes of $2,377,285 resulting in net investment income of $23,248,058. The net realized and unrealized gain from discontinued operations for the years ended December 31, 2002 and 2001 were a $1,254,594 loss and a $6,123,946 gain, respectively. At the time of sale, the properties sold in 2002 had a cost of $22,592,804 and the proceeds of sale were $26,050,000, resulting in a net realized gain of $3,457,196.
Liquidity and Capital Resources
At September 30, 2004 and 2003, the Account’s liquid assets (i.e., its REITs, CMBSs, commercial paper, government securities and cash) had a value of $1,223,928,053 and $1,173,529,230, respectively. The increase in the Account’s liquid assets is primarily due to net positive inflow of transfers and premiums into the Account. In addition, there was an increase in the value of the Account’s REIT holdings during the same period.
At year end 2003 and 2002, the Account’s liquid assets (i.e., its REITs, CMBSs, commercial paper, government securities and cash) had a value of $753,971,810 and $271,568,803, respectively. The increase in the Account’s liquid assets was primarily due to the substantial net positive inflow of transfers and premiums into the Account in 2003, when at the same time there were fewer opportunities to purchase real estate meeting the Account’s investment criteria.
During the nine months ended September 30, 2004, the Account received $524,415,992 in premiums and $808,836,329 in net participant transfers from TIAA, the CREF Accounts and affiliated mutual funds, while for the same period in 2003, the Account received $366,878,102 in premiums and $293,842,836 in net participant transfers.
In 2003, the account received $515,435,665 in premiums and $433,792,602 in net participant transfers from TIAA and CREF Accounts and affiliated mutual funds, while for 2002 the Account received $395,464,695 in premiums and $64,698,804 in net participants’ transfers. Real estate properties costing approximately $753.3 million and $1.1 billion were purchased during 2003 and 2002, respectively. In 2003, the Account also received approximately $187.2 million in proceeds from the sale of one office and one industrial property. The Account’s liquid assets, exclusive of the REITs, will continue to be available to purchase additional suitable real estate properties and to meet expense needs and redemption requests (i.e., cash withdrawals or transfers). In the unlikely event that the Account’s liquid assets and its cash flow from operating activities and
44 | Prospectus TIAA Real Estate Account
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, under certain conditions more fully described under “Borrowing,” on page 7, may borrow money and assume or obtain a mortgage on a property — i.e., to make leveraged real estate investments. Also, to meet any short-term cash needs, the Account may obtain a line of credit whose terms may 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.
Effects of Inflation and Increasing Operating Expenses
Inflation, along with increased insurance and security costs, may increase property operating expenses in the future. We anticipate that these increases in operating expenses 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.
Critical Accounting Policies
The consolidated financial statements of the Account are prepared in conformity with accounting principles generally accepted in the United States.
In preparing the Account’s consolidated financial statements, management is required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances — the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Management believes that the following policies related to the valuation of the Account’s assets reflected in the Account’s consolidated financial statements affect the significant judgments, estimates and assumptions used in preparing its financial statements:
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 TIAA Board of Trustees. 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 judgment because the actual market value of real estate can be determined only by negotiation between the parties in a sales transaction. The Account’s properties are initially valued at their respective purchase prices (including acquisition costs). Subsequently, independent appraisers value each real estate property at least once a year. TIAA’s appraisal staff performs a valuation 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 or appraisal. The appraisals are performed in accordance with Uniform
TIAA Real Estate Account Prospectus | 45
Standards of Professional Appraisal Practices (USPAP), the real estate appraisal industry standards created by The Appraisal Foundation. Real estate appraisals are estimates of property values based on a professional’s opinion.
Valuation of Unconsolidated Joint Ventures: Real estate joint ventures (in which the Account does not have a controlling interest and therefore are not consolidated) are stated at the Account’s equity in the net assets of the underlying entities, which value their real estate holdings at fair value.
Valuation of Marketable Securities: Equity securities listed or traded on any national market or 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. Debt securities, other than money market instruments, are valued at the most recent bid price or the equivalent quoted yield for such securities (or those of comparable maturity, quality and type). Money market instruments, with maturities of one year or less, are valued in the same manner as debt securities or are derived from a pricing matrix that has various types of money market instruments along one axis and various maturities along the other. Portfolio securities and 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 TIAA Board of Trustees and in accordance with the responsibilities of the Board as a whole.Forward-Looking Statements
Some statements in this report which are not historical facts may be “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our expectations, beliefs, intentions or strategies for the future, and the assumptions underlying these forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or management’s present expectations.
Caution should be taken not to place undue reliance on management’s forward-looking statements, which represent management’s views only as of the date this report is filed. Neither management nor the Account undertake any obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 2004, 17.83% of the Account’s investments were in market risk sensitive instruments, comprised entirely of marketable securities. These include real estate investment trusts (REITs), commercial mortgage-backed securities (CMBSs), and high-quality short-term debt instruments (i.e., commercial paper and government agency instruments). The Consolidated Statements of Investments for the Account sets forth the terms of these instruments, along with their fair value, as determined in accordance with procedures described in Note 1 to the
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Account’s financial statements. Note that the Account does not currently invest in derivative financial instruments.
The Account’s investments in marketable securities are subject to the following general risks:
• | 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. |
• | market risk—price volatility due to changing conditions in the financial markets and, particularly for debt securities, changes in overall interest rates. | ||
• | interest rate volatility, which may affect current income from an investment. |
In addition, mortgage-backed securities are subject to prepayment risk — i.e., the risk that borrowers will repay the loans early. If the underlying mortgage assets experience greater than anticipated payments of principal, the Account could fail to recoup some or all of its initial investment in these securities. The market value of these securities is also highly sensitive to changes in interest rates. Note that the potential for appreciation, which could otherwise be expected to result from a decline in interest rates, may be limited by any increased prepayments.
In addition to these risks, REITs and mortgage-backed securities are subject to many of the same general risks inherent in real estate investing, making mortgage loans and investing in debt securities. For more information on the risks associated with all of the Account’s investments, see “Risks” on page 9.
Valuing the Account’s Assets
We value the Account’s assets as of the close of each valuation day by taking the sum of:
• | the value of the Account’s cash, cash equivalents, and short-term and other debt instruments | ||
• | the value of the Account’s other securities investments and other assets | ||
• | the value of the individual real properties and other real estate-related investments owned by the Account | ||
• | 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 49.
Valuing Real Estate 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.
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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, within one year from the initial funding by the Account, or the property is substantially leased, 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). The outstanding balance of the debt will be recorded as a liability. 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 pre-payable, 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. 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
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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
• | is made within three months of the annual independent appraisal or | ||
• | results in an increase or decrease of: | ||
• | more than 6 percent of the value of any of the Account’s properties since the last independent annual appraisal | ||
• | more than 2 percent in the value of the Account since the prior month or | ||
• | 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.
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Valuing Other Investments (Including Certain Real Estate-Related Investments)
Debt Securities and Money Market Instruments: We value debt securities (excluding money market instruments) for which market quotations are readily available based on the most recent bid price or the equivalent quoted yield for such securities (or those of comparable maturity, quality and type). We derive these values utilizing an independent pricing service, except when we believe the prices do not accurately reflect the security’s fair value. We value money market instruments with maturities of one year or less in the same manner as debt securities, or derive them from a pricing matrix that has various types of money market instruments along one axis and various maturities along the other. All debt securities may also be valued at fair value as determined in good faith by the Investment Committee of the TIAA Board of Trustees.
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.
Mortgage-Backed Securities: We value mortgage-backed securities in the same manner in which we value debt securities, as described above.
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 certain 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, LLC (“Services”), a subsidiary of TIAA. Because services are provided at
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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:
| ||||
Type of Expense Deduction | Services Performed | |||
Investment Management | 0.220 | % | For TIAA’s investment advice, portfolio accounting, custodial services, and similar services, including independent fiduciary and appraisal fees | |
Administration | 0.225 | % | For Services’ administrative services, such as allocating premiums and paying annuity income | |
Distribution | 0.050 | % | For Services’ expenses related to distributing the annuity contracts | |
Mortality and Expense Risk | 0.070 | % | For TIAA’s bearing certain mortality and expense risks | |
Liquidity Guarantee | 0.035 | % | For TIAA’s liquidity guarantee | |
Total Annual Expense Deduction | 0.600 | % | For total services to the Account | |
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 following 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.
Employer Plan Fee Withdrawals
Your employer may, in accordance with the terms of your plan, and with TIAA’s approval, withdraw amounts from your Real Estate Account accumulation under your GRA, GSRA, Retirement Select or Retirement Select Plus contract to pay fees associated with the administration of the plan. TIAA reserves the right to suspend or reinstate its approval for a plan to make such withdrawals. The amount and the effective date of an employer plan fee withdrawal
will be in accordance with the terms of your plan. TIAA will determine all values as of the end of the effective date. An employer plan fee withdrawal cannot be revoked after its effective date. Each employer plan fee withdrawal will be made on a pro-rata basis from all your available TIAA and CREF accounts. An employer plan fee withdrawal reduces the accumulation from which it is paid by the amount withdrawn.
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, Retirement Select, Retirement Select Plus or Keogh contracts. The Account is not available in California.
RA (Retirement Annuity), GRA (Group Retirement Annuity),
and Retirement Select Contracts
RA, GRA, and Retirement Select contracts are used mainly for employee retirement plans. RA contracts are issued directly to you. GRA and Retirement Select contracts, which are group contracts, are issued through an agreement between your employer and TIAA.
Depending on the terms of your plan, RA, GRA, and Retirement Select 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. Ask your employer for more information about these contracts.
SRA (Supplemental Retirement Annuity), GSRA (Group Supplemental
Retirement Annuity), and Retirement Select Plus Contracts
These are for voluntary tax-deferred annuity (TDA) plans and 401(k) plans. SRA contracts are issued directly to you. GSRA and Retirement Select Plus 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. (The dollar limits listed are for 2004; different dollar limits may apply in future years.) We can’t issue you a joint contract.
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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. (The dollar limits listed are for 2004; different dollar limits may apply in future years.) 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.
ATRA (After-Tax Retirement Annuity)
The after-tax retirement annuities (ATRA) are individual non-qualified deferred annuity contracts, issued to participants who are eligible and would like to remit personal premiums under the contractual provisions of their RA contract. To be eligible, you must have an active and premium-paying or paid up RA contract. Note that the tax rules governing these non-qualified contracts differ significantly from the treatment of qualified contracts. See “Taxes,” on page 65 for more information.
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.
State Regulatory Approval
State regulatory approval is pending for certain of these certificates and they may not currently be available in your state.
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 or have a different default.) 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 balance will 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 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, SRA, GSRA Retirement Select, Retirement Select Plus 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.
Note that we cannot accept money orders or travelers checks. In addition, we will not accept a third-party check where the relationship of the payor to the account owner cannot be identified from the face of the check.
We will not be deemed to have received any premiums sent to the addresses designated for remitting premiums until the third party service that administers the receipt of mail through those addresses has processed the payment on our behalf.
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Important Information About Procedures for Opening a New Account
To help the U.S. government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions, including us, to obtain, verify and record information that identifies each person who opens an account.
What this means for you: When you open an account, we will ask for your name, address, date of birth, social security number and other information that will allow us to identify you, such as your home telephone number. Until you provide us with the information we need, we may not be able to open an account or effect any transactions for you.
Choosing Among Investment 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, the CREF variable investment accounts, and, in some cases, certain mutual funds if the account or fund is available under your employer’s plan.
You can change your allocation choices for future premiums by
• | writing to our home office | ||
• | using the TIAA-CREF Web Center’s account access feature at www.tiaa-cref.org or | ||
• | calling our Automated Telephone Service (24 hours a day) at 800-842-2252 |
The Right to Cancel Your Contract
You can cancel your contract (other than a Retirement Select or Retirement Select Plus 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). A business day generally ends at 4:00p.m. Eastern time or when trading closes on the NYSE, if earlier.
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:
• | from the Real Estate Account to a CREF investment account, or TIAA’s traditional annuity | ||
• | 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) | ||
• | from the Real Estate Account to other companies | ||
• | to the Real Estate Account from other companies/plans | ||
• | by withdrawing cash | ||
• | 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. For any transfers to TIAA’s traditional annuity, the crediting rate will be the rate in effect at the close of business of the first day that you participate in TIAA’s traditional annuity, which is the next business day after the effective date of the transfer.
To request a transfer or to withdraw cash:
• | write to TIAA’s home office at 730 Third Avenue, New York, NY 10017-3206 | ||
• | call us at 800 842-2252 or | ||
• | for internal transfers, using the TIAA-CREF Web Center’s account access feature at www.tiaa-cref.org |
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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 65.
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 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, GRA, and Retirement Select contracts are subject to restrictions under the terms of those contracts. Amounts held under an ATRA contract cannot be transferred to or from any retirement plan contract.
Because excessive transfer activity can hurt Account performance and other participants, we may further limit how often you transfer or otherwise modify the transfer privilege.
Transfers to Other Companies
Generally you may transfer funds from the Real Estate Account to a company other than TIAA or CREF, subject to certain tax restrictions. This right may be limited by your employer’s plan. If your employer participates in our special transfer services program, we can make automatic monthly transfers from your RA, GRA, or Retirement Select 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), 401(a)/403(a) or governmental 457(b) retirement plan to your qualified 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, Retirement Select Plus, 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, GRA or Retirement Select accumulation
may be limited by the terms of your employer’s plan and federal tax law. Normally, you can’t withdraw money from a contract if you’ve already begun receiving lifetime annuity income.
Current federal tax law restricts your ability to make cash withdrawals from your accumulation under most voluntary salary reduction agreements. Withdrawals are generally available only if you reach age 591/2, leave your job, become disabled, or die, or if your employer terminates its retirement plan. If your employer’s plan permits, you may also be able to withdraw money if you encounter hardship, as defined by the IRS, but hardship withdrawals can be from contributions only, not investment earnings. You may be subject to a 10 percent penalty tax if you make a withdrawal before you reach age 591/2, unless an exception applies to your situation.
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 701/2 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 591/2).
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.
Withdrawals To Pay Advisory Fees
You can set up a program to have monies withdrawn directly from your retirement plan or IRA accumulations to pay your financial advisor, if your employer’s plan allows. We reserve the right to determine the eligibility of financial advisors for this type of fee reimbursement. You will be required to complete and return certain forms to effect these withdrawals, including how and from which accounts you want these monies to be withdrawn. Before you set up this program, make sure you understand the possible tax consequences of these withdrawals. See the discussion under “Taxes” below.
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.
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If we decide to stop accepting premiums into the Account, amounts that would otherwise be allocated to the Account will be allocated to the CREF Money Market Account instead, unless you give us other allocation instructions. We will not transfer these amounts out of the CREF Money Market Account when the restriction period is over, unless you request that we do so. However, we will resume allocating premiums to the Account on the date we remove the restrictions.
Additional Limitations
Federal law requires us to obtain, verify and record information that identifies each person who opens an account. Until we receive the information we need, we may not be able to effect transactions for you. Furthermore, if we are unable to verify your identity, or that of another person authorized to act on your behalf, or if we believe that we have identified potentially criminal activity, we reserve the right to take such action as we deem appropriate, which may include closing your account.
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, the accounts or funds 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. In addition, market timing can interfere with efficient portfolio management and cause dilution, if timers are able to take advantage of pricing inefficiencies. To discourage market-timing activity, transfers from the Account to a CREF or TIAA account are limited to once every calendar quarter. In addition, participants who make more than three transfers out of any TIAA or CREF account or any of the TIAA-CREF mutual funds available under your plan (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 591/2 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 701/2 or you retire. For more information, see “Minimum Distribution Requirements,” on page 66. 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.
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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 calculate the amount of annuity payments, see page 62. 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, Retirement Select, Retirement Select Plus, 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:
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• | 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. | ||
• | Annuity for a Fixed Period: Pays income for any period you choose from 5 to 30 years. | ||
• | 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. | ||
• | 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. This pay-out annuity is not available under the Retirement Select or Retirement Select Plus contracts. Instead, required minimum distributions will be paid directly from these contracts pursuant to the terms of your employer’s plan. |
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, GRA, or Retirement Select 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 65.
If you haven’t picked an income option when the annuity starting date arrives for your RA, GRA, SRA, GSRA, Retirement Select or Retirement Select Plus 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,
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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. Transfers under the annual income payment method will affect your annuity payments beginning on the May 1 following the March 31 which is on or after the effective date of the transfer. Transfers under the monthly income payment method and all transfers into TIAA’s traditional annuity will affect your annuity payments beginning with the first payment due after the monthly payment valuation day that is on or after the transfer date. You can switch between the annual and monthly income change methods, and the switch will go into effect on the following March 31.
Annuity Payments
The amount of annuity payments we pay you or your beneficiary (annuitant) will depend upon the number and value of the annuity units payable. The number of annuity units is first determined on the day before the annuity starting date. The amount of the annuity payments will change according to the income change method chosen.
Under the annual income change method, the value of an annuity unit for payments is redetermined on March 31 of each year — the payment valuation day. Annuity payments change beginning May 1. The change reflects the net investment experience of the Real Estate Account. The net investment experience for the twelve months following each March 31 revaluation will be reflected in the following year’s value.
Under the monthly income change method, the value of an annuity unit for payments is determined on the payment valuation day, which is the 20th day of the month preceding the payment due date or, if the 20th is not a business day, the preceding business day. The monthly changes in the value of an annuity unit reflect the net investment experience of the Real Estate Account.
The formulas for calculating the number and value of annuity units payable are described below.
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
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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 payment 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 dies. 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.
Payment of Death Benefit
To authorize payment and pay a death benefit, we must have received all necessary forms and documentation, including proof of death and the selection of the method of payment.
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. If death occurs while your contract is in the accumulation stage, in most cases we can 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:
• | Single-Sum Payment, in which the entire death benefit is paid to your beneficiary at once; | ||
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• | One-Life Annuity with or without Guaranteed Period, in which the death benefit is paid monthly for the life of the beneficiary or through the guaranteed period; | ||
• | Annuity for a Fixed Period of 5 to 30 years (not available under Retirement Select or Retirement Select Plus); | ||
• | 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 | ||
• | Minimum Distribution Option, which automatically pays income according to the Internal Revenue Code’s minimum distribution requirements (not available under Retirement Select or Retirement Select Plus). It operates in much the same way as the MDO annuity income option. It’s possible, under this method, that your beneficiary won’t receive income for life. |
Death benefits are usually paid monthly (unless you chose a single-sum method of payment), but your beneficiary can switch them to quarterly, semi-annual, or annual payments.
Payments During the Annuity Period: If you and your annuity partner die during the annuity period, your beneficiary can choose to receive any remaining guaranteed periodic payments due under your contract. Alternatively, your beneficiary can choose to receive the commuted value of those payments in a single sum unless you have indicated otherwise. The amount of the commuted value will be different than the total of the periodic payments that would otherwise be paid.
Ordinarily, death benefits are subject to federal estate tax. 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 $13,000 per year ($16,000 per year if you are age 50 or older). Certain long-term employees may be able to defer up to $15,000 per year in a 403(b) plan ($18,000 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 is $13,000 ($16,000 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.
Note that the dollar limits listed above are for 2004; different dollar limits may apply in future years.
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 591/2, 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 591/2 (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 from qualified certificates must begin by April 1 of the year after the year you reach age 701/2, 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 701/2. 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 requiring minimum distributions during your lifetime. You are responsible for requesting distributions that comply with the minimum distribution rules.
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Withholding on Distributions
If we pay an “eligible rollover” distribution directly to you, federal law requires us to withhold 20 percent from the taxable portion. On the other hand, 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 types of distributions that are not considered eligible rollovers such as payments from IRAs, hardship 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.
Special Rules For After-Tax Retirement Annuities
If you paid premiums directly to an RA and the premiums are not subject to your employer’s retirement plan, or if you have been issued an ATRA contract, the following general discussion describes our understanding of current federal income tax law that applies to these accumulations. This discussion does not apply to premiums paid on your behalf under the terms of your employer’s retirement plan. It also does not cover every situation and does not address all possible circumstances.
In General. These annuities are generally not taxed until distributions occur. When distributions occur, they are taxed as follows:
• | Withdrawals, including withdrawals of the entire accumulation under the contract, are generally taxed as ordinary income to the extent that the contract’s value is more than your investment in the contract (i.e., what you have paid into it). | ||
• | Annuity payments are generally treated in part as taxable ordinary income and in part as non-taxable recovery of your investment in the contract until you recover all of your investment in the contract. After that, annuity payments are taxable in full as ordinary income. |
Required Distributions. In general, if you die after you start your annuity payments but before the entire interest in the annuity contract has been distributed, the remaining portion must be distributed at least as quickly as under the method in effect on the date of your death. If you die before your annuity payments begin, the entire interest in your annuity contract generally must be distributed within five years after your death, or be used to provide payments that begin within one year of your death and that will be made for the life of your designated beneficiary or for a period not extending beyond the life expectancy of your designated beneficiary. The “designated beneficiary” refers to a natural person you designate and to whom ownership of the
contract passes because of your death. However, if the designated beneficiary is your surviving spouse, your surviving spouse can continue the annuity contract as the new owner.
Death Benefit Proceeds. Death benefit proceeds are taxed like withdrawals of the entire accumulation in the contract if distributed in a single sum and are taxed like annuity payments if distributed as annuity payments. Your beneficiary may be required to take death benefit proceeds within a certain time period.
Penalty Tax on Certain Distributions. You may have to pay a penalty tax (10 percent of the amount treated as taxable income) on distributions you take prior to age 591/2. There are some exceptions to this rule, however. You should consult a tax adviser for information about those exceptions.
Withholding. Annuity distributions are generally subject to federal income tax withholding but most recipients can usually choose not to have the tax withheld.
Certain Designations or Exchanges. Designating an annuitant, payee or other beneficiary, or exchanging a contract may have tax consequences that should be discussed with a tax adviser before you engage in any of these transactions.
Multiple Contracts. All non-qualified deferred annuity contracts issued by us and certain of our affiliates to the same owner during a calendar year must generally be treated as a single contract in determining when and how much income is taxable and how much income is subject to the 10 percent penalty tax (see above).
Special Rules For Withdrawals To Pay Advisory Fees
If you have arranged for us to pay advisory fees to your financial advisor from your accumulations, those partial withdrawals generally will not be treated as taxable distributions as long as:
• | the payment is for expenses that are ordinary and necessary; | ||
• | the payment is made from a Section 401 or 403 retirement plan or an IRA, and | ||
• | with respect to payments from retirement plans (not IRAs): | ||
• | your financial advisor’s payment is only made from the accumulations in your retirement plan, and not directly by you or anyone else, under the agreement with your financial advisor; and | ||
• | once advisory fees begin to be paid from your retirement plan, you continue to pay those fees solely from your plan and not from any other source. |
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.
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General Matters
Making Choices and Changes
You may have to make certain choices or changes (e.g., changing your income option, making a cash withdrawal) by written notice satisfactory to us and received at our home office or at some other location that we have specifically designated for that purpose. When we receive a notice of a change in beneficiary or other person named to receive payments, we’ll execute the change as of the date it was signed, even if the signer has died in the meantime. We execute all other changes as of the date received.
Telephone and Internet Transactions
You can use our Automated Telephone Service (ATS) or 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 accounts and funds available to you through TIAA-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 877 518-9161 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 877 518-9161, or write us.
Miscellaneous Policies
If You’re Married: If you’re married, you may be required by law or your employer’s plan to get advance written consent from your spouse before we make certain transactions for you. If you’re married at your annuity starting date, you may also be required by law or your employer’s plan to choose an income option that provides survivor annuity income to your spouse, unless he or she waives that right in writing. There are limited exceptions to the waiver requirement.
Texas Optional Retirement Program Restrictions: If you’re in the Texas Optional Retirement Program, you or your beneficiary can redeem some or all of your accumulation only if you retire, die, or leave your job in the state’s public institutions of higher education.
Assigning Your Contract: Generally, neither you nor your beneficiaries can assign your ownership of a TIAA retirement contract to anyone else.
Overpayment of Premiums: If your employer mistakenly sends more premiums on your behalf than you’re entitled to under your employer’s retirement plan or the Internal Revenue Code, we’ll refund them to your employer as long as we’re requested to do so (in writing) before you start receiving annuity income. Any time there’s a question about premium refunds, TIAA will rely on information from your employer. If you’ve withdrawn or transferred the amounts involved from your accumulation, we won’t refund them.
Errors or Omissions: We reserve the right to correct any errors or omissions on any form, report, or statement that we send you.
Payment to an Estate, Guardian, Trustee, etc.: We reserve the right to pay in one sum the commuted value of any benefits due an estate, corporation, partnership, trustee, or other entity not a natural person. Neither TIAA nor the Account will be responsible for the conduct of any executor, trustee, guardian, or other third party to whom payment is made.
Benefits Based on Incorrect Information: If the amounts of benefits provided under a contract were based on information that is incorrect, benefits will be recalculated on the basis of the correct data. If the Account has overpaid or underpaid, appropriate adjustments will be made.
Proof of Survival: We reserve the right to require satisfactory proof that anyone named to receive benefits under a contract is living on the date payment is due. If we have not received this proof after we request it in writing, the Account will have the right to make reduced payments or to withhold payments entirely until such proof is received.
Distribution
The annuity contracts are offered continuously by TIAA-CREF Individual & Institutional Services, LLC (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
70 | Prospectus TIAA Real Estate Account
subsidiaries of TIAA. Their addresses are at 730 Third Avenue, New York, NY 10017-3206. No commissions are paid for distributing the contracts.
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 George W. Madison, 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 registered public accounting firm, with respect to the Account, have audited the Account’s consolidated financial statements and schedule at December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, as set forth in their reports. Ernst & Young LLP, independent auditors, with respect to TIAA, have audited TIAA’s statutory-basis financial statements at December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, as set forth in their report (which contains an explanatory paragraph describing that 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, and that the effects of the variances between such bases of accounting on TIAA’s financial statements are not reasonably determinable but are presumed to be material, as described in Note 2 to the TIAA statutory-basis financial statements). Friedman LLP, independent auditors, have audited the (i) statement of revenues and certain expenses of Four Oaks Place for the year ended December 31, 2003; (ii) statement of revenues and certain expenses of 3111 Camino Del Rio North for the year ended December 31, 2003; (iii) statement of revenues and certain expenses of 30721 and 30699 Russell Ranch Road for the year ended December 31, 2003; (iv) statement of revenues and certain expenses of 1900 K Street, NW, Washington DC for the year ended September 30, 2004; (v) statement of revenues and certain expenses of 1001 Pennsylvania Ave., NW, Washington DC for the year ended September 30, 2004; (vi) statement of
TIAA Real Estate Account Prospectus | 71
revenues and certain expenses of 50 Fremont Street, San Francisco, CA for the year ended September 30, 2004; (vii) statement of revenues and certain expenses of IDX Tower, Seattle, WA for the year ended September 30, 2004; and (viii) statement of revenues and certain expenses of the IDI Industrial Portfolio Joint Venture 1900 K Street, NW, Washington DC for the year ended December 31, 2003, and the nine months ended September 30, 2004. 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 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
72 | Prospectus TIAA Real Estate Account
Customer Complaints
Customer complaints may be directed to our Participant Relations Unit, P.O. Box 1259, Charlotte, NC 28201-1259, telephone 800-842-2776.
Financial Statements
The consolidated financial statements of the TIAA Real Estate Account, financial statements of certain properties purchased by the Account and condensed unaudited statutory-basis financial statements of TIAA follow. The full audited statutory-basis financial statements of TIAA, which are incorporated into this prospectus by reference, are available upon request by calling 877 518-9161.
The financial statements of TIAA should be distinguished from the consolidated financial statements of the 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 Account.
Additional Developments
Mr. William H. Waltrip, a trustee of TIAA, and Professor Stephen A. Ross, a trustee of the TIAA-CREF registered investment companies (the “Funds”), resigned from their respective boards on November 30, 2004.
On August 1, 2003, the valuation practice, a non-auditing practice of Ernst & Young LLP (“E&Y”), the independent auditor to TIAA and the Funds, entered into an agreement with a company owned by the two trustees among others, a majority of which was owned by Professor Ross. The business relationship was created to develop intellectual property and related services to value corporate stock options. The aggregate amount paid by E&Y to the company under this agreement was approximately $1.33 million of which Professor Ross received, or will receive, approximately $335,000 (of which $60,000 represented reimbursement of expenses and $25,000 represented repayment of a loan he made to the company). Mr. Waltrip has not received any payment from the company. The agreement and business activity thereunder was terminated on August 20, 2004 and a dissolution agreement was signed as of November 17, 2004.
On August 9, 2004, E&Y informed TIAA and the Funds that the business relationship between E&Y and the company owned by the trustees was not in accordance with the auditor independence standards of Regulation S-X and the Public Company Accounting Oversight Board. E&Y also notified the SEC and the Audit Committees of TIAA and the Funds of this business relationship. The Audit Committees consist entirely of independent trustees having no business relationships with TIAA, the Funds or E&Y.
The Audit Committees of TIAA and the Funds, and E&Y, each determined that the trustees’ business relationship with E&Y did not compromise E&Y’s independence from either TIAA or the Funds or the integrity or objectivity of the respective audits for 2003 and 2004. This determination was based on, among other things, the fact that the E&Y audit team was not aware of the business relationship when they issued the 2003 audit opinions on the financial statements of TIAA and the Funds and the business activity under the agreement was ceased in
TIAA Real Estate Account Prospectus | 73
2004 upon identification of the matter. Professor Ross and Mr. Waltrip had no other functions or responsibilities as Board members that would have caused them to have direct dealings with the E&Y audit team. Professor Ross and Mr. Waltrip were not members of the Audit Committees.
TIAA and the Funds will immediately begin to develop a request for proposals from accounting firms that have the requisite capacity and expertise to perform audit services for TIAA and the Funds for their respective 2005 audits. TIAA and the Funds have also taken steps to ensure that their respective trustees will identify promptly any business relationships that may bring the independence of the outside auditors into question. These steps include revising their officers and trustees questionnaires, improving the questionnaire review process, receiving quarterly auditor independence certifications, and enhancing continuing education for all trustees regarding SEC matters.
On December 6, 2004, the staff of the SEC informed TIAA and the Funds that it is conducting an informal inquiry into the E&Y auditor independence matter. TIAA and the Funds intend to fully cooperate with the SEC staff in connection with the informal inquiry.
74 | Prospectus TIAA Real Estate Account
Index to Financial Statements
TIAA Real Estate Account
Audited Consolidated Financial Statements: | |||
76 | Report of Management Responsibility | ||
77 | Report of the Audit Committee | ||
78 | Consolidated Statements of Assets and Liabilities | ||
79 | Consolidated Statements of Operations | ||
81 | Consolidated Statements of Changes in Net Assets | ||
82 | Consolidated Statements of Cash Flows | ||
83 | Notes to Consolidated Financial Statements | ||
91 | Consolidated Statements of Investments | ||
104 | Report of Independent Registered Public Accounting Firm | ||
Proforma Condensed Financial Statements: | |||
105 | Proforma Condensed Statement of Assets and Liabilities | ||
106 | Proforma Condensed Statement of Operations | ||
108 | Notes to Proforma Condensed Financial Statements | ||
Property Financial Statements: | |||
109 | 3111 Camino del Rio North, San Diego, CA | ||
109 | Independent Auditors’ Report | ||
110 | Statement of Revenues and Certain Expenses | ||
110 | Notes to Statement of Revenues and Certain Expenses | ||
112 | 30721 and 30699 Russell Ranch Road, Westlake Village, CA | ||
112 | Independent Auditors’ Report | ||
113 | Statement of Revenues and Certain Expenses | ||
113 | Notes to Statement of Revenues and Certain Expenses | ||
115 | Four Oaks Place, Houston, TX | ||
115 | Independent Auditors’ Report | ||
116 | Statement of Revenues and Certain Expenses | ||
116 | Notes to Statement of Revenues and Certain Expenses | ||
118 | 1900 K Street, NW, Washington DC | ||
118 | Independent Auditors’ Report | ||
119 | Statement of Revenues and Certain Expenses | ||
119 | Notes to Statement of Revenues and Certain Expenses | ||
121 | 1001 Pennsylvania Ave., NW, Washington DC | ||
121 | Independent Auditors’ Report | ||
122 | Statement of Revenues and Certain Expenses | ||
122 | Notes to Statement of Revenues and Certain Expenses | ||
124 | 50 Fremont Street, San Francisco, CA | ||
124 | Independent Auditors’ Report | ||
125 | Statement of Revenues and Certain Expenses | ||
125 | Notes to Statement of Revenues and Certain Expenses | ||
127 | IDX Tower, 925 Fourth Avenue, Seattle, WA | ||
127 | Independent Auditors’ Report | ||
128 | Statement of Revenues and Certain Expenses | ||
128 | Notes to Statement of Revenues and Certain Expenses | ||
130 | JV with IDI - Industrial Portfolio | ||
130 | Independent Auditors’ Report | ||
131 | Statement of Revenues and Certain Expenses | ||
132 | Notes to Statement of Revenues and Certain Expenses | ||
Teachers Insurance and Annuity Association of America | |||
134 | Condensed Unaudited Statutory-Basis Financial Statements | ||
136 | Supplemental Information to Condensed Unaudited Statutory-Basis Financial Statements |
TIAA Real Estate Account Prospectus | 75
Report of Management Responsibility
To the Participants of the TIAA Real Estate Account:
The accompanying consolidated financial statements of the TIAA Real Estate Account (“Account”) of Teachers Insurance and Annuity Association of America (“TIAA”) are the responsibility of TIAA’s management. They have been prepared in accordance with 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 and disclosure 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, and the chief audit executive regularly reports to the Audit Committee of the TIAA Board of Trustees.
The accompanying consolidated financial statements have been audited by the independent auditing firm of 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 management advisory or consulting services be obtained from a firm other than the external financial audit firm. 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. In addition to the annual audit of the Account’s financial statements by the independent auditing firm, the New York State Insurance Department and other state insurance departments perform periodic examinations of the Accounts’ operations.
/s/ Herbert M. Allison, Jr. | /s/ Elizabeth A. Monrad |
Herbert M. Allison, Jr. | Elizabeth A. Monrad |
Chairman, President and | Executive Vice President and |
Chief Executive Officer | Chief Financial Officer |
76 | Prospectus TIAA Real Estate Account
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 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 consolidated financial statements, development and maintenance of a strong system of internal controls and disclosure 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 of the Account. 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 consolidated 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 and completeness of disclosures in the financial statements. The Committee has also discussed the audited consolidated financial statements with Ernst & Young LLP, the independent auditing firm responsible for expressing an opinion on the conformity of these audited consolidated 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 and completeness of the consolidated financial statements and related disclosures, and other significant matters, such as any significant changes in accounting policies, internal controls, 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 Public Company Accounting Oversight Board and the Independence Standards Board.
Based on the review and discussions referred to above, the Committee has approved the release of the accompanying audited consolidated financial statements for publication and filing with appropriate regulatory authorities.
Rosalie J. Wolf, Audit Committee Chair
Leonard S. Simon, Audit Committee Member
Paul R. Tregurtha, Audit Committee Member
February 18, 2004
TIAA Real Estate Account Prospectus | 77
TIAA Real Estate Account
December 31, | |||||||||
September 30, | |||||||||
2004 | 2003 | 2002 | |||||||
(Unaudited) | |||||||||
ASSETS | |||||||||
Investments, at value: | |||||||||
Real estate properties | |||||||||
(cost: $4,868,342,563, $4,016,534,969 and $3,230,013,803) | $ | 4,919,318,131 | $ | 3,935,639,068 | $ | 3,189,850,858 | |||
Real Estate properties held for sale | |||||||||
(cost: $97,684,909, $96,287,588 and $91,265,838) | 94,211,883 | 85,100,000 | 91,481,506 | ||||||
Other real estate related investments, including joint ventures (cost: $478,374,728, $256,127,352 and $249,182,234) | 618,741,097 | 283,252,850 | 246,906,005 | ||||||
Marketable securities: Real estate related (cost: $311,523,063, | |||||||||
$295,835,312 and $163,146,056) | 330,181,546 | 318,251,737 | 153,137,369 | ||||||
Other (cost: $892,535,901, $435,725,426 and | |||||||||
$117,786,465) | 892,313,857 | 435,720,073 | 117,934,570 | ||||||
Total Investments | |||||||||
(cost: $6,648,461,164, $5,100,510,647 and $3,851,394,396) | 6,854,766,514 | 5,057,963,728 | 3,799,310,308 | ||||||
Cash | 1,432,650 | — | 496,864 | ||||||
Other | 129,928,257 | 107,719,658 | 70,725,106 | ||||||
Total assets | 6,986,127,421 | 5,165,683,386 | 3,870,532,278 | ||||||
LIABILITIES | |||||||||
Mortgage notes payable—Note 6 | 124,521,077 | — | — | ||||||
Amount due to bank | — | 1,015,345 | — | ||||||
Payable for securities transactions | 4,529,110 | — | — | ||||||
Accrued real estate property level expenses and taxes | 99,928,960 | 67,791,195 | 43,796,440 | ||||||
Security deposits held | 13,192,119 | 13,137,670 | 11,718,245 | ||||||
Total Liabilities | 242,171,266 | 81,944,210 | 55,514,685 | ||||||
Minority Interest in Subsidiaries | 265,852,156 | 290,317,015 | 139 ,029,033 | ||||||
NET ASSETS | |||||||||
Accumulation Fund | 6,261,937,912 | 4,621,918,975 | 3,538,288,326 | ||||||
Annuity Fund | 216,166,087 | 171,503,186 | 137,700,234 | ||||||
Total net assets | $ | 6,478,103,999 | $ | 4,793,422,161 | $ | 3,675,988,560 | |||
Number of accumulation units | |||||||||
outstanding—Notes 7 and 8 | 30,760,870 | 24,724,183 | 20,346,696 | ||||||
Net asset value, per accumulation | |||||||||
unit—Note 7 | $ | 203.57 | $ | 186.94 | $ | 173.90 | |||
78 | Prospectus TIAA Real Estate Account | SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Consolidated Statements of Operations
TIAA Real Estate Account
For the Nine Months | ||||||||||||||
Ended September 30, | Years Ended December 31, | |||||||||||||
2004 | 2003 | 2003 | 2002 | 2001 | ||||||||||
(Unaudited) | (Unaudited) | |||||||||||||
INVESTMENT INCOME | ||||||||||||||
Real estate income, net: | ||||||||||||||
Rental income | $372,054,340 | $282,551,806 | $381,687,320 | $274,855,449 | $225,601,964 | |||||||||
Real estate property level expenses and taxes: | ||||||||||||||
Operating expenses | 94,086,733 | 68,429,574 | 92,474,277 | 60,716,734 | 46,928,471 | |||||||||
Real estate taxes | 53,955,456 | 38,616,581 | 52,019,197 | 34,402,652 | 27,293,171 | |||||||||
Interest expense | 2,695,856 | — | — | — | — | |||||||||
Total real estate property level expenses, taxes and interest | 150,738,045 | 107,046,155 | 144,493,474 | 95,119,386 | 74,221,642 | |||||||||
Real estate income, net | 221,316,295 | 175,505,651 | 237,193,846 | 179,736,063 | 151,380,322 | |||||||||
Income from real estate joint ventures | 12,443,808 | 14,620,644 | 19,492,494 | 14,125,306 | 2,392,594 | |||||||||
Interest | 9,319,462 | 4,402,372 | 7,221,765 | 13,546,694 | 24,490,376 | |||||||||
Dividends | 15,208,315 | 7,499,103 | 12,240,166 | 12,891,207 | 9,196,967 | |||||||||
Total Income | 258,287,880 | 202,027,770 | 276,148,271 | 220,299,270 | 187,460,259 | |||||||||
EXPENSES—Note 2: | ||||||||||||||
Investment advisory charges | 10,225,925 | 9,370,775 | 12,751,191 | 9,495,736 | 5,896,729 | |||||||||
Administrative and distribution charges | 11,166,357 | 11,087,140 | 14,786,580 | 10,390,705 | 8,470,496 | |||||||||
Mortality and expense risk charges | 2,884,388 | 2,099,836 | 2,916,880 | 2,430,240 | 1,987,604 | |||||||||
Liquidity guarantee charges | 1,297,846 | 816,184 | 1,199,414 | 987,655 | 837,100 | |||||||||
Total Expenses | 25,574,516 | 23,373,935 | 31,654,065 | 23,304,336 | 17,191,929 | |||||||||
Investment Income, Net | 232,713,364 | 178,653,835 | 244,494,206 | 196,994,934 | 170,268,330 | |||||||||
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | TIAA Real Estate Account Prospectus | 79 |
Consolidated Statements of Operations (continued)
TIAA Real Estate Account
For the Nine Months | ||||||||||||||
Ended September 30, | Years Ended December 31, | |||||||||||||
2004 | 2003 | 2003 | 2002 | 2001 | ||||||||||
(Unaudited) | (Unaudited) | |||||||||||||
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | ||||||||||||||
Net realized gain (loss) on: | ||||||||||||||
Real estate properties | — | — | — | — | (4,109,121) | |||||||||
Marketable securities | 32,945,273 | (797,978) | 7,692,266 | 6,926,085 | 2,839,417 | |||||||||
Net realized gain (loss) on investments | 32,945,273 | (797,978) | 7,692,266 | 6,926,085 | (1,269,704) | |||||||||
Net change in unrealized appreciation (depreciation) on: | ||||||||||||||
Real estate properties | 131,871,469 | (13,695,618) | (27,009,350) | (89,735,475) | (32,735,012) | |||||||||
Other real estate related investments | 113,240,871 | 26,675,169 | 29,401,727 | (5,781,360) | 2,002,837 | |||||||||
Marketable securities | (3,974,633) | 21,306,489 | 32,271,654 | (13,121,940) | 2,392,319 | |||||||||
Net change in unrealized appreciation (depreciation) on investments | 241,137,707 | 34,286,040 | 34,664,031 | (108,638,775) | (28,339,856) | |||||||||
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | 274,082,980 | 33,488,062 | 42,356,297 | (101,712,690) | (29,609,560) | |||||||||
NET INCREASE IN NET ASSETS RESULTING | ||||||||||||||
FROM CONTINUING OPERATIONS | ||||||||||||||
BEFORE MINORITY INTEREST AND DISCONTINUED OPERATIONS | 506,796,344 | 212,141,897 | 286,850,503 | 95,282,244 | 140,658,770 | |||||||||
Minority interest in net increase in net assets resulting from operations | (30,157,854) | (4,522,199) | (6,655,183) | (1,484,585) | (811,789) | |||||||||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS BEFORE DISCONTINUED OPERATIONS | 476,638,490 | 207,619,698 | 280,195,320 | 93,797,659 | 139,846,981 | |||||||||
Discontinued operations—Note 3: | ||||||||||||||
Investment income from discontinued net operations | 2,437,353 | 13,986,518 | 15,905,880 | 23,698,973 | 23,248,058 | |||||||||
Realized gain from discontinued operations | — | 32,598,548 | 32,598,548 | 3,457,196 | — | |||||||||
Net change in unrealized appreciation on real estate properties held for sale | 7,714,562 | (23,557,780) | (25,126,862) | (4,711,790) | 6,123,946 | |||||||||
Net increase in net assets resulting from discontinued operations | 10,151,915 | 23,027,286 | 23,377,566 | 22,444,379 | 29,372,004 | |||||||||
NET INCREASE IN NET ASSETS | ||||||||||||||
RESULTING FROM OPERATIONS | $486,790,405 | $230,646,984 | $303,572,886 | $116,242,038 | $169,218,985 | |||||||||
80 | Prospectus TIAA Real Estate Account | SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Consolidated Statements of Changes In Net Assets
TIAA Real Estate Account
For the Nine Months | ||||||||||||||
Ended September 30, | Years Ended December 31, | |||||||||||||
2004 | 2003 | 2003 | 2002 | 2001 | ||||||||||
(Unaudited) | (Unaudited) | |||||||||||||
FROM OPERATIONS | ||||||||||||||
Investment income, net | $ 232,713,364 | $ 178,653,835 | $ 244,494,206 | $ 196,994,934 | $ 170,268,330 | |||||||||
Net realized gain (loss) on investments | 32,945,273 | (797,978) | 7,692,266 | 6,926,085 | (1,269,704) | |||||||||
Net change in unrealized appreciation (depreciation) on investments | 241,137,707 | 34,286,040 | 34,664,031 | (108,638,775) | (28,339,856) | |||||||||
Minority interest in net increase in net assets resulting from operations | (30,157,854) | (4,522,199) | (6,655,183) | (1,484,585) | (811,789) | |||||||||
Discontinued operations | 10,151,915 | 23,027,286 | 23,377,566 | 22,444,379 | 29,372,004 | |||||||||
Net increase in net assets resulting from operations | 486,790,405 | 230,646,984 | 303,572,886 | 116,242,038 | 169,218,985 | |||||||||
FROM PARTICIPANT TRANSACTIONS | ||||||||||||||
Premiums | 524,415,992 | 366,878,102 | 515,435,665 | 395,464,695 | 254,149,962 | |||||||||
Net transfers from (to) TIAA | 91,804,633 | 4,770,906 | 30,198,200 | (158,282,438) | (6,241,427) | |||||||||
Net transfers from CREF Accounts | 717,031,696 | 289,071,930 | 403,594,402 | 222,981,242 | 492,856,010 | |||||||||
Annuity and other periodic payments | (18,676,797) | (14,078,057) | (22,213,682) | (18,024,403) | (13,710,081) | |||||||||
Withdrawals and death benefits | (116,684,091) | (78,242,150) | (113,153,870) | (96,059,751) | (69,728,343) | |||||||||
Net increase in net assets resulting from participant transactions | 1,197,891,433 | 568,400,731 | 813,860,715 | 346,079,345 | 657,326,121 | |||||||||
Net increase in net assets | 1,684,681,838 | 799,047,715 | 1,117,433,601 | 462,321,383 | 826,545,106 | |||||||||
NET ASSETS | ||||||||||||||
Beginning of year | 4,793,422,161 | 3,675,988,560 | 3,675,988,560 | 3,213,667,177 | 2,387,122,071 | |||||||||
End of period | $6,478,103,999 | $4,475,036,275 | $4,793,422,161 | $3,675,988,560 | $3,213,667,177 | |||||||||
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | TIAA Real Estate Account Prospectus | 81 |
Consolidated Statements of Cash Flows
TIAA Real Estate Account
For the Nine Months | |||||||||||||||||||
Ended September 30, | Years Ended December 31, | ||||||||||||||||||
2004 | 2003 | 2003 | 2002 | 2001 | |||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||||||||||
Net increase in net assets resulting from operations | $ | 486,790,405 | $ | 230,646,984 | $ | 303,572,886 | $ | 116,242,038 | $ | 169,218,985 | |||||||||
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: | |||||||||||||||||||
Increase in investments | (1,787,281,709) | (812,295,853) | (1,258,653,420) | (573,204,724) | (836,986,805) | ||||||||||||||
Increase in other assets | (22,208,599) | (1,533,109) | (36,994,552) | (26,721,697) | (10,737,652) | ||||||||||||||
Increase in accrued real estate property level expenses and taxes | 32,137,765 | 12,095,621 | 23,994,755 | 1,713,246 | 15,199,279 | ||||||||||||||
Increase in security deposits held | 54,449 | (249,081) | 1,419,425 | 2,950,569 | 1,949,704 | ||||||||||||||
Increase (decrease) in other liabilities | 3,513,765 | (868) | 1,015,345 | 1,869,590 | (1,117,817) | ||||||||||||||
Increase in minority interest | (24,464,859) | 3,191,529 | 151,287,982 | 131,293,040 | 4,707,776 | ||||||||||||||
Net cash used in operating activities | (1,311,458,783) | (568,144,777) | (814,357,579) | (345,857,938) | (657,766,530) | ||||||||||||||
CASH FLOWS FROM PARTICIPANT TRANSACTIONS | |||||||||||||||||||
Premiums | 524,415,992 | 366,878,102 | 515,435,665 | 395,464,695 | 254,149,962 | ||||||||||||||
Net transfers from (to) TIAA | 91,804,633 | 4,770,906 | 30,198,200 | (158,282,438) | (6,241,427) | ||||||||||||||
Net transfers from CREF Accounts | 717,031,696 | 289,071,930 | 403,594,402 | 222,981,242 | 492,856,010 | ||||||||||||||
Annuity and other periodic payments | (18,676,797) | (14,078,057) | (22,213,682) | (18,024,403) | (13,710,081) | ||||||||||||||
Withdrawals and death benefits | (116,684,091) | (78,242,150) | (113,153,870) | (96,059,751) | (69,728,343) | ||||||||||||||
Net cash provided by participant transactions | 1,197,891,433 | 568,400,731 | 813,860,715 | 346,079,345 | 657,326,121 | ||||||||||||||
CASH FLOWS FROM FINANCING TRANSACTIONS | |||||||||||||||||||
Proceeds of mortgage loan | 115,000,000 | — | — | — | — | ||||||||||||||
NET CASH PROVIDED BY FINANCING TRANSACTIONS | 115,000,000 | — | — | — | — | ||||||||||||||
Net increase (decrease) in cash | 1,432,650 | 255,954 | (496,864) | 221,407 | (440,409) | ||||||||||||||
CASH | |||||||||||||||||||
Beginning of year | — | 496,864 | 496,864 | 275,457 | 715,866 | ||||||||||||||
End of period | $ | 1,432,650 | $ | 752,818 | $ | — | $ | 496,864 | $ | 275,457 | |||||||||
82 | Prospectus TIAA Real Estate Account | SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Notes to Consolidated Financial Statements
Real Estate Account
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 TIAA 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 all appraisals and approves any valuation adjustments which exceed certain prescribed limits before such adjustments are recorded by the Account. TIAA continues to use the revised value to calculate the Account’s net asset value until the next valuation review or appraisal.
TIAA Real Estate Account Prospectus | 83
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 Unconsolidated Joint Ventures: Real estate joint ventures (in which the Account does not have a controlling interest and therefore are not consolidated) are stated at the Account’s equity in the net assets of the underlying entity, which value their real estate holdings at fair value.
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 and 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 TIAA 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 amortization of discounts and premiums. Dividend income is recorded on the ex-dividend date. Realized gains and losses on securities transactions are accounted for on the specific identification method.
Change in Accounting Policy: Effective January 1, 2003, the Account changed the method by which realized gains and losses on securities transactions are calculated from the average cost method to the specific identification method. This change was made in order to conform more closely with industry standards. For the Account, the effect of this change for the year ended December 31, 2003 was to increase net real-
84 | Prospectus TIAA Real Estate Account
Notes to Consolidated Financial Statements (continued)
ized gain by $391,221 and decrease net unrealized gain by $391,221. There was no impact on investment income-net and no impact on the increase in net assets resulting from operations or on total net assets.
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.
Reclassifications: Certain amounts in the 2001, 2002 and 2003 consolidated financial statements have been reclassified to conform with the September 30, 2004 presentation.
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. Effective January 1, 2004 Services was converted from a regular corporation to a limited liability corporation.
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.
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.
Note 3—Real Estate Properties
During the nine months ended September 30, 2004, the Account purchased 14 properties for approximately $800 million. Had the Account’s real estate properties which were purchased during the nine months ended September 30, 2004 been acquired at the beginning of the period (January 1, 2004), rental income and operating expenses for the nine months ended September 30, 2004 would have increased by approximately $63,954,000 (unaudited) and $25,451,000 (unaudited), respectively. In addition, interest income for the nine months ended September 30, 2004 would have decreased by approximately $12,920,000 (unaudited). Accordingly, the total proforma effect on the
TIAA Real Estate Account Prospectus | 85
Account’s net investment income for the nine months ended September 30, 2004 would have been an increase of approximately $25,583,000 (unaudited), if the real estate properties acquired during the nine months ended September 30, 2004, had been acquired at the beginning of the year.
During 2003, the Account purchased 12 properties for approximately $754 million. Had the Account’s real estate properties which were purchased during the year ended December 31, 2003 been acquired at the beginning of the year (January 1, 2003), rental income and real estate property level expenses and taxes for the year ended December 31, 2003 would have increased by approximately $91,488,000 (unaudited) and $36,464,000 (unaudited), respectively. In addition, interest income for the year ended December 31, 2003 would have decreased by approximately $7,222,000 (unaudited). Accordingly, the total proforma effect on the Account’s net investment income for the year ended December 31, 2003 would have been an increase of approximately $37,663,000 (unaudited), if the real estate properties acquired during the year ended December 31, 2003 had been acquired at the beginning of the year.
During the nine months ended September 30, 2004, the Account moved five real estate properties from the held for investment category to the held for sale category. The current unrealized gain on these properties for the nine months ended September 30, 2004 was $7,714,562 (unaudited) which is included in discontinued operations along with net investment income for the period of $2,437,353 (unaudited), consisting of rental income of $6,374,458 (unaudited) less operating expense of $3,937,105 (unaudited).
During the year ended December 31, 2003 the Account sold two real estate properties. The income for these properties during 2003 (prior to the sale) consisted of rental income of $14,215,497 less operating expenses of $3,502,961 and real estate taxes of $1,669,535, resulting in net investment income of $9,043,001. At the time of sale, the properties had a cost basis of $154,626,452 and the proceeds of sale were $187,225,000, resulting in a realized gain of $32,598,548.
Note 4—Leases
The Account’s real estate properties are leased to tenants under operating lease agreements which expire on various dates through 2046. Aggregate minimum annual rentals for the properties owned, excluding short-term residential leases and storage facility leases, are as follows:
Years Ending December 31, | ||
2004 | $ 384,239,000 | |
2005 | 347,178,000 | |
2006 | 297,300,000 | |
2007 | 262,404,000 | |
2008 | 223,367,000 | |
2009-2046 | 707,247,000 | |
Total | $2,221,735,000 | |
Certain leases provide for additional rental amounts based upon the recovery of actual operating expenses in excess of specified base amounts.
86 | Prospectus TIAA Real Estate Account
Notes to Consolidated Financial Statements (continued)
Note 5—Investment in Unconsolidated Joint Ventures
The Account owns several real estate properties through unconsolidated joint ventures and receives distributions and allocations of profits and losses from the joint ventures based on the Account’s ownership interest percentages. Several of these joint ventures have mortgage notes payable on the properties owned. The Account’s allocated portion of the mortgage notes payable at September 30, 2004 is $217,244,302 (unaudited) and $218,224,058 at December 31, 2003. The Accounts’ equity in the joint ventures at September 30, 2004 is $574,826,810 (unaudited) and $241,022,012 at December 31, 2003. A condensed summary of the financial position and results of operations of the joint ventures is shown below.
December 31, | ||||||||||||
September 30, | ||||||||||||
2004 | 2003 | 2002 | 2001 | |||||||||
(Unaudited) | ||||||||||||
ASSETS | ||||||||||||
Real estates properties | $ | 1,587,007,626 | $ | 914,645,112 | $ | 851,578,413 | $ | 56,686,326 | ||||
Other assets | 20,528,494 | 24,673,188 | 32,997,030 | 1,435,578 | ||||||||
Total assets | $ | 1,607,536,120 | $ | 939,318,300 | $ | 884,575,443 | $ | 58,121,904 | ||||
LIABILITIES AND EQUITY | ||||||||||||
Mortgages payable, including accrued interest | $ | 434,488,604 | $ | 436,448,116 | $ | 385,456,582 | $ | — | ||||
Other liabilities | 23,393,896 | 20,826,160 | 15,040,756 | 708,502 | ||||||||
Total liabilities | 457,882,500 | 457,274,276 | 400,497,338 | 708,502 | ||||||||
EQUITY | 1,149,653,620 | 482,044,024 | 484,078,105 | 57,413,402 | ||||||||
Total liabilities and equity | $ | 1,607,536,120 | $ | 939,318,300 | $ | 884,575,443 | $ | 58,121,904 | ||||
For the | ||||||||||
Nine Months Ended | ||||||||||
September 30, | Year Ended December 31, | |||||||||
2004 | 2003 | 2003 | 2002 | 2001 | ||||||
(Unaudited) | (Unaudited) | |||||||||
OPERATING REVENUES AND EXPENSES | ||||||||||
Revenues | $81,985,649 | $72,489,535 | $ 98,912,953 | $ 93,708,332 | $ 6,461,814 | |||||
Expenses | 47,194,227 | 42,074,376 | 57,489,623 | 54,386,720 | 2,240,630 | |||||
Excess of revenues over expenses | $34,791,422 | $30,415,159 | $ 41,423,330 | $ 39,321,612 | $ 4,221,184 | |||||
TIAA Real Estate Account Prospectus | 87
Note 6—Mortgage Notes Payable (Unaudited)
On March 31, 2004, the Account obtained a mortgage totaling $115 million on a portfolio of 32 storage facilities located throughout the U.S. which were purchased at the end of 2003. The interest on the mortgage is paid monthly based on an annual rate of 4.62%. The total principal is due on April 1, 2011. On September 30, 2004, the Account assumed a mortgage totaling $9.5 million in the purchase of a property. The interest on the mortgage is paid monthly based on an annual rate of 7.24%. The total principal is due on May 1, 2011.
88 | Prospectus TIAA Real Estate Account
Notes to Consolidated Financial Statements (continued)
Note 7—Condensed Consolidated Financial Information
Selected condensed consolidated financial information for an Accumulation Unit of the Account is presented below
For the Nine Months | |||||||||||||
Ended | |||||||||||||
September 30, | Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||
(Unaudited) | |||||||||||||
Per Accumulation Unit data: | |||||||||||||
Rental income | $11.934 | $ 16.514 | $ 14.537 | $ 14.862 | $ 14.530 | $ 12.168 | |||||||
Real estate property level expenses and taxes | 4.835 | 6.263 | 4.988 | 4.754 | 4.674 | 3.975 | |||||||
Real estate income, net | 7.099 | 10.251 | 9.549 | 10.108 | 9.856 | 8.193 | |||||||
Income from real estate joint ventures | 0.399 | 0.790 | 0.665 | 0.130 | 0.056 | — | |||||||
Dividends and interest | 0.787 | 0.788 | 1.244 | 1.950 | 2.329 | 2.292 | |||||||
Total income | 8.285 | 11.829 | 11.458 | 12.188 | 12.241 | 10.485 | |||||||
Expense charges (1) | 0.820 | 1.282 | 1.097 | 0.995 | 0.998 | 0.853 | |||||||
Investment income, net | 7.465 | 10.547 | 10.361 | 11.193 | 11.243 | 9.632 | |||||||
Net realized and unrealized gain (loss) on investments | 9.164 | 2.492 | (4.621) | (1.239) | 3.995 | 1.164 | |||||||
Net increase in Accumulation Unit Value | 16.629 | 13.039 | 5.740 | 9.954 | 15.238 | 10.796 | |||||||
Accumulation Unit Value: | |||||||||||||
Beginning of year | 186.939 | 173.900 | 168.160 | 158.206 | 142.968 | 132.172 | |||||||
End of period | $203.568 | $186.939 | $173.900 | $168.160 | $158.206 | $142.968 | |||||||
Total return | 8.90% | 7.50% | 3.41% | 6.29% | 10.66% | 8.17% | |||||||
Ratios to Average Net Assets: | |||||||||||||
Expenses (1) | 0.47% | 0.76% | 0.67% | 0.61% | 0.67% | 0.63% | |||||||
Investment income, net | 4.24% | 6.25% | 6.34% | 6.81% | 7.50% | 7.13% | |||||||
Portfolio turnover rate: | |||||||||||||
Real estate properties | 0.00% | 5.12% | 0.93% | 4.61% | 3.87% | 4.46% | |||||||
Securities | 97.46% | 71.83% | 52.08% | 40.62% | 32.86% | 27.68% | |||||||
Thousands of Accumulation Units outstanding at end of period | 30,761 | 24,724 | 20,347 | 18,456 | 14,605 | 11,487 | |||||||
(1) | Expense charges per Accumulation Unit and the Ratio of Expenses to Average Net Assets 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 nine months ended September 30, 2004 would be $5.655 (unaudited) and for the year ended December 31, 2003 would be $7.545 ($6.085, $5.749, $5.672 and $4.828 for the years ended December 31, 2002, 2001, 2000 and 1999, respectively), and the Ratio of Expenses to Average Net Assets for the nine months ended September 30, 2004 would be 3.21% (unaudited) and for the year ended December 31, 2003 would be 4.47% (3.72%, 3.50%, 3.79% and 3.58% for the years ended December 31, 2002, 2001, 2000 and 1999, respectively). |
TIAA Real Estate Account Prospectus | 89
Note 8—Accumulation Units
Changes in the number of Accumulation Units outstanding were as follows:
For the Nine Months | ||||||||
Ended | For the Years Ended December 31, | |||||||
September 30, | ||||||||
2004 | 2003 | 2002 | 2001 | |||||
(Unaudited) | ||||||||
Accumulation Units: | ||||||||
Credited for premiums | 2,712,898 | 2,860,354 | 2,310,355 | 1,542,511 | ||||
Credited (cancelled) for transfers, net disbursements and amounts | ||||||||
applied to the Annuity Fund | 3,323,789 | 1,517,133 | (420,104) | 2,309,261 | ||||
Outstanding: | ||||||||
Beginning of year | 24,724,183 | 20,346,696 | 18,456,445 | 14,604,673 | ||||
End of period | 30,760,870 | 24,724,183 | 20,346,696 | 18,456,445 | ||||
Note 9—Commitments
During the normal course of business, the Account enters into discussions and agreements to purchase or sell real estate properties. As of September 30, 2004 and December 31, 2003, the Account had no outstanding commitments to purchase properties.
As of September 30, 2004 and December 31, 2003, the Account had commitments to invest in three limited partnerships over the next three years, totalling approximately $56.7 million and $2 million, respectively.
Note 10—Subsequent Event
As of September 30, 2004, the Account reclassified five properties to real estate properties held for sale. For the nine months ended September 30, 2004, the net investment income and net change in unrealized appreciation (depreciation) for such properties is reported in discontinued operations. In accordance with the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company has revised the historical financial statements for 2003, 2002 and 2001 to also reflect the net investment income and net change in unrealized appreciation (depreciation) associated with those properties in those years as discontinued operations.
In addition, the Account has revised the historical financial statements for 2003, 2002 and 2001 to reflect the net change in unrealized appreciation (depreciation) associated with the properties sold in 2003 and 2002 within discontinued operations for the years presented.
The above reclassifications impacted the presentation of these properties within the consolidated statements of operations between continuing operations and discontinued operations which had no impact on the net increase in net assets resulting from operations for any year.
90 | Prospectus TIAA Real Estate Account
Consolidated Statement of Investments (Unaudited)- Real Estate Account -September 30, 2004
REAL ESTATE PROPERTIES — 73.14% | |||
REAL ESTATE PROPERTIES | |||
HELD FOR INVESTMENT — 71.77% | |||
Location / Description | Value | ||
Arizona: | |||
Biltmore Commerce Center — | |||
Office building | $ | 31,502,060 | |
RREEF America Mountain | |||
Portfolio — Industrial building | 5,504,662 | ||
California: | |||
3 Hutton Centre Drive — | |||
Office building | 40,423,955 | ||
9 Hutton Centre — | |||
Office building | 22,321,856 | ||
88 Kearny Street — Office building | 64,077,351 | ||
Cabot Industrial Portfolio — | |||
Industrial building | 57,800,000 | ||
Capitol Place — Office building | 42,418,500 | ||
Centerside I — Office building | 65,000,000 | ||
Eastgate Distribution Center — | |||
Industrial building | 18,300,000 | ||
Kenwood Mews — Apartments | 25,592,033 | ||
Larkspur Courts — Apartments | 57,100,000 | ||
The Legacy at Westwood — | |||
Apartments | 86,500,000 | ||
Northpoint Commerce Center — | |||
Industrial building | 42,700,000 | ||
Ontario Industrial Portfolio — | |||
Industrial building | 179,337,691 | (1) | |
Regents Court — Apartments | 56,500,000 | ||
RREEF America Northern California | |||
Portfolio — Industrial building | 59,040,654 | ||
RREEF America Southern California | |||
Portfolio — Industrial building | 88,832,725 | ||
Treat Towers — Office building | 119,519,868 | (2) | |
Westcreek — Apartments | 25,513,821 | ||
West Lake North Business Park — | |||
Office building | 49,500,000 | ||
Westwood Marketplace — | |||
Shopping center | 77,000,000 | ||
Colorado: | |||
The Lodge at Willow Creek — | |||
Apartments | 32,200,000 | ||
The Market at Southpark — | |||
Shopping center | 33,429,560 | ||
Monte Vista — Apartments | 22,306,264 | ||
Location / Description | Value | ||
Connecticut: | |||
Ten & Twenty Westport Road — | |||
Office building | $148,005,670 | ||
Delaware: | |||
RREEF America Mideast Portfolio — | |||
Industrial building | 16,518,688 | ||
Florida: | |||
701 Brickell — Office building | 174,040,353 | ||
4200 West Cypress Street — | |||
Office building | 32,528,132 | ||
Golfview — Apartments | 27,765,787 | ||
The Fairways of Carolina — | |||
Apartments | 17,900,000 | ||
The Greens at Metrowest — | |||
Apartments | 14,300,000 | ||
Maitland Promenade One — | |||
Office building | 36,017,751 | ||
Plantation Grove — Shopping center | 10,700,000 | ||
Pointe on Tampa Bay — | |||
Office building | 40,577,392 | ||
Quiet Waters at Coquina Lakes — | |||
Apartments | 19,415,000 | ||
Royal St. George — Apartments | 19,400,000 | ||
Sawgrass Office Portfolio — | |||
Office building | 50,501,250 | ||
South Florida Apartment Portfolio — | |||
Apartments | 48,000,000 | ||
Georgia: | |||
Alexan Buckhead — Apartments | 37,500,000 | ||
Atlanta Industrial Portfolio — | |||
Industrial building | 38,000,000 | ||
Prominence in Buckhead — | |||
Office building | 105,478,853 | (2) | |
Illinois: | |||
161 North Clark Street — | |||
Office building | 210,357,385 | (2) | |
Chicago Caleast Industrial Portfolio — | |||
Industrial building | 41,400,000 | ||
Chicago Industrial Portfolio — | |||
Industrial building | 69,840,912 | ||
Columbia Center III — Office building | 30,100,000 | ||
Oak Brook Regency Towers — | |||
Office building | 68,100,000 | ||
Parkview Plaza — Office building | 48,000,000 | ||
RREEF America EN Central Portfolio — | |||
Industrial building | 23,661,072 | ||
Rolling Meadows — Shopping center | 14,800,000 |
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | TIAA Real Estate Account Prospectus | 91 |
Consolidated Statement of Investments (Unaudited)- Real Estate Account -September 30, 2004
Location / Description | Value | ||
Kentucky: | |||
IDI Kentucky Portfolio — | |||
Industrial building | $48,842,583 | ||
Maryland: | |||
Corporate Boulevard — | |||
Office building | 70,000,000 | ||
FEDEX Distribution Facility — | |||
Industrial building | 8,100,000 | ||
Massachusetts: | |||
Batterymarch Park II — | |||
Office building | 10,700,000 | ||
Longwood Towers — Apartments | 78,000,000 | ||
Mellon Financial Center at | |||
One Boston Place — | |||
Office building | 275,000,000 | (2) | |
Needham Corporate Center — | |||
Office building | 11,640,984 | ||
RREEF America Northeast Portfolio — | |||
Industrial building | 33,077,653 | ||
Michigan: | |||
Indian Creek — Apartments | 18,000,000 | ||
Minnesota: | |||
Interstate Crossing — | |||
Industrial building | 6,525,088 | ||
River Road Distribution Center — | |||
Industrial building | 4,150,000 | ||
Nevada: | |||
UPS Distribution Facility — | |||
Industrial building | 12,900,000 | ||
New Jersey: | |||
10 Waterview Boulevard — | |||
Office building | 27,000,000 | ||
371 Hoes Lane — Office building | 10,700,000 | ||
Konica Photo Imaging | |||
Headquarters — Industrial building | 21,000,000 | ||
Morris Corporate Center III — | |||
Office building | 85,400,000 | ||
NJ Caleast Industrial Portfolio — | |||
Industrial building | 39,300,000 | ||
South River Road Industrial — | |||
Industrial building | 33,000,000 | ||
New York: | |||
780 Third Avenue — Office building | 190,000,000 | ||
The Colorado — Apartments | 58,073,061 | ||
Ohio: | |||
Bent Tree — Apartments | 13,300,000 | ||
BISYS Fund Services Building — | |||
Office building | 35,700,000 | (2) | |
Location / Description | Value | ||
Columbus Portfolio — | |||
Office building | $ | 21,500,000 | |
Oregon: | |||
Five Centerpointe — Office building | 14,000,000 | ||
Pennsylvania: | |||
Lincoln Woods — Apartments | 27,301,678 | ||
Tennessee: | |||
Memphis Caleast Industrial | |||
Portfolio — Industrial building | 46,100,000 | ||
Summit Distribution Center — | |||
Industrial building | 23,300,000 | ||
Texas: | |||
Butterfield Industrial Park — | |||
Industrial building | 4,600,000 | (3) | |
Dallas Industrial Portfolio — | |||
Industrial building | 140,000,000 | ||
Four Oaks Place — Office building | 255,357,238 | ||
The Legends at Chase Oaks — | |||
Apartments | 26,999,927 | ||
Utah: | |||
Landmark at Salt Lake City | |||
(Building #4) — | |||
Industrial building | 12,500,000 | ||
Virginia: | |||
Ashford Meadows — Apartments | 67,000,228 | ||
Fairgate at Ballston — Office building | 28,500,000 | ||
Monument Place — Office building | 37,000,000 | ||
One Virginia Square — Office building | 42,428,275 | ||
Washington: | |||
Rainier Corporate Park — | |||
Industrial building | 54,000,000 | ||
RREEF America Northwest Portfolio — | |||
Industrial building | 19,412,990 | ||
Washington DC: | |||
1015 15th Street — Office building | 60,000,000 | ||
Mazza Gallerie — Shopping center | 80,000,000 | ||
The Farragut Building — | |||
Office building | 46,500,000 | ||
Other: | |||
Storage Portfolio | 177,079,181 | (2)(4)(5) | |
TOTAL REAL ESTATE PROPERTIES HELD | |||
FOR INVESTMENT | |||
(Cost $4,868,342,563) | 4,919,318,131 | ||
92 | Prospectus TIAA Real Estate Account | SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Consolidated Statement of Investments (Unaudited)- Real Estate Account -September 30, 2004
REAL ESTATE PROPERTIES HELD | |||
FOR SALE — 1.37% | |||
Location / Description | Value | ||
Florida: | |||
Doral Pointe — Apartments | $ | 55,011,883 | |
Maryland: | |||
Longview Executive Park — | |||
Office building | 19,500,000 | ||
North Carolina: | |||
The Lynnwood Collection — | |||
Shopping center | 8,400,000 | ||
The Millbrook Collection — | |||
Shopping center | 6,100,000 | ||
Ohio: | |||
Northmark Business Center III — | |||
Office building | 5,200,000 | ||
TOTAL REAL ESTATE PROPERTIES | |||
HELD FOR SALE | |||
(Cost $97,684,909) | 94,211,883 | ||
TOTAL REAL ESTATE PROPERTIES | |||
(Cost $4,966,027,472) | 5,013,530,014 | ||
OTHER REAL ESTATE RELATED | |||
INVESTMENTS — 9.03% | |||
REAL ESTATE JOINT VENTURE — 8.39% | |||
Colorado Center Limited Partnership | |||
Colorado Center | |||
(50% Account Interest) | 223,435,699 | ||
Florida Mall Association, Ltd. | |||
The Florida Mall | |||
(50% Account Interest) | 158,315,354 | (6) | |
Teachers REA IV, LLC | |||
Tyson’s Executive Plaza II | |||
(50% Account Interest) | 27,140,804 | ||
West Dade County Associates | |||
Miami International Mall | |||
(50% Account Interest). | 60,357,331 | (6) | |
West Town Mall Joint Venture | |||
West Town Mall | |||
(50% Account Interest) | 105,577,622 | (6) | |
TOTAL REAL ESTATE JOINT VENTURE | |||
(Cost $435,044,036) | 574,826,810 |
Location / Description | Value | |||
LIMITED PARTNERSHIPS — 0.64% | ||||
Essex Apartment Value Fund, L.P. | ||||
(10% Account Interest) | $ | 17,751,022 | ||
Heitman Value Part Fund | ||||
(34.17% Account Interest) | 9,986,066 | |||
MONY/Transwestern Mezzanine | ||||
Realty Partners L.P. | ||||
(19.76% Account Interest) | 16,177,199 | |||
TOTAL LIMITED PARTNERSHIP | ||||
(Cost $43,330,692) | 43,914,287 | |||
TOTAL OTHER REAL ESTATE RELATED | ||||
INVESTMENTS(Cost $478,374,728) | 618,741,097 | |||
MARKETABLE SECURITIES — 17.83% | ||||
REAL ESTATE RELATED — 4.81% | ||||
REAL ESTATE INVESTMENT TRUSTS — 4.09% | ||||
Shares | Issuer | |||
77,500 | Acadia Realty Trust | $ | 1,143,125 | |
540,688 | Affordable Residential | |||
Communities | 7,894,045 | |||
36,685 | AMB Property Corp | 1,358,079 | ||
557,300 | American Campus | |||
Communities | 10,343,488 | |||
140,000 | Amli Residential Properties | 4,277,000 | ||
602,800 | Ashford Hospitality Trust | 5,666,320 | ||
30,000 | Avalonbay Communities Inc | 1,806,600 | ||
110,750 | Biomed Realty Trust Inc | 1,948,093 | ||
191,600 | Boston Properties Inc | 10,612,724 | ||
177,000 | Brandywine Realty Trust | 5,040,960 | ||
35,000 | BRE Properties | 1,342,250 | ||
21,000 | Capital Automotive Reit | 656,670 | ||
120,000 | Capital Lease Funding Inc | 1,324,800 | ||
158,000 | CB Richard Ellis Group Inc | 3,649,800 | ||
60,000 | Centerpoint Properties Trust | 2,614,800 | ||
200,000 | Cohen & Steers Inc | 3,088,000 | ||
220,300 | Corporate Office Properties | 5,644,086 | ||
150,000 | Developers Diversified Realty | 5,872,500 | ||
200,000 | Equity Office Properties Trust | 5,450,000 | ||
203,800 | Equity Residential | 6,317,800 | ||
594,500 | Extra Space Storage Inc | 7,579,875 | ||
400,000 | Falcon Financial Investment | 3,236,000 | ||
100,000 | General Growth Properties | 3,100,000 | ||
446,400 | Gramercy Capital Corp | 6,963,840 | ||
92,700 | Health Care Realty Trust Inc | 3,619,008 | ||
374,800 | Hersha Hospitality Trust | 3,523,120 | ||
114,700 | Hilton Hotels Corp | 2,160,948 | ||
294,200 | Home Properties Inc | 11,638,552 |
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | TIAA Real Estate Account Prospectus | 93 |
Consolidated Statement of Investments (Unaudited)- Real Estate Account -September 30, 2004
Shares | Issuer | Value | ||
350,000 | Homebanc Corp/Ga | $ | 3,150,000 | |
574,049 | Host Marriott Corp | 8,053,907 | ||
300,000 | Interstate Hotels & Resorts | 1,215,000 | ||
1,450,000 | Jameson Inns Inc | 2,581,000 | ||
60,000 | Kimco Realty Corp | 3,078,000 | ||
649,000 | Kite Realty Group Trust | 8,534,350 | ||
467,670 | Lexington Corporate | |||
Properties Trust | 10,153,116 | |||
1,266,660 | Lodgian Inc | 12,539,934 | ||
163,807 | LTC Properties Inc | 2,930,507 | ||
175,000 | Luminent Mortgage Capital | 2,219,000 | ||
150,000 | Macerich Company/The | 7,993,500 | ||
30,420 | Mack-Cali Realty Corp | 1,347,606 | ||
31,875 | Manufactured Home | |||
Communities | 1,059,525 | |||
1,155,000 | Meristar Hospitality Trust | 6,294,750 | ||
65,000 | Mills Corp/The | 3,371,550 | ||
150,000 | Mission West Properties | 1,552,500 | ||
193,190 | Mortgageit Holdings Inc | 2,791,596 | ||
370,000 | New York Mortgage Trust Inc | 3,459,500 | ||
60,000 | NewCastle Investment Corp | 1,842,000 | ||
525,000 | Origen Financial Inc | 3,864,000 | ||
75,000 | Prentiss Properties Trust | 2,700,000 | ||
200,000 | Prologis Trust | 7,048,000 | ||
79,000 | Reckson Associates Realty Corp | 2,271,250 | ||
50,000 | Regency Centers Corp | 2,324,500 | ||
150,000 | Saxon Captal Inc | 3,225,000 | ||
255,900 | Simon Property Group Inc | 13,723,917 | ||
50,000 | Starwood Hotels & Resorts | 2,321,000 | ||
150,000 | Strategic Hotel Capital Inc | 2,028,000 | ||
303,820 | Sunset Financial Resources | 3,241,759 | ||
128,000 | The St Joe Company | 6,114,560 | ||
123,090 | Trizec Properties Inc | 1,965,747 | ||
100,000 | United Dominion Realty Trust | 1,983,000 | ||
77,558 | Ventas Inc | 2,010,303 | ||
100,000 | Vornado Realty Trust | 6,268,000 | ||
190,975 | Weingarten Realty Investors | 6,304,085 | ||
106,200 | Winston Hotels Inc | 1,136,340 | ||
TOTAL REAL ESTATE INVESTMENT TRUSTS | ||||
(Cost $261,771,340) | 280,569,285 | |||
COMMERCIAL MORTGAGE BACKED | |||||
SECURITIES — 0.72% | |||||
Issuer, Current Rate | |||||
Principal | and Maturity Date | Value | |||
$ | 10,000,000 | Bear Stearns CMS | |||
1.978% 05/14/16 | $9,991,930 | ||||
10,000,000 | COMM 2004 HTL1 A1 | ||||
2.000% 07/15/16 | 9,999,660 | ||||
10,000,000 | GSMS 2001-Rock A2FL | ||||
2.030% 05/03/18 | 10,012,190 | ||||
10,000,000 | MSDWC 2001-280 A2F | ||||
1.894% 02/03/11 | 9,851,160 | ||||
7,807,731 | Opryland Hotel Trust | ||||
2.180% 04/01/11 | 7,811,128 | ||||
1,940,947 | Trize 2001 — TZHA A3FL | ||||
2.130% 03/15/13 | 1,946,193 | ||||
TOTAL COMMERCIAL MORTGAGE | |||||
BACKED SECURITIES | |||||
(Cost $49,751,723) | 49,612,261 | ||||
TOTAL REAL ESTATE RELATED | |||||
(Cost $311,523,063) | 330,181,546 | ||||
OTHER — 13.02% | |||||
COMMERCIAL PAPER — 5.86% | |||||
13,000,000 | American Honda | ||||
Finance, Corp | |||||
1.750% 11/08/04 | 12,974,791 | ||||
10,000,000 | Beta Finance, Inc | ||||
1.890% 01/14/05 | 9,941,994 | ||||
15,000,000 | Beta Finance, Inc | ||||
1.970% 01/21/05 | 14,907,246 | ||||
745,000 | CC (USA), Inc | ||||
1.770% 10/15/04 | 744,454 | ||||
13,000,000 | CC (USA), Inc | ||||
1.940% 01/14/05 | 12,924,593 | ||||
11,000,000 | CC (USA), Inc | ||||
1.690% 10/14/04 | 10,992,428 | ||||
3,295,000 | Ciesco LP | ||||
1.730% 11/15/04 | 3,287,295 | ||||
20,000,000 | Ciesco LP | ||||
1.790% 11/16/04 | 19,952,217 | ||||
19,140,000 | Corporate Asset Funding | ||||
Corp, Inc | |||||
1.820% 11/29/04 | 19,081,623 | ||||
6,000,000 | Delaware Funding Corp | ||||
1.780% 11/02/04 | 5,990,155 | ||||
3,500,000 | Dorada Finance Inc | ||||
1.680% 11/24/04 | 3,490,215 |
94 | Prospectus TIAA Real Estate Account | SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Consolidated Statement of Investments (Unaudited)- Real Estate Account -September 30, 2004
Issuer, Current Rate | ||||||
Principal | and Maturity Date | Value | ||||
$ | 19,015,000 | Dorada Finance Inc | ||||
1.780% 11/15/04 | $ | 18,970,537 | ||||
17,175,000 | Eli Lilly & Co | |||||
1.540% 10/14/04 | 17,163,178 | |||||
10,000,000 | FCAR Owner Trust I | |||||
1.560% 10/15/04 | 9,992,667 | |||||
10,000,000 | Govco Incorporated | |||||
1.510% 10/08/04 | 9,996,067 | |||||
15,000,000 | Govco Incorporated | |||||
1.490% 10/07/04 | 14,994,808 | |||||
25,000,000 | Kitty Hawk Funding Corp | |||||
1.600% 10/12/04 | 24,985,250 | |||||
15,000,000 | Links Finance L.L.C. | |||||
1.810% 12/09/04 | 14,945,604 | |||||
10,000,000 | Links Finance L.L.C. | |||||
1.550% 10/18/04 | 9,991,200 | |||||
13,216,000 | McCormick & Co, Inc. | |||||
1.700% 11/02/04 | 13,193,224 | |||||
6,200,000 | Morgan Stanley | |||||
1.790% 11/04/04 | 6,189,210 | |||||
2,255,000 | Paccar Financial Corp | |||||
1.730% 12/01/04 | 2,247,757 | |||||
10,000,000 | Paccar Financial Corp | |||||
1.910% 01/24/05 | 9,936,522 | |||||
18,340,000 | Proctor & Gamble | |||||
1.470% 10/04/04 | 18,336,373 | |||||
1,605,000 | Royal Bank of Scotland PLC | |||||
1.630% 10/25/04 | 1,603,038 | |||||
3,830,000 | Sigma Finance Inc | |||||
1.280% 10/21/04 | 3,826,068 | |||||
20,325,000 | Sigma Finance Inc | |||||
1.190% 10/22/04 | 20,303,139 | |||||
15,000,000 | Societe Generale | |||||
North America, Inc | ||||||
1.490% 10/12/04 | 14,991,150 | |||||
25,000,000 | Toronto Dominion Bank | |||||
2.015% 03/10/05 | 24,985,172 | |||||
25,000,000 | UBS Finance, (Delaware) Inc | |||||
1.790% 11/23/04 | 24,931,375 | |||||
10,000,000 | Wells Fargo | |||||
1.760% 10/28/04 | 9,999,914 | |||||
3,078,000 | Yorktown Capital, LLC | |||||
1.830% 12/13/04 | 3,066,200 | |||||
13,000,000 | Yorktown Capital, LLC | |||||
1.850% 12/17/04 | 12,946,483 | |||||
TOTAL COMMERCIAL PAPER | ||||||
(Amortized cost $401,948,231) | 401,881,947 | |||||
Issuer, Current Rate | ||||||
Principal | and Maturity Date | Value | ||||
GOVERNMENT AGENCIES — 7.16% | ||||||
$ | 9,380,000 | Federal Farm | ||||
Credit Banks | ||||||
1.780% 03/15/05 | $ | 9,290,901 | ||||
500,000 | Federal Farm | |||||
Credit Banks | ||||||
1.080% 10/13/04 | 499,688 | |||||
8,603,000 | Federal Farm | |||||
Credit Banks | ||||||
1.220% 01/07/05 | 8,556,867 | |||||
10,750,000 | Federal Farm | |||||
Credit Banks | ||||||
1.100% 11/17/04 | 10,723,913 | |||||
41,941,000 | Federal Home Loan | |||||
Banks | ||||||
1.650% 10/01/04 | 41,939,078 | |||||
3,655,000 | Federal Home Loan | |||||
Banks | ||||||
1.540% 12/03/04 | 3,643,174 | |||||
9,825,000 | Federal Home Loan | |||||
Banks | ||||||
1.090% 10/06/04 | 9,822,167 | |||||
27,075,000 | Federal Home Loan | |||||
Banks | ||||||
1.550% 11/19/04 | 27,006,560 | |||||
8,510,000 | Federal Home Loan | |||||
Banks | ||||||
1.935% 03/11/05 | 8,431,112 | |||||
21,345,000 | Federal Home Loan | |||||
Banks | ||||||
1.850% 12/27/04 | 21,246,386 | |||||
17,500,000 | Federal Home Loan | |||||
Banks | ||||||
1.730% 11/12/04 | 17,463,002 | |||||
4,000,000 | Federal Home Loan | |||||
Banks | ||||||
1.090% 10/08/04 | 3,998,462 | |||||
7,145,000 | Federal Home Loan | |||||
Banks | ||||||
1.200% 10/20/04 | 7,138,093 | |||||
7,860,000 | Federal Home Loan | |||||
Banks | ||||||
1.850% 04/21/05 | 7,766,481 | |||||
21,016,000 | Federal Home Loan | |||||
Banks | ||||||
1.520% 11/10/04 | 20,973,635 |
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | TIAA Real Estate Account Prospectus | 95 |
Consolidated Statement of Investments (Unaudited)- Real Estate Account -September 30, 2004
Issuer, Current Rate | |||||||
Principal | and Maturity Date | Value | |||||
$ | 2,240,000 | Federal Home Loan | |||||
Mortgage Corp | |||||||
1.500% 11/30/04 | $ | 2,233,092 | |||||
5,134,000 | Federal Home Loan | ||||||
Mortgage Corp | |||||||
1.540% 10/04/04 | 5,133,013 | ||||||
15,000,000 | Federal Home Loan | ||||||
Mortgage Corp | |||||||
1.875% 01/15/05 | 14,991,379 | ||||||
6,860,000 | Federal Home Loan | ||||||
Mortgage Corp | |||||||
1.650% 11/23/04 | 6,841,272 | ||||||
15,000,000 | Federal Home Loan | ||||||
Mortgage Corp | |||||||
1.790% 12/07/04 | 14,948,433 | ||||||
24,100,000 | Federal Home Loan | ||||||
Mortgage Corp | |||||||
1.550% 10/19/04 | 24,077,868 | ||||||
50,000,000 | Federal Home Loan | ||||||
Mortgage Corp | |||||||
1.570% 10/26/04 | 49,937,167 | ||||||
4,345,000 | Federal Home Loan | ||||||
Mortgage Corp | |||||||
1.780% 12/14/04 | 4,328,525 | ||||||
17,974,000 | Federal Home Loan | ||||||
Mortgage Corp | |||||||
1.620% 11/09/04 | 17,938,651 | ||||||
25,000,000 | Federal National | ||||||
Mortgage Association | |||||||
1.490% 10/06/04 | 24,992,792 | ||||||
20,000,000 | Federal National | ||||||
Mortgage Association | |||||||
1.590% 10/20/04 | 19,980,667 | ||||||
13,590,000 | Federal National | ||||||
Mortgage Association | |||||||
1.520% 11/03/04 | 13,567,282 | ||||||
45,000,000 | Federal National | ||||||
Mortgage Association | |||||||
1.560% 10/27/04 | 44,941,275 | ||||||
185,000 | Federal National | ||||||
Mortgage Association | |||||||
1.700% 12/08/04 | 184,355 | ||||||
18,000,000 | Federal National | ||||||
Mortgage Association | |||||||
1.740% 11/17/04 | 17,956,320 | ||||||
Issuer, Current Rate | |||||||
Principal | Principal and Maturity DateValue | ||||||
$ | 30,000,000 | Federal National | |||||
Mortgage Association | |||||||
1.792% 12/15/04 | $ | 29,880,300 | |||||
TOTAL GOVERNMENT AGENCIES | |||||||
(Amortized cost $490,587,670) | 490,431,910 | ||||||
TOTAL OTHER | |||||||
(Cost $892,535,901) | 892,313,857 | ||||||
TOTAL MARKETABLE SECURITIES | |||||||
(Cost $1,204,058,964) | 1,222,495,403 | ||||||
TOTAL INVESTMENTS — 100.00% | |||||||
(Cost $6,648,461,164) | $6,854,766,514 | ||||||
(1 | ) | The market value reflects the Account’s interest in the property gross of debt. | |||||
(2 | ) | This amount reflects the market value of the property as stated in the consolidated financial statements, which includes minority interest. | |||||
(3 | ) | Leasehold interest only. | |||||
(4 | ) | The market value reflects the Account’s interest in the joint venture gross of debt. | |||||
(5 | ) | 32 facilities throughout the U.S. | |||||
(6 | ) | The market value reflects the Account’s interest in the joint venture after debt. |
96 | Prospectus TIAA Real Estate Account | SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Consolidated Statement of Investments- Real Estate Account -December 31, 2003
REAL ESTATE PROPERTIES—79.49% | |||
REAL ESTATE PROPERTIES | |||
HELD FOR INVESTMENT—77.81% | |||
Location / Description | |||
Arizona: | |||
Biltmore Commerce Center — | |||
Office building | $ | 28,639,089 | |
California: | |||
3 Hutton Centre — Office building | 39,991,353 | ||
9 Hutton Centre — Office building | 20,343,676 | ||
88 Kearny Street — Office building | 62,541,205 | ||
Treat Towers — Office building | 112,941,315 | (1) | |
Cabot Industrial Portfolio — | |||
Industrial building | 52,223,082 | (1) | |
Capitol Place — Office building | 38,805,345 | ||
Eastgate Distribution Center — | |||
Industrial building | 16,600,000 | ||
Kenwood Mews — Apartments | 22,700,000 | ||
Larkspur Courts — Apartments | 55,000,000 | ||
The Legacy at Westwood — | |||
Apartments | 84,400,000 | ||
Northpoint Commerce Center — | |||
Industrial building | 41,800,000 | ||
Ontario Industrial Portfolio — | |||
Industrial building | 117,500,000 | ||
Regents Court — Apartments | 49,600,000 | ||
Westcreek — Apartments | 22,000,000 | ||
Westwood Marketplace — | |||
Shopping center | 74,000,000 | ||
Colorado: | |||
The Lodge at Willow Creek — | |||
Apartments | 31,698,947 | ||
Monte Vista — Apartments | 20,600,000 | ||
Connecticut: | |||
Ten & Twenty Westport Road — | |||
Office building | 144,000,000 | ||
Florida: | |||
701 Brickell — Office building | 177,009,565 | ||
4200 West Cypress Street — | |||
Office building | 32,824,935 | ||
Golfview — Apartments | 27,750,000 | ||
The Fairways of Carolina — | |||
Apartments | 18,000,000 | ||
The Greens at Metrowest — | |||
Apartments | 14,000,000 | ||
Maitland Promenade One — | |||
Office building | 35,192,924 | ||
Plantation Grove — Shopping center | 9,100,000 | ||
Pointe on Tampa Bay — | |||
Office building | 42,100,000 | ||
Quiet Waters at Coquina Lakes — | |||
Apartments | 18,800,000 | ||
Royal St. George — Apartments | 17,700,000 | ||
Sawgrass Office Portfolio — | |||
Office building | 45,400,000 | ||
South Florida Apartment Portfolio — | |||
Apartments | 46,700,000 | ||
Georgia: | |||
Alexan Buckhead — Apartments | 41,000,000 | ||
Atlanta Industrial Portfolio — | |||
Industrial building | 37,300,000 | ||
Prominence in Buckhead — | |||
Office building | 92,494,922 | (1) | |
Illinois: | |||
161 North Clark Street — | |||
Office building | 209,051,330 | (1) | |
Chicago CalEast Industrial | |||
Portfolio — Industrial building | 40,232,195 | ||
Chicago Industrial Portfolio — | |||
Industrial building | 59,292,310 | ||
Columbia Center III — Office building | 30,000,000 | ||
Oak Brook Regency Towers — | |||
Office building | 67,300,000 | ||
Parkview Plaza — Office building | 50,400,000 | ||
Rolling Meadows — Shopping center | 13,550,000 | ||
Kentucky: | |||
IDI Kentucky Portfolio — | |||
Industrial building | 52,000,000 | ||
Maryland: | |||
Corporate Boulevard — | |||
Office building | 69,500,000 | ||
FEDEX Distribution Facility — | |||
Industrial building | 7,600,000 | ||
Massachusetts: | |||
Batterymarch Park II — | |||
Office building | 10,000,000 | ||
Longwood Towers — Apartments | 76,400,000 | ||
Mellon Financial Center at One | |||
Boston Place — Office building | 248,000,000 | (1) | |
Needham Corporate Center — | |||
Office building | 12,544,934 | ||
Michigan: | |||
Indian Creek — Apartments | 17,700,000 |
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | TIAA Real Estate Account Prospectus | 97 |
Consolidated Statement of Investments- Real Estate Account -December 31, 2003
Location / Description | Value | ||
Minnesota: | |||
Interstate Crossing — | |||
Industrial building | $ | 6,345,000 | |
River Road Distribution Center — | |||
Industrial building | 4,150,000 | ||
Nevada: | |||
UPS Distribution Facility — | |||
Industrial building | 11,500,000 | ||
New Jersey: | |||
10 Waterview Boulevard — | |||
Office building | 27,000,000 | ||
371 Hoes Lane — Office building | 8,500,000 | ||
Konica Photo Imaging | |||
Headquarters — Industrial building | 18,500,000 | ||
Morris Corporate Center III — | |||
Office building | 90,000,000 | ||
NJ CalEast Industrial Portfolio — | |||
Industrial building | 39,843,924 | ||
South River Road Industrial — | |||
Industrial building | 31,000,000 | ||
New York: | |||
780 Third Avenue — Office building | 180,000,000 | ||
The Colorado — Apartments | 54,008,059 | ||
Ohio: | |||
Bent Tree — Apartments | 13,000,00 | ||
BISYS Fund Services Building — | |||
Office building | 35,500,000 | (1) | |
Columbus Portfolio — Office building | 22,000,000 | ||
Oregon: | |||
Five Centerpointe — Office building | 13,850,797 | ||
Pennsylvania: | |||
Lincoln Woods — Apartments | 26,704,000 | ||
Tennessee: | |||
Memphis CalEast Industrial | |||
Portfolio — Industrial building | 43,036,559 | ||
Summit Distribution Center — | |||
Industrial building | 21,961,420 | ||
Texas: | |||
Butterfield Industrial Park — | |||
Industrial building | 4,506,687 | (2) | |
Dallas Industrial Portfolio — | |||
Industrial building | 138,000,000 | ||
The Legends at Chase Oaks — | |||
Apartments | 26,000,000 | ||
Utah: | |||
Landmark at Salt Lake City | |||
(Building #4) — Industrial building | 12,500,000 | ||
Virginia: | |||
Ashford Meadows — Apartments | 62,000,000 | ||
Fairgate at Ballston — | |||
Office building | 28,400,000 | ||
Monument Place — Office building | 33,334,338 | ||
Washington: | |||
Rainier Corporate Park — | |||
Industrial building | 53,994,267 | ||
Washington DC: | |||
1015 15th Street — Office building | 54,300,000 | ||
The Farragut Building — | |||
Office building | 45,700,000 | ||
Other: | |||
Storage Portfolio I LLC | 175,676,890 | (1) | |
TOTAL REAL ESTATE PROPERTIES | |||
HELD FOR INVESTMENT | |||
(Cost $4,016,534,969) | 3,935,639,068 | ||
REAL ESTATE PROPERTIES | |||
HELD FOR SALE — 1.68% | |||
Location / Description | |||
Florida: | |||
Doral Pointe — Apartments | $ | 42,600,000 | |
Maryland: | |||
Longview Executive Park — | |||
Office building | 22,200,000 | ||
North Carolina: | |||
The Lynnwood Collection — | |||
Shopping center | 8,100,000 | ||
The Millbrook Collection — | |||
Shopping center | 7,000,000 | ||
Ohio: | |||
Northmark Business Center III — | |||
Office building | 5,200,000 | ||
TOTAL REAL ESTATE PROPERTIES | |||
HELD FOR SALE | |||
(Cost $96,287,588) | 85,100,000 | ||
TOTAL REAL ESTATE PROPERTIES | |||
(Cost $4,112,822,557) | 4,020,739,068 | ||
98 | Prospectus TIAA Real Estate Account | SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Consolidated Statement of Investments- Real Estate Account -December 31, 2003
Location / Description | ||||
OTHER REAL ESTATE RELATED | ||||
INVESTMENTS — 5.60% | ||||
REAL ESTATE JOINT VENTURES — 4.77% | ||||
Florida Mall Association, Ltd. | ||||
The Florida Mall (50% | ||||
Account Interest)* | $ | 99,279,653 | ||
Teachers REA IV, LLC, which owns | ||||
Tyson’s Executive Plaza II | ||||
(50% Account Interest) | 25,577,096 | |||
West Dade County Associates | ||||
Miami International Mall | ||||
(50% Account Interest)* | 39,789,620 | |||
West Town Mall Joint Venture | ||||
West Town Mall (50% Account | ||||
Interest)* | 76,375,643 | |||
TOTAL REAL ESTATE JOINT VENTURES | ||||
(Cost $213,788,540) | 241,022,012 | |||
LIMITED PARTNERSHIPS — 0.83% | ||||
Essex Apartment Value Fund, L.P. | ||||
(10% Account Interest) | 20,864,368 | |||
MONY/Transwestern Mezzanine | ||||
Realty Partners L.P. (19.76% | ||||
Account Interest) | 21,366,470 | |||
TOTAL LIMITED PARTNERSHIP | ||||
(Cost $42,338,812) | 42,230,838 | |||
TOTAL OTHER REAL ESTATE RELATED | ||||
INVESTMENTS(Cost $256,127,352) | 283,252,850 | |||
* The market value reflects the Account’s interest in the | ||||
joint venture after debt. | ||||
(1) This amount reflects the market value of the property | ||||
as stated in the consolidated financial statements, | ||||
which includes minority interest. | ||||
(2) Leasehold interest only. | ||||
MARKETABLE SECURITIES — 14.91% | ||||
REAL ESTATE RELATED — 6.29% | ||||
REAL ESTATE INVESTMENT TRUSTS — 5.24% | ||||
Shares | Issuer | |||
30,000 | Apartment Investment & | |||
Management Co | $ | 1,035,000 | ||
120,325 | Archstone-Smith Trust | 3,366,694 | ||
560,000 | Ashford Hospitality Trust | 5,258,400 | ||
115,000 | Avalonbay Communities Inc | 5,497,000 | ||
206,800 | Boston Properties, Inc | 9,965,692 | ||
315,000 | BRE Properties | 10,521,000 | ||
440,000 | Cedar Shopping Centers Inc | 5,464,800 | ||
40,000 | Chelsea Property Group Inc | 2,192,400 | ||
200,000 | Entertainment Properties Trust | 6,942,000 | ||
300,000 | Equity Office Properties Trust | 8,595,000 | ||
300,000 | Equity One Inc | 5,064,000 | ||
203,800 | Equity Residential | 6,014,138 | ||
40,000 | Essex Property Trust Inc | 2,568,800 | ||
400,000 | Falcon Financial Investment | 3,920,000 | ||
70,000 | Gables Residential Trust | 2,431,800 | ||
140,000 | Health Care Reit Inc | 5,040,000 | ||
114,700 | Hilton Hotels Corp | 1,964,811 | ||
822,800 | Host Marriott Corp | 10,136,896 | ||
300,000 | Interstate Hotels & Resorts | 1,605,000 | ||
250,000 | Istar Financial Inc | 9,725,000 | ||
640,000 | Keystone Property Trust | 14,137,600 | ||
100,000 | Kimco Realty Corp | 4,475,000 | ||
640,000 | Lexington Corporate | |||
Properties Trust | 12,921,600 | |||
230,000 | Liberty Property Trust | 8,947,000 | ||
290,000 | LTC Properties 8.5% | 9,097,300 | ||
200,000 | Macerich Company/ The | 8,900,000 | ||
800,000 | Meristar Hospitality Trust | 5,208,000 | ||
200,000 | Mission West Properties, Inc | 2,590,000 | ||
130,000 | Post Properties, Inc | 3,629,600 | ||
250,000 | Prentiss Properties Trust | 8,247,500 | ||
330,000 | Prologis Trust | 10,589,700 | ||
285,000 | PS Business Parks Inc | 11,759,100 | ||
172,500 | Ramco-Gershenson Properties | 4,881,750 | ||
235,900 | Simon Property Group, Inc | 10,931,606 | ||
22,100 | Sun Communities Inc | 855,270 | ||
200,000 | Tanger Factory Outlet Center | 8,140,000 | ||
800,000 | United Dominion Realty Trust | 15,360,000 | ||
260,000 | US Restaurant Properties | 4,430,400 | ||
131,300 | Washington Real Estate Inv | 3,833,960 | ||
85,000 | Weingarten Realty Investors | 3,769,750 | ||
170,000 | Windrose Medical Properties | 2,109,700 | ||
306,300 | Winston Hotels Inc | 3,124,260 | ||
TOTAL REAL ESTATE INVESTMENT TRUSTS | ||||
(Cost $242,402,103) | 265,247,527 | |||
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | TIAA Real Estate Account Prospectus | 99 |
Consolidated Statement of Investments- Real Estate Account -December 31, 2003
COMMERCIAL MORTGAGE BACKED | |||||
SECURITIES — 1.05% | |||||
Issuer, Current Rate | |||||
Principal | and Maturity Date | ||||
$ | 10,000,000 | GSMS 2001-Rock A2FL | |||
1.530% 05/03/18 | $ | 9,909,090 | |||
20,000,000 | LBF 1.49% | ||||
1.543% 06/14/17 | 20,007,680 | ||||
10,000,000 | MSDWC 2001-280 A2F | ||||
1.560% 02/03/11 | 9,797,770 | ||||
8,429,804 | Opryland Hotel Trust | ||||
1.630% 04/01/11 | 8,418,230 | ||||
5,000,000 | Trize 2001 — TZHA A3FL | ||||
1.533% 03/15/13 | 4,871,440 | ||||
TOTAL COMMERCIAL MORTGAGE | |||||
BACKED SECURITIES | |||||
(Cost $53,433,209) | 53,004,210 | ||||
TOTAL REAL ESTATE RELATED | |||||
(Cost $295,835,312) | 318,251,737 | ||||
OTHER — 8.62% | |||||
COMMERCIAL PAPER — 8.62% | |||||
25,000,000 | Canadian Imperial Bank of | ||||
Commerce | |||||
1.060% 01/28/04 | 24,999,805 | ||||
2,215,000 | CC (USA), Inc | ||||
1.100% 02/10/04 | 2,212,351 | ||||
25,000,000 | Ciesco LP | ||||
1.080% 02/13/04 | 24,967,917 | ||||
18,000,000 | Corporate Asset Funding | ||||
Corp, Inc | |||||
1.090% 01/14/04 | 17,992,720 | ||||
20,275,000 | Delaware Funding Corp | ||||
1.080% 01/22/04 | 20,261,866 | ||||
13,905,000 | Federal Home Loan | ||||
Mortgage Corp | |||||
1.020% 01/09/04 | 13,901,559 | ||||
37,980,000 | Federal Home Loan | ||||
Mortgage Corp | |||||
1.020% 01/08/04 | 37,971,644 | ||||
10,715,000 | Federal Home Loan | ||||
Mortgage Corp | |||||
1.020% 02/24/04 | 10,698,630 | ||||
10,000,000 | Federal Home Loan | ||||
Mortgage Corp | |||||
1.020% 02/17/04 | 9,986,667 | ||||
30,000,000 | Federal National | ||||
Mortgage Association | |||||
1.054% 01/07/04 | 29,994,458 | ||||
50,000,000 | Federal National | ||||
Mortgage Association | |||||
1.010% 01/15/04 | 49,979,166 | ||||
6,500,000 | Federal National | ||||
Mortgage Association | |||||
1.000% 01/05/04 | 6,499,142 | ||||
50,000,000 | Federal National | ||||
Mortgage Association | |||||
1.050% 01/30/04 | 49,958,334 | ||||
9,800,000 | Govco Incorporated | ||||
1.040% 02/23/04 | 9,784,418 | ||||
15,000,000 | Govco Incorporated | ||||
1.080% 02/26/04 | 14,974,825 | ||||
10,000,000 | Greyhawk Funding LLC | ||||
1.100% 01/20/04 | 9,994,111 | ||||
25,000,000 | Kitty Hawk Funding Corp | ||||
1.080% 01/05/04 | 24,996,458 | ||||
1,300,000 | New York Times Co | ||||
1.070% 02/17/04 | 1,298,163 | ||||
14,535,000 | Park Avenue | ||||
Receivables Corp | |||||
1.080% 01/29/04 | 14,522,589 | ||||
2,000,000 | Private Export Funding | ||||
Corporation | |||||
1.090% 02/19/04 | 1,997,056 | ||||
4,460,000 | Receivables | ||||
Capital Corp | |||||
1.050% 01/05/04 | 4,459,368 | ||||
19,285,000 | Receivables | ||||
Capital Corp | |||||
1.070% 01/20/04 | 19,273,643 | ||||
25,000,000 | Sigma Finance Inc | ||||
1.090% 01/06/04 | 24,995,750 | ||||
10,000,000 | UBS Finance, | ||||
(Delaware) Inc | |||||
0.960% 01/02/04 | 9,999,433 | ||||
TOTAL COMMERCIAL PAPER | |||||
(Amortized cost $435,725,426) | 435,720,073 | ||||
TOTAL OTHER | |||||
(Cost $435,725,426) | 435,720,073 | ||||
TOTAL MARKETABLE SECURITIES | |||||
(Cost $731,560,738) | 753,971,810 | ||||
TOTAL INVESTMENTS — 100.00% | |||||
(Cost $5,100,510,647) | $ | 5,057,963,728 | |||
100 | Prospectus TIAA Real Estate Account | SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Consolidated Statement of Investments- Real Estate Account -December 31, 2002
REAL ESTATE PROPERTIES—86.37% | ||
REAL ESTATE PROPERTIES | ||
HELD FOR INVESTMENT—83.96% | ||
Location / Description | ||
Arizona: | ||
Biltmore Commerce Center — | ||
Office building | $ | 28,394,213 |
California: | ||
9 Hutton Centre — Office building | 19,425,493 | |
88 Kearny Street — Office building | 65,083,257 | |
Cabot Industrial Portfolio — | ||
Industrial building | 41,586,565 | |
Eastgate Distribution Center — | ||
Industrial building | 15,200,000 | |
Kenwood Mews Apartments — | ||
Apartments | 22,700,000 | |
Larkspur Courts — Apartments | 55,014,500 | |
The Legacy at Westwood | ||
Apartments — Apartments | 85,075,210 | |
Northpoint Commerce Center — | ||
Industrial building | 37,972,054 | |
Ontario Industrial Portfolio — | ||
Industrial building | 108,000,000 | |
Regents Court Apartments — | ||
Apartments | 49,567,031 | |
Westcreek Apartments — | ||
Apartments | 18,686,112 | |
Westwood Marketplace — | ||
Shopping Center | 74,026,411 | |
Colorado: | ||
The Lodge at Willow Creek — | ||
Apartments | 31,000,000 | |
Monte Vista — Apartments | 20,499,262 | |
Connecticut: | ||
Ten & Twenty Westport Road — | ||
Office building | 140,000,000 | |
Florida: | ||
701 Brickell — Office building | 172,088,618 | |
Golfview Apartments — | ||
Apartments | 26,240,000 | |
The Fairways of Carolina — | ||
Apartments | 16,100,000 | |
The Greens at Metrowest | ||
Apartments — Apartments | 13,900,000 | |
Maitland Promenade One — | ||
Office building | 37,600,000 | |
Plantation Grove — Shopping center | 8,200,000 | |
The Pointe on Tampa Bay — | ||
Office building | 41,239,643 | |
Quiet Waters at Coquina Lakes — | ||
Apartments | 17,600,000 | |
Royal St. George — Apartments | 17,100,000 | |
Sawgrass Office Portfolio — | ||
Office building | 45,000,000 | |
South Florida Apartment Portfolio — | ||
Apartments | 46,800,000 | |
Westinghouse Facility — | ||
Industrial building | 5,300,000 | |
Georgia: | ||
Alexan Buckhead — Apartments | 45,739,570 | |
Atlanta Industrial Portfolio — | ||
Industrial building | 38,400,000 | |
Illinois: | ||
Chicago Industrial Portfolio — | ||
Industrial building | 40,100,000 | |
Columbia Center III — | ||
Office building | 33,800,000 | |
Oak Brook Regency Towers — | ||
Office building | 66,602,200 | |
Parkview Plaza — Office building | 50,315,694 | |
Rolling Meadows — Shopping center | 12,850,000 | |
Kentucky: | ||
IDI Kentucky Portfolio — | ||
Industrial building | 50,200,000 | |
Maryland: | ||
Corporate Boulevard — | ||
Office building | 68,020,401 | |
FEDEX Distribution Facility — | ||
Industrial building | 7,500,000 | |
Massachusetts: | ||
Batterymarch Park II — | ||
Office building | 15,000,000 | |
Longwood Towers — Apartments | 80,202,248 | |
Mellon Financial Center | ||
at One Boston Place — | ||
Office building | 261,896,938 | |
Needham Corporate Center — | ||
Office building | 26,500,000 | |
Michigan: | ||
Indian Creek Apartments — | ||
Apartments | 17,700,000 | |
Minnesota: | ||
Interstate Crossing — | ||
Industrial building | 6,304,905 | |
River Road Distribution Center — | ||
Industrial building | 4,150,000 |
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | TIAA Real Estate Account Prospectus | 101 |
Consolidated Statement of Investments- Real Estate Account -December 31, 2002
Location / Description | |||
Nevada: | |||
UPS Distribution Facility — | |||
Industrial building | $ | 11,500,000 | |
New Jersey: | |||
10 Waterview Boulevard — | |||
Office building | 27,000,000 | ||
371 Hoes Lane — Office building | 10,817,795 | ||
Konica Photo Imaging Headquarters — | |||
Industrial building | 17,900,000 | ||
Morris Corporate Center III — | |||
Office building | 92,400,000 | ||
South River Road Industrial — | |||
Industrial building | 32,800,000 | ||
New York: | |||
780 Third Avenue — Office building | 178,500,000 | ||
The Colorado — Apartments | 55,702,614 | ||
Ohio: | |||
Bent Tree Apartments — Apartments | 13,400,000 | ||
BISYS Fund Services Building — | |||
Office building | 34,700,000 | ||
Columbus Portfolio — | |||
Office building | 23,600,000 | ||
Oregon: | |||
Five Centerpointe — Office building | 16,002,154 | ||
Pennsylvania: | |||
Lincoln Woods Apartments — | |||
Apartments | 24,676,180 | ||
Texas: | |||
Butterfield Industrial Park — | |||
Industrial building | 4,500,000 | (1) | |
Dallas Industrial Portfolio — | |||
Industrial building | 136,034,954 | ||
The Legends at Chase Oaks — | |||
Apartments | 26,000,000 | ||
Utah: | |||
Landmark at Salt Lake City | |||
(Building #4) — | |||
Industrial building | 12,700,000 | ||
Virginia: | |||
Ashford Meadows Apartments — | |||
Apartments | 62,000,000 | ||
Fairgate at Ballston — Office building | 30,700,000 | ||
Monument Place — Office building | 33,500,000 | ||
Washington DC: | |||
1015 15th Street — Office building | 51,600,000 | ||
1801 K Street, N.W. — | |||
Office building | 162,636,836 | ||
The Farragut Building — | |||
Office building | 46,500,000 | ||
TOTAL REAL ESTATE PROPERTIES HELD FOR INVESTMENT | |||
(Cost $3,230,013,803) | $ | 3,189,850,858 | |
REAL ESTATE PROPERTIES | |||
HELD FOR SALE — 2.41% | |||
Location / Description | |||
Florida: | |||
Doral Pointe — Apartments | 43,507,416 | ||
Maryland: | |||
Longview Executive Park — | |||
Office building | 24,990,805 | ||
North Carolina: | |||
The Lynnwood Collection — | |||
Shopping center | 7,983,285 | ||
The Millbrook Collection — | |||
Shopping center | 7,000,000 | ||
Ohio: | |||
Northmark Business Center III — | |||
Office building | 8,000,000 | ||
TOTAL REAL ESTATE PROPERTIES | |||
HELD FOR SALE | |||
(Cost $91,265,838) | 91,481,506 | ||
TOTAL REAL ESTATE PROPERTIES | |||
(Cost $3,321,279,641) | $ | 3,281,332,364 | |
OTHER REAL ESTATE RELATED | |||
INVESTMENTS — 6.50% | |||
REAL ESTATE JOINT VENTURE — 6.19% | |||
Florida Mall Association, Ltd. | |||
The Florida Mall (49.975% | |||
Account Interest)* | $ | 84,997,624 | |
Teachers REA IV, LLC, which owns | |||
Tyson’s Executive Plaza II | |||
(50% Account Interest) | 25,632,730 | ||
West Dade County Associates | |||
Miami International Mall | |||
(49.950% Account Interest)* | 57,322,356 | ||
West Town Mall Joint Venture | |||
West Town Mall | |||
(49.932% Account Interest)* | 67,216,965 | ||
TOTAL REAL ESTATE JOINT VENTURE | |||
(Cost $237,492,256) | 235,169,675 | ||
LIMITED PARTNERSHIPS — 0.31% | |||
MONY/Transwestern Mezzanine | |||
Realty Partners L.P. (19.76% | |||
Account Interest) | 6,457,921 |
102 | Prospectus TIAA Real Estate Account | SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Consolidated Statement of Investments- Real Estate Account -December 31, 2002
Location / Description | Value | |||
Essex Apartment Value Fund, L.P. | ||||
(10% Account Interest) | $ | 5,278,409 | ||
TOTAL LIMITED PARTNERSHIP | ||||
(Cost $11,689,978) | 11,736,330 | |||
TOTAL OTHER REAL ESTATE RELATED INVESTMENTS | ||||
(Cost $249,182,234) | 246,906,005 | |||
MARKETABLE SECURITIES — 7.13% | ||||
REAL ESTATE RELATED — 4.03% | ||||
REAL ESTATE INVESTMENT TRUSTS — 2.87% | ||||
Shares | Issuer | Value | ||
75,600 | Alexandria Real Estate | |||
Equities, Inc. | $ | 3,220,560 | ||
210,000 | Apartment Investment & | |||
Management Co | 7,870,800 | |||
335,325 | Archstone-Smith Trust | 7,893,551 | ||
125,700 | Avalonbay Communities, Inc. | 4,919,898 | ||
306,800 | Boston Properties, Inc | 11,308,648 | ||
154,500 | Chateau Communities, Inc | 3,553,500 | ||
500,000 | Equity Office Properties Trust | 12,490,000 | ||
463,800 | Equity Residential Properties | |||
Trust Co. | 11,400,204 | |||
125,000 | Heritage Property Investment | 3,121,250 | ||
114,700 | Hilton Hotels Corp | 1,457,837 | ||
222,800 | Host Marriott Corp (New) | 1,971,780 | ||
230,750 | Kimco Realty Corp. | 7,070,180 | ||
47,100 | Manufactured Home | |||
Communities, Inc. | 1,395,573 | |||
56,000 | Mills Corp. | 1,643,040 | ||
290,000 | Mission West Properties, Inc. | 2,871,000 | ||
180,000 | Post Properties, Inc. | 4,302,000 | ||
180,000 | Prologis Trust | 4,527,000 | ||
184,700 | Public Storage, Inc. | 5,967,657 | ||
230,000 | Reckson Associates Realty Corp | 4,841,500 | ||
160,900 | Simon Property Group, Inc. | 5,481,863 | ||
43,700 | Sun Communities, Inc | 1,598,109 | ||
TOTAL REAL ESTATE INVESTMENT TRUSTS | ||||
(Cost $117,775,472) | 108,905,950 | |||
* The market value reflects the Account’s interest in the | ||||
joint venture after debt. | ||||
(1) Leasehold interest only. |
COMMERCIAL MORTGAGE BACKED | |||||
SECURITIES — 1.16% | |||||
Issuer, Current Rate | |||||
Principal | and Maturity Date | ||||
$ | 10,000,000 | GSMS 2001 — Rock A2FL | |||
1.799% 05/03/11 | $ | 9,473,810 | |||
10,000,000 | MSDW Capital | ||||
1.830% 02/03/11 | 9,669,950 | ||||
8,000,000 | MSDWC 2001 — FRMA C | ||||
2.001% 07/12/16 | 7,780,528 | ||||
2,378,141 | MSDWC 2001 — XLF A1 | ||||
1.940% 10/07/13 | 2,378,386 | ||||
10,000,000 | Opryland Hotel Trust | ||||
1.840% 04/01/04 | 9,983,850 | ||||
5,000,000 | Trize 2001 — TZHA A3FL | ||||
1.790% 03/15/13 | 4,944,895 | ||||
TOTAL COMMERCIAL MORTGAGE BACKED | |||||
SECURITIES | |||||
(Cost $45,370,584) | 44,231,419 | ||||
TOTAL REAL ESTATE RELATED | |||||
(Cost $163,146,056) | 153,137,369 | ||||
OTHER — 3.10% | |||||
COMMERCIAL PAPER — 2.94% | |||||
25,000,000 | General Electric Capital Corp | ||||
1.260% 01/09/03 | 24,991,500 | ||||
10,000,000 | Merck, Inc | ||||
1.200% 01/02/03 | 9,999,267 | ||||
1,800,000 | Pharmacia Corp | ||||
1.180% 01/02/03 | 1,799,868 | ||||
25,000,000 | Royal Bank of Scotland PLC | ||||
1.320% 01/09/03 | 24,991,500 | ||||
25,000,000 | Salomon Smith Barney | ||||
Holdings, Inc | |||||
1.150% 01/02/03 | 24,998,167 | ||||
25,000,000 | UBS Finance (Delaware) Inc | ||||
1.200% 01/02/03 | 24,998,168 | ||||
TOTAL COMMERCIAL PAPER | |||||
(Amortized cost $111,783,643) | 111,778,470 | ||||
GOVERNMENT BONDS — 0.16% | |||||
5,610,798 | Treasury Inflation Indexed | ||||
3.625% 01/15/08 | 6,156,100 | ||||
TOTAL GOVERNMENT BONDS | |||||
(Cost $6,002,822) | 6,156,100 | ||||
TOTAL OTHER | |||||
(Cost $117,786,465) | 117,934,570 | ||||
TOTAL MARKETABLE SECURITIES | |||||
(Cost $280,932,521) | 271,071,939 | ||||
TOTAL INVESTMENTS — 100.00% | |||||
(Cost $3,851,394,396) | $3,799,310,308 | ||||
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | TIAA Real Estate Account Prospectus | 103 |
Report of Independent Registered Public Accounting Firm
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 of the TIAA Real Estate Account (“Account”) of Teachers Insurance and Annuity Association of America (“TIAA”), including the consolidated statements of investments, as of December 31, 2003 and 2002, 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, 2003. 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 the standards of the Public Company Accounting Oversight Board (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.
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, 2003 and 2002, and the consolidated results of its operations, changes in its net assets and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
February 18, 2004, except for
Note 10, as to which the
date is December 20, 2004
104 | Prospectus TIAA Real Estate Account
Proforma Condensed Statement of Assets and Liabilities (Unaudited)
TIAA Real Estate Account
September 30, 2004
Historical | Adjustments | Proforma | ||||
ASSETS | ||||||
Real estate and other real estate related investments | $5,632,271,111 | 1,570,000,000 | (a) | $7,202,271,111 | ||
Marketable securities | 1,222,495,403 | — | 1,222,495,403 | |||
Cash | 1,432,650 | — | 1,432,650 | |||
Other | 129,928,257 | — | 129,928,257 | |||
TOTAL ASSETS | 6,986,127,421 | 1,570,000,000 | 8,556,127,421 | |||
LIABILITIES | ||||||
Mortgage notes payable | 124,521,077 | 560,000,000 | (a) | 684,521,077 | ||
Payable for securities transactions | 4,529,110 | — | 4,529,110 | |||
Accrued real estate property level expenses and taxes | 99,928,960 | — | 99,928,960 | |||
Security deposits held | 13,192,119 | — | 13,192,119 | |||
TOTAL LIABILITIES | 242,171,266 | 560,000,000 | 802,171,266 | |||
MINORITY INTEREST | 265,852,156 | 42,000,000 | (a) | 307,852,156 | ||
NET ASSETS | $6,478,103,999 | 968,000,000 | (a) | $7,446,103,999 | ||
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | TIAA Real Estate Account Prospectus | 105 |
Proforma Condensed Statement of Operations (Unaudited)
TIAA Real Estate Account
For the Nine Months Ended September 30, 2004
Historical | Adjustments | Proforma | |||||
Rental income, net: | $372,054,340 | $181,059,000 | (b) | $553,113,340 | |||
Operating expenses | 94,086,733 | 40,039,000 | (b) | 134,125,733 | |||
Real estate taxes | 53,955,456 | 23,449,000 | (b) | 77,404,456 | |||
Interest expense | 2,695,856 | 26,281,000 | (b) | 28,976,856 | |||
Total real estate property level expenses and taxes | 150,738,045 | 89,769,000 | 240,507,045 | ||||
Real estate income, net | 221,316,295 | 91,290,000 | 312,606,295 | ||||
Income from real estate joint venture | 12,443,808 | 4,580,000 | (b) | 17,023,808 | |||
Interest and dividends | 24,527,777 | — | 24,527,777 | ||||
TOTAL INCOME | 258,287,880 | 95,870,000 | 354,157,880 | ||||
EXPENSES | 25,574,516 | 3,228,000 | (c) | 28,802,516 | |||
INVESTMENT INCOME, NET | 232,713,364 | 92,642,000 | 325,355,364 | ||||
REALIZED AND UNREALIZED GAINS | 274,082,980 | — | 274,082,980 | ||||
506,796,344 | 92,642,000 | 599,438,344 | |||||
Minority interest in net increase in net assets from operations | (30,157,854) | 165,000 | (b) | (29,992,854) | |||
RESULTS FROM CONTINUING OPERATIONS | $476,638,490 | $92,807,000 | $569,445,490 | ||||
106 | Prospectus TIAA Real Estate Account | SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Proforma Condensed Statement of Operations (Unaudited)
TIAA Real Estate Account
For the Year Ended December 31, 2003
Historical | Adjustments | Proforma | |||||
Rental income, net: | $381,687,320 | $329,932,000 | (b) | $711,619,320 | |||
Operating expenses | 92,474,277 | 74,055,000 | (b) | 166,529,277 | |||
Real estate taxes | 52,019,197 | 45,394,000 | (b) | 97,413,197 | |||
Interest expense | — | 33,212,000 | (b) | 33,212,000 | |||
Total real estate property level expenses and taxes | 144,493,474 | 152,661,000 | 297,154,474 | ||||
Real estate income, net | 237,193,486 | 177,271,000 | 414,464,846 | ||||
Income from real estate joint venture | 19,492,494 | 9,887,000 | (b) | 29,379,494 | |||
Interest and dividends | 19,461,931 | — | 19,461,931 | ||||
TOTAL INCOME | 276,148,271 | 187,158,000 | 463,306,271 | ||||
EXPENSES | 31,654,065 | 6,003,000 | (c) | 37,657,065 | |||
INVESTMENT INCOME, NET | 244,494,206 | 181,155,000 | 425,649,206 | ||||
REALIZED AND UNREALIZED GAINS | 42,356,297 | — | 42,356,297 | ||||
286,850,503 | 181,155,000 | 468,005,503 | |||||
Minority interest in net increase in net assets from operations | (6,655,183) | 513,000 | (b) | (6,142,183) | |||
RESULTS FROM CONTINUING OPERATIONS | $280,195,320 | $181,668,000 | $461,863,320 | ||||
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | TIAA Real Estate Account Prospectus | 107 |
Notes to Proforma Condensed Financial Statements (Unaudited)
TIAA Real Estate Account
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 from January 1, 2003 through the date of this prospectus. During 2003, the Account purchased 12 properties: six office properties, including three consolidated joint ventures, five industrial properties and a consolidated joint venture interest in a portfolio of storage facilities. During the nine months ended September 30, 2004, the Account purchased 15 properties: five office properties, including one unconsolidated joint venture, eight industrial properties and two retail properties. Information regarding these properties is included under “Description of Properties” on page 17. During the period from October 1, 2004 through the date of this prospectus, the Account purchased or expects to purchase six properties: four office properties (three of which are subject to leverage) and two industrial properties, including one consolidated joint venture. Information regarding these properties is included under “Recent Property Purchases and Sales” on page 28.
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 or expected to be purchased during the period from October 1, 2004 through the date of this prospectus were purchased as of September 30, 2004. The proforma condensed statement of operations for the year ended December 31, 2003 and the proforma consolidated statement of operations for the nine months ended September 30, 2004 has been prepared assuming all real estate properties purchased or expected to be purchased during the period from January 1, 2003 through the date of this prospectus were purchased as of January 1, 2003.
Note 2 —Proforma Adjustments
The following proforma adjustments were made in preparing the proforma condensed financial statements to reflect the purpose described in Note 1.
Proforma Condensed Statement of Assets and Liabilities: | ||
(a) | To record the cost, related mortgage notes payable and minority interest, of properties purchased during the period from October 1, 2004 through the date of this prospectus, assuming such properties were purchased on September 30, 2004 and to record the inflow of sufficient cash from participant transactions to fund such purchases. | |
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 from January 1, 2003 through the date of this prospectus, including the portion allocable to the Account for unconsolidated joint ventures and the portion allocable to the minority interest for consolidated joint ventures, assuming such properties were owned for the period from January 1, 2003 through September 30, 2004. | |
(c) | To record additional investment advisory charges which would have been incurred during the periods presented, assuming the real estate properties purchased during the period from January 1, 2003 through the date of this prospectus had been purchased as of January 1, 2003. |
108 | Prospectus TIAA Real Estate Account
3111 Camino Del Rio North, San Diego, California
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 3111 Camino Del Rio North, San Diego, California (the “Property”), as described in Note 1, for the year ended December 31, 2003. 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, 2003, in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
November 24, 2004
TIAA Real Estate Account Prospectus | 109
Statement of Revenues and Certain Expenses
(In Thousands)
Revenues | |||||||||||||||||
Rental income | $5,185 | $1,695 | |||||||||||||||
Recoveries | 343 | 120 | |||||||||||||||
Parking | 213 | 85 | |||||||||||||||
Other income | 226 | 24 | |||||||||||||||
5,967 | 1,924 | ||||||||||||||||
Certain expenses | |||||||||||||||||
Administrative | 152 | 42 | |||||||||||||||
Operating and maintenance | 1,197 | 446 | |||||||||||||||
Management fees | 179 | 51 | |||||||||||||||
Insurance | 116 | 42 | |||||||||||||||
Real estate taxes | 152 | 64 | |||||||||||||||
1,796 | 645 | ||||||||||||||||
Excess of revenues over certain expenses | �� | $4,171 | $1,279 | ||||||||||||||
The accompanying notes are an integral part of this financial statement. |
Notes to Statement of Revenues and Certain Expenses
1 — Organizaton and Basis of Presentation
The Property, located at 3111 Camino Del Rio North, San Diego, California, is also known as Centerside I. The building contains approximately 205,000 square feet of office space, and a parking lot. At April 30, 2004, the building was approximately 89% leased to 27 tenants, of which 22%, or 6 tenants, are major credit tenants. The largest tenant occupies approximately 32% of the space at an annual rental of approximately $1,959,000. Certain tenants’ leases contain provisions for additional rent based on increases in operating expenses and real estate taxes over base period amounts.
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 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.
110 | Prospectus TIAA Real Estate Account
The statement of revenues and certain expenses for the four months ended April 30, 2004 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 an 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 from leases with scheduled rent increases is recognized 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 space in the Property is rented to tenants under operating leases. Approximate minimum future rentals required under these leases (including leases entered into from January 1, 2004 to April 30, 2004) are as follows:
Year Ending December 31, | (In Thousands) | ||
2004 | $ 5,307 | ||
2005 | 5,099 | ||
2006 | 4,225 | ||
2007 | 3,258 | ||
2008 | 2,369 | ||
Thereafter | 1,111 | ||
$21,369 | |||
4 — RELATED PARTY TRANSACTION
Management fees are paid to the managing member of the limited liability company which owns the Property. Fees are collected based on 3% of rental revenues collected and were $179,182 for the year ended December 31, 2003 and $51,430 for the period ended April 30, 2004.
TIAA Real Estate Account Prospectus | 111
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 properties located at 30721 and 30699 Russell Ranch Road, Westlake Village, California (the “Properties”), as described in Note 1, for the year ended December 31, 2003. 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 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 December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
May 6, 2004
/s/ Friedman, Alpren & Green LLP
112 | Prospectus TIAA Real Estate Account
30721 and 30699 Russell Ranch Road, Westlake Village, California
Statement of Revenues and Certain Expenses
(In Thousands)
Revenues | |||||||||||||||||||
Rental income | $2,927 | $772 | |||||||||||||||||
Recoveries | 48 | 14 | |||||||||||||||||
Miscellaneous income | 15 | 3 | |||||||||||||||||
2,990 | 789 | ||||||||||||||||||
Certain expenses | |||||||||||||||||||
Administrative | 37 | 10 | |||||||||||||||||
Operating and maintenance | 754 | 224 | |||||||||||||||||
Management fees | 87 | 22 | |||||||||||||||||
Insurance | 159 | 41 | |||||||||||||||||
Real estate taxes | 296 | 77 | |||||||||||||||||
1,333 | 374 | ||||||||||||||||||
Excess of revenues over certain expenses | $1,657 | $415 | |||||||||||||||||
The accompanying notes are an integral part of this financial statement. | |||||||||||||||||||
Notes to Statement of Revenues and Certain Expenses
1 — Organizaton and Basis of Presentation
The Properties, located at 30721 and 30699 Russell Ranch Road, Westlake Village, California, are also known as Westlake North Business Park II & III. The buildings contain approximately 199,000 square feet of office space, and 4,300 square feet of parking space. At March 31, 2004, the buildings are approximately 91% leased to 8 tenants, of which 84%, or 5 tenants, are major credit tenants. The largest tenant occupies approximately 33% of the space at an approximate annual rental of $1,840,000. Certain tenants’ leases contain provisions for additional rent based on increases in operating expenses and real estate taxes over base period amounts.
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 Properties, 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 Properties.
TIAA Real Estate Account Prospectus | 113
The statement of revenues and certain expenses for the three months ended March 31, 2004 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 an 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 from leases with scheduled rent increases is recognized 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 space in the Properties is rented to tenants under operating leases. Approximate minimum future rentals required under these leases (including leases entered into from January 1, 2004 to March 31, 2004) are as follows:
Year Ending December 31, | (In Thousands) | |
2004 | $ 3,810 | |
2005 | 5,116 | |
2006 | 4,915 | |
2007 | 4,763 | |
2008 | 3,293 | |
Thereafter | 1,810 | |
$23,707 | ||
114 | Prospectus TIAA Real Estate Account
Four Oaks Place, Houston, Texas
Independent Auditors’ Report
To the Management of Teachers Insurance and Annuity Association
We have audited the accompanying statement of revenues and certain expenses of Four Oaks Place — Houston, Texas (the “Property”), as described in Note 1, for the year ended December 31, 2003. This financial statement is the responsibility of the Property’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, 2003, in conformity with accounting principles generally accepted in the United States of America.
September 22, 2004
/s/ Friedman LLP
TIAA Real Estate Account Prospectus | 115
Four Oaks Place — Houston, Texas
Statement of Revenues and Certain Expenses
(In Thousands)
Revenues | |||||||
Rental income | $31,565 | $17,419 | |||||
FASB Statement No. 13 accrual | 1,276 | 1,149 | |||||
Recoveries | 1,260 | 573 | |||||
Parking income | 1,039 | 643 | |||||
Other income | 188 | 145 | |||||
35,328 | 19,929 | ||||||
Certain expenses | |||||||
Utilities | 2,467 | 1,541 | |||||
Repairs and maintenance | 5,554 | 3,148 | |||||
General and administrative | 1,546 | 953 | |||||
Marketing and advertising | 135 | 42 | |||||
Management fees | 823 | 461 | |||||
Real estate taxes | 5,823 | 3,230 | |||||
Insurance | 339 | 181 | |||||
Bad debt expense | 1,048 | 436 | |||||
17,735 | 9,992 | ||||||
Excess of revenues over certain expenses | $17,593 | $ 9,937 | |||||
The accompanying notes are an integral part of this financial statement. | |||||||
Notes to Statement of Revenues and Certain Expenses
1 — Organizaton and Basis of Presentation
The Property, located in Houston, Texas, contains approximately 1.7 million square feet of commercial space in four high-rise office buildings and approximately 25,000 square feet of retail space. In addition, land is currently being rented under a ground lease. At July 31, 2004, the Property was approximately 85% leased.
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 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 Property, have been excluded. Expenses excluded consist of interest, depreciation and amortization and certain other expenses not directly related to the future operations of the Property.
The statement of revenues and certain expenses for the seven months ended July 31, 2004 is unaudited. However, in the opinion of management, all adjustments (con-
116 | Prospectus TIAA Real Estate Account
sisting 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 an interim period are not necessarily indicative of the results for the entire year.
2 — Summary of significant accounting policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 from leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Recoveries, based on payments for real estate taxes and operating expenses, are estimated and accrued.
3 — Major Tenants
Two tenants lease approximately 10% and 14%, respectively, of the Property’s square footage. Rent from these tenants represented approximately 12% and 16%, respectively, of total revenues for the year ended December 31, 2003 and approximately 11% and 18%, respectively, of total revenues for the seven months ended July 31, 2004.
4 — Transactions with Related Parties
The Property is managed by an affiliate of Lehndorff Four Oaks Place Joint Venture, the owner of the Property. Management fees of approximately $823,000 and $461,000 were incurred for the year ended December 31, 2003 and the seven months ended July 31, 2004, respectively.
5 — Operating Leases
Space in the Property is rented to tenants under various noncancelable operating leases. Approximate minimum future rents (including ground rent) required under leases in effect at December 31, 2003 (and additional leases entered into from January 1, 2004 through July 31, 2004) are as follows:
Year Ending December 31, | |
2004 | $30,513,000 |
2005 | 31,183,000 |
2006 | 29,326,000 |
2007 | 27,574,000 |
2008 | 25,695,000 |
Thereafter | 69,432,000 |
$213,723,000 | |
TIAA Real Estate Account Prospectus | 117
1900 K Street, NW - Washington, D.C.
Independent Auditors’ Report
To the Management of Teachers Insurance and Annuity Association
We have audited the accompanying statement of revenues and certain expenses of 1900 K STREET, NW - WASHINGTON, D.C. (the “Property”), as described in Note 1, for the year ended September 30, 2004. This financial statement is the responsibility of the Property’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 September 30, 2004, in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
November 24, 2004
118 | Prospectus TIAA Real Estate Account
1900 K STREET, NW - WASHINGTON, D.C.
STATEMENT OF REVENUES AND CERTAIN EXPENSES
(In Thousands)
Year Ended | ||
September 30, | ||
2004 | ||
Revenues | ||
Rental income | $ | 12,108 |
FASB Statement No. 13 accrual | 705 | |
Recoveries | 5,319 | |
Management fees | 530 | |
Parking income | 580 | |
Other income | 106 | |
19,348 | ||
Certain expenses | ||
Salaries and wages | 424 | |
Cleaning | 587 | |
Utilities | 578 | |
Repairs and maintenance | 378 | |
Building management services | 1,056 | |
Taxes and insurance | 3,004 | |
Nonrecoverable costs | 42 | |
6,069 | ||
Excess of revenues over certain expenses | $ | 13,279 |
The accompanying notes are an integral part of this financial statement.
Notes to Statement of Revenues and Certain Expenses
1 — Organizaton and Basis of Presentation
The Property, located in Washington, D.C., contains 331,477 square feet of commercial space, 5,962 square feet of retail space, and 5,445 square feet of storage space. In addition, the building contains a three-level parking garage. At September 30, 2004, the Property was 100% leased. The current owner of the Property is National Office Partners Limited Partnership (“NOP”).
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 actual operations for the period presented, as certain expenses, which may not be comparable to the expenses expected to be incurred in the future operations of the Property, have been excluded. Expenses excluded consist of interest, depreciation and amortization and certain other expenses not directly related to the future operations of the Property.
TIAA Real Estate Account Prospectus | 119
2 — Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 from leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Recoveries, based on payments for real estate taxes and operating expenses, are estimated and accrued.
3 — Major Tenants
Three tenants lease approximately 82% of the Property’s square footage. Rent from these tenants represented approximately 80% of total revenues for the year ended September 30, 2004.
4 — Transactions with Related Parties
The Property is managed by an affiliate of NOP, the owner of the Property. Management fees and certain other expenses of approximately $567,000 and $21,000, respectively, were incurred for the year ended September 30, 2004.
5 — Operating Leases
Space in the Property is rented to tenants under various noncancelable operating leases. Approximate minimum future rents required under leases in effect at September 30, 2004 are as follows.
Year Ending September 30, | |
2005 | $12,124,000 |
2006 | 13,168,000 |
2007 | 10,825,000 |
2008 | 9,778,000 |
2009 | 9,922,000 |
Thereafter | 18,241,000 |
$74,058,000 | |
120 | Prospectus TIAA Real Estate Account
1001 Pennsylvania Avenue, NW - Washington, D.C.
Independent Auditors’ Report
To the Management of Teachers Insurance and Annuity Association
We have audited the accompanying statement of revenues and certain expenses of 1001 PENNSYLVANIA AVENUE, NW - WASHINGTON, D.C. (the “Property”), as described in Note 1, for the year ended September 30, 2004. This financial statement is the responsibility of the Property’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 September 30, 2004, in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
November 24, 2004
TIAA Real Estate Account Prospectus | 121
1001 PENNSYLVANIA AVENUE, NW - WASHINGTON, D.C.
STATEMENT OF REVENUES AND CERTAIN EXPENSES
(In Thousands)
Year Ended | ||
September 30, | ||
2004 | ||
Revenues | ||
Rental income | $ | 24,735 |
FASB Statement No. 13 accrual | 885 | |
Recoveries | 10,504 | |
Management fees | 1,158 | |
Parking income | 1,505 | |
Other income | 518 | |
39,305 | ||
Certain expenses | ||
Salaries and wages | 894 | |
Cleaning | 1,266 | |
Utilities | 940 | |
Repairs and maintenance | 956 | |
Building management services | 2,007 | |
Taxes and insurance | 6,008 | |
Nonrecoverable costs | 172 | |
12,243 | ||
Excess of revenues over certain expenses | $ | 27,062 |
The accompanying notes are an integral part of this financial statement.
Notes to Statement of Revenues and Certain Expenses
1 — Organizaton and Basis of Presentation
The Property, located in Washington, D.C., contains 731,818 square feet of office space, 41,023 square feet of retail space and 29,549 square feet of storage space. The current owner of the Property is Lincoln Square Corporation (“LSC”). At September 30, 2004, the Property was approximately 99% leased.
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 actual operations for the period presented, as certain expenses, which may not be comparable to the expenses expected to be incurred in the future operations of the Property, have been excluded. Expenses excluded consist of interest, depreciation and amortization and certain other expenses not directly related to the future operations of the Property.
122 | Prospectus TIAA Real Estate Account
2 — Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 from leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Recoveries, based on payments for real estate taxes and operating expenses, are estimated and accrued.
3 — Major Tenants
Four tenants lease approximately 93% of the Property’s square footage. Rent from these tenants represented approximately 81% of total revenues for the year ended September 30, 2004.
4 — Transactions with Related Parties
The Property is managed by an affiliate of LSC. Management fees and certain other expenses of approximately $1,182,000 and $47,000, respectively, were incurred for the year ended September 30, 2004.
5 — Operating Leases
Space in the Property is rented to tenants under various noncancelable operating leases. Approximate minimum future rents required under leases in effect at September 30, 2004 are as follows:
Year Ending September 30, | |
2005 | $ 25,149,000 |
2006 | 26,946,000 |
2007 | 27,624,000 |
2008 | 27,898,000 |
2009 | 28,261,000 |
Thereafter | 118,980,000 |
$254,858,000 | |
TIAA Real Estate Account Prospectus | 123
50 Fremont Street - San Francisco, California
Independent Auditors’ Report
To the Management of Teachers Insurance and Annuity Association
We have audited the accompanying statement of revenues and certain expenses of 50 FREMONT STREET - SAN FRANCISCO, CALIFORNIA (the “Property”), as described in Note 1, for the year ended September 30, 2004. This financial statement is the responsibility of the Property’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 September 30, 2004, in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
November 24, 2004
124 | Prospectus TIAA Real Estate Account
50 FREMONT STREET - SAN FRANCISCO, CALIFORNIA
STATEMENT OF REVENUES AND CERTAIN EXPENSES
(In Thousands)
Year Ended | ||
September 30, | ||
2004 | ||
Revenues | ||
Rental income | $ | 26,309 |
FASB Statement No. 13 accrual | 937 | |
Recoveries | 4,210 | |
Parking income | 1,518 | |
Other income | 337 | |
33,311 | ||
Certain expenses | ||
Salaries and wages | 1,144 | |
Cleaning | 1,828 | |
Utilities | 1,114 | |
Repairs and maintenance | 920 | |
Building management services | 1,884 | |
Taxes and insurance | 3,716 | |
Nonrecoverable costs | 719 | |
11,325 | ||
Excess of revenues over certain expenses | $ | 21,986 |
The accompanying notes are an integral part of this financial statement.
Notes to Statement of Revenues and Certain Expenses
1 — Organizaton and Basis of Presentation
The Property, located in San Francisco, California, contains 817,412 square feet of commercial space in a 42-story office building. The current owner of the Property is National Office Partners Limited Partnership (“NOP”). At September 30, 2004, the overall occupancy of the Property was approximately 90%.
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 actual operations for the period presented, as certain expenses, which may not be comparable to the expenses expected to be incurred in the future operations of the Property, have been excluded. Expenses excluded consist of interest, depreciation and amortization and certain other expenses not directly related to the future operations of the Property.
TIAA Real Estate Account Prospectus | 125
2 — Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 from leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Recoveries, based on payments for real estate taxes and operating expenses, are estimated and accrued.
3 — Major Tenants
Two tenants lease approximately 34% and 27%, respectively, of the Property’s square footage. Rent from these tenants represented approximately 40% and 29%, respectively, of total revenues for the year ended September 30, 2004.
4 — Transactions with Related Parties
The Property is managed by an affiliate of NOP, the owner of the Property. Management fees and certain other expenses of approximately $830,000 and $50,000, respectively, were incurred for the year ended September 30, 2004.
5 — Operating Leases
Space in the Property is rented to tenants under various noncancelable operating leases. Approximate minimum future rents required under leases in effect at September 30, 2004, and additional leases entered into from October 1, 2004 through November 23, 2004, are as follows:
Year Ending September 30, | |
2005 | $ 24,842,000 |
2006 | 24,518,000 |
2007 | 23,849,000 |
2008 | 21,323,000 |
2009 | 20,876,000 |
Thereafter | 96,297,000 |
$211,705,000 | |
126 | Prospectus TIAA Real Estate Account
IDX Tower - 925 Fourth Avenue - Seattle, Washington
Independent Auditors’ Report
To the Management of Teachers Insurance and Annuity Association
We have audited the accompanying statement of revenues and certain expenses of IDX TOWER - 925 FOURTH AVENUE - SEATTLE, WASHINGTON (the “Property”), as described in Note 1, for the year ended September 30, 2004. This financial statement is the responsibility of the Property’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 September 30, 2004, in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
November 22, 2004
TIAA Real Estate Account Prospectus | 127
IDX TOWER - 925 FOURTH AVENUE - SEATTLE, WASHINGTON
STATEMENT OF REVENUES AND CERTAIN EXPENSES
(In Thousands)
Year Ended | ||
September 30, | ||
2004 | ||
Revenues | ||
Rental income | $ | 17,089 |
FASB Statement No. 13 accrual | 2,966 | |
Recoveries | 6,364 | |
Parking income | 1,940 | |
Other income | 49 | |
28,408 | ||
Certain expenses | ||
Salaries and wages | 970 | |
Cleaning | 1,175 | |
Utilities | 610 | |
Repairs and maintenance | 740 | |
Building management services | 1,774 | |
Taxes and insurance | 1,504 | |
Nonrecoverable costs | 435 | |
7,208 | ||
Excess of revenues over certain expenses | $ | 21,200 |
The accompanying notes are an integral part of this financial statement.
Notes to Statement of Revenues and Certain Expenses
1 — Organizaton and Basis of Presentation
The Property, located in Seattle, Washington, contains 845,533 square feet of office space. Construction of the building was completed during 2002, and the first tenants moved in during January 2003. The current owner of the Property is National Office Partners Limited Partnership (“NOP”). At September 30, 2004, the overall occupancy of the Property was approximately 95%.
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 actual operations for the period presented, as certain expenses, which may not be comparable to the expenses expected to be incurred in the future operations of the Property, have been excluded. Expenses excluded consist of interest, depreciation and amortization and certain other expenses not directly related to the future operations of the Property.
128 | Prospectus TIAA Real Estate Account
2 — Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 from leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Recoveries, based on payments for real estate taxes and operating expenses, are estimated and accrued.
3 — Major Tenants
Four tenants lease approximately 79% of the Property’s square footage. Rent from these tenants represented approximately 83% of total revenues for the year ended September 30, 2004.
4 — Transactions with Related Parties
The Property is managed by an affiliate of NOP, the owner of the Property. Management fees and certain other expenses of approximately $705,000 and $52,000, respectively, were incurred for the year ended September 30, 2004.
5 — Operating Leases
Space in the Property is rented to tenants under various noncancelable operating leases. Approximate minimum future rents required under leases in effect at September 30, 2004, and additional leases entered into from October 1, 2004 through November 22, 2004, are as follows:
Year Ending September 30, | |
2005 | $ 18,691,000 |
2006 | 21,942,000 |
2007 | 23,071,000 |
2008 | 22,715,000 |
2009 | 23,425,000 |
Thereafter | 108,528,000 |
$218,372,000 | |
TIAA Real Estate Account Prospectus | 129
JV with IDI - Industrial Portfolio
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 properties included in JV With IDI - Industrial Portfolio (the “Properties”), as described in Note 1, for the year ended December 31, 2003. 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 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 December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
November 9, 2004
130 | Prospectus TIAA Real Estate Account
JV with IDI - Industrial Portfolio
Statement of Revenues and Certain Expenses
(In Thousands)
Year Ended December 31, 2003 (Audited) | Nine Months Ended September 30, 2004 (Unaudited) | |||||||||||||||
Revenues | ||||||||||||||||
Rental income | $2,661 | $3,100 | ||||||||||||||
FASB Statement No. 13 accrual | 306 | 1,219 | ||||||||||||||
Recoveries | 659 | 805 | ||||||||||||||
Miscellaneous income | 9 | 29 | ||||||||||||||
3,635 | 5,153 | |||||||||||||||
Certain expenses | ||||||||||||||||
Operating and maintenance | 552 | 547 | ||||||||||||||
Management fees | 111 | 119 | ||||||||||||||
Insurance | 169 | 196 | ||||||||||||||
Real estate taxes | 823 | 1,201 | ||||||||||||||
1,655 | 2,063 | |||||||||||||||
Less - - Portion capitalized | (362) | (496) | ||||||||||||||
1,293 | 1,567 | |||||||||||||||
Excess of revenues over certain expenses | $2,342 | $3,586 | ||||||||||||||
The accompanying notes are an integral part of this financial statement. |
TIAA Real Estate Account Prospectus | 131
Notes to Statement of Revenues and Certain Expenses
1 — Organizaton and Basis of Presentation
The JV With IDI - Industrial Portfolio includes 12 properties that contain approximately 3.6 million square feet of office space. At September 30, 2004, the buildings are approximately 86% leased to 16 tenants under net lease agreements. The buildings were developed by IDI and were completed as shown in the schedule below. Operating expenses incurred during the first year after the building obtained a certificate of occupancy have been capitalized until the building began to charge rents.
Building | Location | |
Airways Distribution - Building C | Southhaven, Mississippi | August, 2003 |
Airways Distribution - Building E | Southhaven, Mississippi | February, 2004 |
Bolingbrook - - International Truck | Bolingbrook, Illinois | January, 2004 |
Bolingbrook Corporate Center | Bolingbrook, Illinois | |
Bolingbrook Corporate Center III | Bolingbrook, Illinois | February, 2003 |
Chickasaw | Memphis, Tennessee | April, 2004 |
Miramar Business Center B | Miramar, Florida | March, 2002 |
Prairie Point Inventory Facility III | Naperville, Illinois | August, 1999 |
Rock Run VI | Will County, Illinois | December, 2002 |
Southpoint F | Forest Park, Georgia | August, 2001 |
Westfork A5 | Lithia Springs, Georgia | July, 2001 |
Westfork C4 | Lithia Springs, Georgia | January, 1999 |
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 Properties, 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 Properties.
The statement of revenues and certain expenses for the nine months ended September 30, 2004 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 an 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 financial statements 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.
132 | Prospectus TIAA Real Estate Account
Revenue Recognition
Rental income from leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Recoveries, based on payments for real estate taxes and operating expenses, are estimated and accrued.
3 — Related Party Transaction
The Properties are managed by an affiliate of IDI, the owner of the Properties. Management fees of approximately $111,000 and $119,000 were incurred for the year ended December 31, 2003 and the nine months ended September 30, 2004, respectively.
4 — Operating Leases
Office space in the Properties is rented to tenants under noncancelable operating leases. Approximate minimum future rentals required under these leases (including leases entered into from January 1, 2004 to September 30, 2004) are as follows:
Year Ending December 31, | |
2004 | $ 5,019,000 |
2005 | 9,353,000 |
2006 | 8,940,000 |
2007 | 8,468,000 |
2008 | 7,155,000 |
Thereafter | 34,716,000 |
$73,651,000 | |
TIAA Real Estate Account Prospectus | 133
Condensed Unaudited Statutory-Basis Financial Statements
(These condensed unaudited statutory-basis financial statements have been derived from audited statutory-basis financial statements which are available upon request)
TIAA Condensed Statutory-Basis Balance Sheets
(in thousands) | |||||
December 31, | |||||
ASSETS | |||||
Bonds | $106,054,117 | $ 96,870,101 | |||
Mortgages | 23,987,966 | 23,968,793 | |||
Real estate | 5,855,297 | 5,643,825 | |||
Stocks | 1,357,814 | 2,184,326 | |||
Other long-term investments | 3,910,718 | 3,843,445 | |||
Cash, cash equivalents and short-term investments | 1,076,403 | 1,787,873 | |||
Investment income due and accrued | 1,356,407 | 1,420,194 | |||
Separate account assets | 5,849,058 | 4,357,873 | |||
Deferred federal income tax asset | 893,245 | 836,682 | |||
Other assets | 905,744 | 917,339 | |||
Total Assets | $151,246,769 | $141,830,451 | |||
LIABILITIES, CAPITAL AND CONTINGENCY RESERVES | |||||
Policy and contract reserves | $124,777,130 | $116,913,443 | |||
Dividends declared for the following year | 2,337,922 | 2,460,410 | |||
Asset valuation reserve | 2,288,501 | 2,263,133 | |||
Interest maintenance reserves | 610,882 | 410,580 | |||
Separate account liabilities | 5,849,058 | 4,357,873 | |||
Securities lending collateral | 2,985,776 | 3,973,109 | |||
Other liabilities | 2,156,038 | 2,165,212 | |||
Total Liabilities | 141,005,307 | 132,543,760 | |||
Capital (2,500 shares of $1,000 par value common stock issued and outstanding) and paid-insurplus | 3,050 | 3,050 | |||
Contingency reserves: | |||||
For investment losses, annuity and insurance mortality, and other risks | 10,238,412 | 9,283,641 | |||
Total Capital and Contingency Reserves | 10,241,462 | 9,286,691 | |||
Total Liabilities, Capital and Contingency Reserves | $151,246,769 | $141,830,451 | |||
134 | Prospectus TIAA Real Estate Account | SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Teachers Insurance and Annuity Association of America (continued)
Condensed Summaries of Statutory-Basis Statements of Operations and
Changes in Capital and Contingency Reserves
(in thousands) | ||||
For the Years Ended December 31, | ||||
INCOME AND NET REALIZED CAPITAL GAINS (LOSSES) | ||||
Insurance and annuity premiums and deposits | $ 5,642,043 | $ 4,744,038 | ||
Transfers from CREF, net | 894,344 | 2,168,251 | ||
Annuity dividend additions | 2,847,173 | 3,244,248 | ||
Net investment income | 9,451,905 | 9,324,726 | ||
Total Income | $18,835,465 | $19,481,263 | ||
DISTRIBUTION OF INCOME | ||||
Policy and contract benefits | $ 3,934,137 | $ 3,397,246 | ||
Dividends to policyholders and beneficiaries | 4,418,956 | 4,929,249 | ||
Increase in policy and contract reserves | 7,848,807 | 9,495,679 | ||
Operating expenses | 490,522 | 469,952 | ||
Transfers to separate accounts, net | 839,172 | 309,186 | ||
Other, net | (13,317) | 56,633 | ||
Federal income tax expense (benefits) | 16,715 | (20,855) | ||
Increase in contingency reserves from operations | 1,300,473 | 844,173 | ||
Total Distribution of Income | $18,835,465 | $19,481,263 | ||
Net Income: | ||||
Increase in contingency reserves from operations | $ 1,300,473 | $ 844,173 | ||
Net realized capital gains (losses) net capital gains taxes and after transfers to Interest maintenance reserve | (786,139) | (1,816,327) | ||
Net Income | $ 514,334 | $ (972,154) | ||
CHANGES IN CAPITAL AND CONTINGENCY RESERVES: | ||||
Net income | $ 514,334 | $ (972,154) | ||
Net unrealized capital gains (losses) on investments | 412,433 | 350,449 | ||
Transfers to (from) the Asset valuation reserve | (25,368) | 356,328 | ||
Change in net deferred income tax | (348,300) | — | ||
Decrease/(Increase) in non-admitted assets, other than investments | 417,028 | (3,205,351) | ||
Change in surplus as a result of reinsurance | (15,356) | 62,739 | ||
Cumulative effect of changes in accounting principles | — | 4,111,351 | ||
Other, net | — | (67,754) | ||
Net Additions To Capital and Contingency Reserves | 954,771 | 635,608 | ||
Capital and Contingency Reserves at Beginning of Year | 9,286,691 | 8,651,083 | ||
Capital and Contingency Reserves at End of Year | $10,241,462 | $ 9,286,691 | ||
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | TIAA Real Estate Account Prospectus | 135 |
Teachers Insurance and Annuity Association of America (continued)
Supplemental Information to Condensed Unaudited Statutory-Basis Financial Statements
Basis of Presentation: Teachers Insurance and Annuity Association of America’s statutory-basis financial statements have been prepared on the basis of statutory accounting practices prescribed or permitted by the New York State Insurance Departments; a comprehensive basis of accounting that differs from accounting principles generally accepted in the United States.
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; preferred stocks in NAIC designations 1, 2 and 3 are started at amortized cost; preferred stocks at NAIC designations 4, 5 and 6 are carried at the lower of amortized cost or fair value; 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, the carrying value is determined using actual and anticipated cash flows under the prospective method for interest-only securities, securities for which other than temporary impairment had been recognized, or securities whose expected future cashflows are lower than the expected cashflows at the time of acquisition. The retrospective method is used for all other loan-backed and structured 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 held for the production of income is carried at depreciated cost, less encumbrances. Real estate held for sale is carried at the lower of depreciated cost or fair value less encumbrances and estimated costs to sell. 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 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 forty-year period on the straight-line method.
Additional Information: |
As a percentage of total bond investments: Below investment grade bonds | 8.4% | 10.2% | ||
As a percentage of total mortgage investments: Total mortgage investments in California | 18.8% | 19.2% | ||
Total mortgage investments in office buildings | 42.5% | 42.4% | ||
Total mortgage investments in shopping centers | 27.2% | 25.8% | ||
As a percentage of total real estate investments: Total real estate investments in Florida | 12.0% | 14.6% | ||
Total real estate investments in office buildings | 72.0% | 68.7% | ||
136 | Prospectus TIAA Real Estate Account
Teachers Insurance and Annuity Association of America (continued)
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, income generation, 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. At December 31, 2003 and 2002, TIAA had outstanding foreign currency swap contracts with a total notional value of approximately $2,415,700,000 and $1,725,300,000, respectively; foreign currency forward contracts with a total notional value of approximately $309,700,000 and $391,700,000, respectively; interest rate swap contracts with a total notional value of approximately $744,500,000 and $681,000,000, respectively; swap options outstanding with a total notional value of $0 and $198,600,000, respectively; and interest rate cap contracts with a total notional value of approximately $90,300,000 and $149,500,000, respectively.
Subsequent Event — Federal Income Taxes: The Internal Revenue Service (IRS) completed its audit of TIAA’s tax returns for 1998 and 1999 and issued its Revenue Agent’s Report (RAR) on April 26, 2004. The RAR contained significant adjustments that would disallow the write-off of certain intangible assets and would adjust TIAA’s tax-basis annuity reserves. The tax deficiency proposed for 1998-99 was approximately $1.1 billion. Should the IRS fully prevail in connection with its proposed adjustments, additional tax and interest due for 1998-2003 is estimated to cause a reduction in TIAA’s surplus of approximately $2.3 billion as of December 31, 2003. Of the $2.3 billion, $2.0 billion would result from reserve deductions taken by TIAA through December 31, 2003 that the IRS would instead spread throughout annuitants’ payout period. The remaining $300 million would cause a permanent adjustment to TIAA’s taxes. TIAA will contest these adjustments and intends to defend its position vigorously through applicable IRS and judicial procedures as needed. The final resolution of the proposed adjustments is uncertain.
TIAA Real Estate Account Prospectus | 137
The Real Estate Account has no officers or directors. The Trustees and principal executive officers of TIAA, their ages, and their principal occupations, are as follows:
Trustees
Name | Age | Principal Occupations During Past 5 Years | |
Elizabeth E. Bailey | 65 | John C. Hower Professor of Public Policy and Management, Wharton School, University of Pennsylvania. Director, CSX Corporation and Altria Group, Inc. | |
Robert C. Clark | 60 | Harvard University Distinguished Service Professor and Austin Wakeman Scott Professor of Law, Harvard Law School, Harvard University. Director, Collins & Aikman Corporation, Time Warner Inc. and Omnicom Group. | |
Estelle A. Fishbein | 70 | Vice President and General Counsel Emerita, Johns Hopkins University. | |
Marjorie Fine Knowles | 65 | Professor of Law, Georgia State University College of Law. | |
Robert M. O’Neil | 70 | Professor of Law, University of Virginia and Director, Thomas Jefferson Center for the Protection of Free Expression. | |
Donald K. Peterson | 55 | Chairman and Chief Executive Officer, Avaya Inc. Formerly, Executive Vice President and Chief Financial Officer, Lucent Technologies. Director, Reynolds & Reynolds Co. | |
Sidney A. Ribeau | 56 | President, Bowling Green University. Director, The Andersons, Convergys and Worthington Industries. | |
Leonard S. Simon | 68 | Former Vice Chairman, Charter One Financial, Inc. Formerly, Chairman, President and Chief Executive Officer, RCSB Financial, Inc. and Chairman and Chief Executive Officer, Rochester Community Savings Bank. Director, Landmark Technology Partners, Inc. and Integrated Nano-Technologies, LLC. | |
David F. Swensen | 50 | Chief Investment Officer, Yale University. Director, Schroders plc. | |
Ronald L. Thompson | 55 | Chairman and Chief Executive Officer, Midwest Stamping and Manufacturing Company. Director, Interstate Bakeries and Ryerson Tull, Inc. | |
Paul R. Tregurtha | 69 | Chairman and Chief Executive Officer, Mormac Marine Group, Inc. and Moran Transportation Company, Inc.; Vice Chairman, Interlake Steamship Company and Lakes Shipping Company; Formerly, Chairman, Meridian Aggregates, L.P. Director, FPL Group, Inc. | |
Rosalie J. Wolf | 63 | Managing Partner, Botanica Capital Partners LLC. Formerly, Managing Director, Offit Hall Capital Management LLC and its predecessor company, Laurel Management Company LLC; earlier, Treasurer and Chief Investment Officer, The Rockefeller Foundation. Director, North European Oil Royalty Trust and Sanford C. Bernstein Fund, Inc. | |
138 | Prospectus TIAA Real Estate Account
Officer-Trustees
Name | Age | Principal Occupations During Past 5 Years | |
Herbert M. Allison, Jr. | 61 | Chairman, President and Chief Executive Officer, TIAA. President and Chief Executive Officer, CREF. Formerly, President, Chief Operating Officer and Member of the Board of Directors of Merrill Lynch & Co., Inc., 1997-1999 and President and Chief Executive Officer of Alliance for LifeLong Learning, Inc., 2000 –2002. Director, New York Stock Exchange. | |
Other Officers
Name | Age | Current Position | |
Gary Chinery | 54 | Vice President and Treasurer, TIAA and CREF. | |
E. Laverne Jones | 55 | Vice President and Corporate Secretary, TIAA and CREF. | |
Elizabeth A. Monrad | 50 | Executive Vice President and Chief Financial Officer, TIAA and CREF. | |
John Somers | 60 | Executive Vice President, TIAA and CREF. | |
Portfolio Management Team
Name | Age | Current Position | |
Thomas Garbutt | 46 | Managing Director – Real Estate Equities. | |
Philip J. McAndrews | 46 | Managing Director – Portfolio Management. | |
Margaret A. Brandwein | 57 | Managing Director – TIAA Real Estate Account. | |
TIAA Real Estate Account Prospectus | 139
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, for certain contracts, 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.
140 | Prospectus TIAA Real Estate Account
How to Reach Us
Our Address | Planning and Service Center | |
Send all notices, forms, requests, or payments to this address |
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TIAA-CREF | 800 223-1200 | |
P.O. Box 1259 | 8 a.m. to 10 p.m. ET, Monday–Friday | |
Charlotte, NC 28201 | Automated Telephone Service | |
TIAA-CREF Web Center | Account performance, personal account information and transactions, and product information | |
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| For Hearing- or Speech-Impaired Participants | |
Telephone Counseling Center | 800 842-2755 | |
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| TIAA-CREF Trust Company, FSB | |
| Investment management, trust administration, estate planning, planned giving, and endowment management | |
IRA Enrollment Hotline | 888 842-9001 | |
Speak with a service representative about our IRA products. We can |
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| TIAA-CREF Tuition Financing, Inc. | |
| Tuition financing programs | |
800 842-2888 |
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8 a.m. to 10 p.m. ET, Monday-Friday |
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9 a.m. to 6 p.m. ET, Saturday | ||
©2004 Teachers Insurance and Annuity Association—College Retirement Equities Fund (TIAA-CREF), New York, NY 10017
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
SEC Registration Fees | $ | 706,200 | ||
Costs of printing and engraving | $ | 500,000 | * | |
Legal fees | $ | 10,000 | * | |
Accounting fees | $ | 10,000 | * | |
TOTAL | $ | 1,206,200 |
* - 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. (as amended)1and the | ||
Amendment thereto4 |
(3) | (A) | Charter of TIAA (as amended)* | |
(B) | Bylaws of TIAA (as amended)* | ||
(4) | (A) | Forms of RA, GRA, GSRA, SRA, IRA Real Estate Account Contract | |
Endorsements2, Keogh Contract1and Retirement Select and Retirement | |||
Select Plus Contracts and Endorsements4 | |||
(B) | Forms of Income-Paying Contracts2 | ||
(5) | Opinion and Consent of George W. Madison, Esquire* | ||
(10) | (A) | Independent Fiduciary Agreement by and among TIAA, the Registrant, and The Townsend Group1and Letter Agreement renewing term3 | |
(B) | Custodial Services Agreement by and between TIAA and Morgan | ||
Guaranty Trust Company of New York with respect to the Real Estate | |||
Account (Agreement assigned to The Bank of New York, January, 1996)2 | |||
(23) | (A) | Opinion and Consent of George W. Madison, Esquire (filed as Exhibit 5) | |
(B) | Consent of Sutherland Asbill & Brennan LLP* | ||
(C) | Consents of Ernst & Young LLP* | ||
(D) | Consent of Friedman LLP* |
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 Post-Effective Amendment No. 2 to the Account’s Registration Statement on Form S-1 filed April 29, 2003 (File No. 333-83964).
4 - Previously filed and incorporated herein by reference to Pre-Effective Amendment No. 1 to the Account’s Registration Statement on Form S-1 filed April 29, 2004 (File No. 333-113602).
* - 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 initialbona 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.
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA INDEX OF AUDITED STATUTORY - BASIS FINANCIAL STATEMENTS DECEMBER 31, 2003 - -------------------------------------------------------------------------------- PAGE Report of Management Responsibility................................. 2 Report of the Audit Committee....................................... 3 Report of Independent Auditors...................................... 4 Statutory - Basis Financial Statements: Balance Sheets.................................................. 5 Statements of Operations........................................ 6 Statements of Changes in Capital and Contingency Reserves....... 7 Statements of Cash Flows........................................ 8 Notes to Financial Statements................................... 9[LOGO] REPORT OF MANAGEMENT RESPONSIBILITY To the Policyholders of Teachers Insurance and Annuity Association of America: The accompanying statutory-basis financial statements of Teachers Insurance and Annuity Association of America ("TIAA") are the responsibility of management. They have been prepared on the basis of statutory accounting principles, a comprehensive basis of accounting comprised of accounting principles 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 principles. TIAA has established and maintains a strong system of internal controls and disclosure controls designed to provide reasonable assurance that assets are properly safeguarded, that 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 Director of Internal Audit regularly reports to the Audit Committee of the TIAA Board of Trustees. The independent audit 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 a conflict of interest, it continues to be TIAA's policy that any management advisory or consulting services are obtained from a firm other than the independent 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 independent audit of the TIAA statutory-basis financial statements, the New York State Insurance Department and other state insurance departments regularly examine the operations and financial statements of TIAA as part of their periodic corporate examinations. Herbert M. Allison, Jr. /s/ Herbert M. Allison, Jr. ----------------------------- Chairman, President and Chief Executive Officer Elizabeth A. Monrad /s/ Elizabeth A. Monrad ----------------------------- Executive Vice President and Chief Financial Officer 2 [LOGO] REPORT OF THE AUDIT COMMITTEE To the Policyholders of Teachers Insurance and Annuity Association of America: The Audit Committee ("Committee") oversees the financial reporting process of Teachers Insurance and Annuity Association of America ("TIAA") on behalf of TIAA's Board of Trustees. The 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 Committee's responsibilities. Management has the primary responsibility for TIAA's financial statements, the development and maintenance of a strong system of internal controls and disclosure 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 audit 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. The Committee has direct responsibility for the appointment, compensation and oversight of the independent audit firm. As required by its charter, the Committee will evaluate rotation of the independent audit firm whenever circumstances warrant, but in no event will the evaluation be later than the tenth year of service. The Committee reviewed and discussed the accompanying audited statutory-basis 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 statutory-basis financial statements. The Committee has also discussed the audited statutory-basis financial statements with Ernst & Young LLP, the independent audit firm, which is responsible for expressing an opinion on the conformity of these audited statutory-basis 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 Public Company Accounting Oversight Board. Based on the review and discussions referred to above, the Committee has approved the release of the accompanying audited statutory-basis financial statements for publication and filing with appropriate regulatory authorities. Rosalie J. Wolf, Audit Committee Chair Leonard S. Simon, Audit Committee Member Donald K. Peterson, Audit Committee Member 3 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, 2003 and 2002, and the related statutory-basis statements of operations, changes in capital and contingency reserves, and cash flows for each of the three years in the period ended December 31, 2003. 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 of these variances on TIAA's financial statements 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, 2003 and 2002, or the results of its operations or its cash flows for each of the three years in the period ended December 31, 2003. Also, in our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TIAA at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, 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. Also as discussed in Note 2 to the financial statements, TIAA began to admit deferred federal income tax assets in 2002 in accordance with the Statement of Statutory Accounting Principles Number 10. /s/ Ernst & Young LLP April 21, 2004 4 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA STATUTORY - BASIS BALANCE SHEETS (DOLLARS IN THOUSANDS)* DECEMBER 31, --------------------------------- 2003 2002 -------------- -------------- ASSETS Bonds ......................................................... $ 106,054,117 $ 96,870,101 Mortgages ..................................................... 23,987,966 23,968,793 Real estate ................................................... 5,855,297 5,643,825 Stocks ........................................................ 1,357,814 2,184,326 Other long-term investments ................................... 3,910,718 3,843,445 Cash, cash equivalents and short-term investments ............. 1,076,403 1,787,873 Investment income due and accrued ............................. 1,356,407 1,420,194 Separate account assets ....................................... 5,849,058 4,357,873 Deferred federal income tax asset ............................. 893,245 836,682 Other assets .................................................. 905,744 917,339 -------------- -------------- TOTAL ASSETS $ 151,246,769 $ 141,830,451 ============== ============== LIABILITIES, CAPITAL AND CONTINGENCY RESERVES Policy and contract reserves .................................. $ 124,777,130 $ 116,913,443 Dividends declared for the following year ..................... 2,337,922 2,460,410 Asset valuation reserve ....................................... 2,288,501 2,263,133 Interest maintenance reserve .................................. 610,882 410,580 Separate account liabilities .................................. 5,849,058 4,357,873 Securities lending collateral ................................. 2,985,776 3,973,109 Other liabilities ............................................. 2,156,038 2,165,212 -------------- -------------- TOTAL LIABILITIES 141,005,307 132,543,760 -------------- -------------- 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 .......................................... 10,238,412 9,283,641 -------------- -------------- TOTAL CAPITAL AND CONTINGENCY RESERVES 10,241,462 9,286,691 -------------- -------------- TOTAL LIABILITIES, CAPITAL AND CONTINGENCY RESERVES $ 151,246,769 $ 141,830,451 ============== ============== * Except par value of common stock See notes to statutory - basis financial statements. 5 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA STATUTORY - BASIS STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------ 2003 2002 2001 -------------- -------------- -------------- INCOME Insurance and annuity premiums and other considerations ................................... $ 5,642,043 $ 4,744,038 $ 3,878,895 Transfers from CREF, net ..................................... 894,344 2,168,251 1,402,316 Annuity dividend additions ................................... 2,847,173 3,244,248 3,059,734 Net investment income ........................................ 9,451,905 9,324,726 8,819,579 -------------- -------------- -------------- TOTAL INCOME $ 18,835,465 $ 19,481,263 $ 17,160,524 ============== ============== ============== EXPENSES Policy and contract benefits ................................. $ 3,934,137 $ 3,397,246 $ 3,065,338 Dividends to policyholders ................................... 4,418,956 4,929,249 4,766,809 Increase in policy and contract reserves ..................... 7,848,807 9,495,679 7,463,548 Operating expenses ........................................... 490,522 469,952 412,789 Transfers to separate accounts, net .......................... 839,172 309,186 615,228 Other, net ................................................... (13,317) 56,633 20,499 TOTAL EXPENSES $ 17,518,277 $ 18,657,945 $ 16,344,211 ============== ============== ============== INCOME/(LOSS) BEFORE FEDERAL INCOME TAXES $ 1,317,188 $ 823,318 $ 816,313 FEDERAL INCOME TAX (BENEFIT)/EXPENSE $ 16,715 $ (20,855) $ 26,784 NET REALIZED CAPITAL (LOSSES) LESS CAPITAL GAINS TAXES, AFTER TRANSFERS TO THE INTEREST MAINTENANCE RESERVE (786,139) (1,816,327) (204,291) -------------- -------------- -------------- NET INCOME / (LOSS) $ 514,334 $ (972,154) $ 585,238 ============== ============== ============== See notes to statutory - basis financial statements. 6 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA STATUTORY - BASIS STATEMENTS OF CHANGES IN CAPITAL AND CONTINGENCY RESERVES (DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------- 2003 2002 2001 ------------ ----------- ----------- CHANGES IN CAPITAL AND CONTINGENCY RESERVES Net Income/(Loss) ............................................ $ 514,334 $ (972,154) $ 585,238 Net unrealized capital gains/(losses) on investments ......... 412,433 350,449 (574,266) Transfers (to)/from the Asset valuation reserve .............. (25,368) 356,328 251,073 Change in net deferred federal income tax asset .............. (348,300) -- -- Cumulative effect of change in accounting principles: Deferred federal income tax asset ......................... -- 4,111,351 -- Other ..................................................... -- -- 375,325 Decrease/(increase) in non-admitted assets: Deferred federal income tax asset ......................... 404,863 (3,274,669) -- Other ..................................................... 12,165 69,318 (59,749) Change in contingency reserves as a result of reinsurance .... (15,356) 62,739 -- Other, net ................................................... -- (67,754) (23,943) ------------ ----------- ----------- NET CHANGE IN CAPITAL AND CONTINGENCY RESERVES 954,771 635,608 553,678 CAPITAL AND CONTINGENCY RESERVES AT BEGINNING OF YEAR 9,286,691 8,651,083 8,097,405 ------------ ----------- ----------- CAPITAL AND CONTINGENCY RESERVES AT END OF YEAR $ 10,241,462 $ 9,286,691 $ 8,651,083 ============ =========== =========== See notes to statutory - basis financial statements. 7 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA STATUTORY - BASIS STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------ 2003 2002 2001 ------------ ------------ ------------ CASH PROVIDED By operating activities: Insurance and annuity premiums and other considerations ................................ $ 5,629,532 $ 4,766,860 $ 3,881,155 Transfers from CREF, net ................................... 894,344 2,168,251 1,402,316 Annuity dividend additions ................................. 2,860,949 3,278,135 3,059,734 Net investment income ...................................... 9,301,083 9,072,530 8,629,197 ----------- ------------ ------------ TOTAL RECEIPTS 18,685,908 19,285,776 16,972,402 Policy and contract benefits ............................... 3,895,031 3,406,551 3,065,118 Dividends .................................................. 4,541,444 4,895,768 4,599,385 Operating expenses ......................................... 616,180 467,250 414,953 Federal income tax expense/(benefit) ....................... 11,957 (6,556) 4,819 Transfers to separate accounts, net ........................ 841,985 304,993 615,980 Other, net ................................................. 5,139,312 951,559 (248,545) ----------- ------------ ------------ TOTAL DISBURSEMENTS 15,045,909 10,019,565 8,451,710 ----------- ------------ ------------ CASH PROVIDED BY OPERATING ACTIVITIES 3,639,999 9,266,211 8,520,692 ----------- ------------ ------------ By investing activities: Sales and redemptions of bonds and stocks .................. 29,137,516 23,992,886 16,188,968 Sales and repayments of mortgage principal ................. 3,403,849 2,137,510 2,941,103 Sales of real estate ....................................... 1,337,963 1,272,931 1,216,527 Other, net ................................................. 5,239,765 3,074,354 632,560 ----------- ------------ ------------ CASH PROVIDED BY INVESTING ACTIVITIES 39,119,093 30,477,681 20,979,158 ----------- ------------ ------------ TOTAL CASH PROVIDED 42,759,092 39,743,892 29,499,850 ----------- ------------ ------------ DISBURSEMENTS FOR NEW INVESTMENTS Investments acquired: Bonds and stocks ........................................... 37,392,538 34,510,180 23,415,372 Mortgages .................................................. 3,513,324 3,503,415 3,920,058 Real estate ................................................ 1,268,351 1,417,058 1,143,375 Other, net ................................................. 1,289,881 1,418,270 705,364 ------------ ------------ ------------ TOTAL DISBURSEMENTS FOR NEW INVESTMENTS 43,464,094 40,848,923 29,184,169 ----------- ------------ ------------ INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (705,002) (1,105,031) 315,681 CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR 1,787,873 2,892,904 2,577,223 ----------- ------------ ------------ CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS AT END OF YEAR $ 1,082,871 $ 1,787,873 $ 2,892,904 =========== ============ ============ See notes to statutory - basis financial statements. 8 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) DECEMBER 31, 2003 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. TIAA has authorized and issued 2,500 shares of Class A common stock. All of the outstanding common stock of TIAA is collectively held by the TIAA Board of Overseers, a nonprofit corporation created to hold the stock of TIAA. By charter, TIAA operates without profit to its sole shareholder. As a result, all contingency reserves are held as special surplus funds solely to provide benefits in furtherance of TIAA's charter. Unless approved by the New York State Insurance Department, dividends to the shareholder are limited by New York State Insurance Law to the lesser of ten percent of surplus as of the prior year end or the prior year's net gain from operations, excluding realized gains. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES CHANGES IN ACCOUNTING PRINCIPLES: TIAA's statutory-basis financial statements have been prepared on the basis of statutory accounting principles prescribed or permitted by the New York State Insurance Department, a comprehensive basis of accounting that differs from accounting principles generally accepted in the United States ("GAAP"). Accounting changes implemented to conform to the provisions of the National Association of Insurance Commissioners' ("NAIC") Accounting Practices and Procedures Manual ("NAIC SAP"), as adopted by the New York State Insurance Department, are reported as changes in accounting principles. The cumulative effect of a change in accounting principle is reported as an adjustment to capital and contingency reserves in the period of the change. The cumulative effect is the difference between the amount of capital and contingency reserves at the effective date of the change 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. The New York State Insurance Department allowed New York-domiciled insurance companies to admit deferred federal income tax ("DFIT") assets for purposes of their statutory-basis financial statements for years ending on or after December 31, 2002, in accordance with Statement of Statutory Accounting Principles No. 10 - INCOME TAXES. The effect of the change in accounting principle for DFIT in 2002 and the initial adoption of NAIC SAP in 2001 increased capital and contingency reserves by $836,682 and $375,325, respectively. 9 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) The table below provides a reconciliation of TIAA's net income/(loss) and contingency reserves between NAIC SAP and the annual statement filed with the New York State Insurance Department: 2003 2002 ------------ ------------ Net Income/(Loss), New York Basis ....... $ 514,334 $ (972,154) Additional Reserves for: Term Conversions ................ 535 6,429 Deferred and Payout Annuities ... 476,333 614,093 ------------ ------------ Net Income / (Loss), NAIC SAP ........... $ 991,202 $ (351,632) ============ ============ Contingency Reserves, New York Basis .... $ 10,238,412 $ 9,283,641 Additional Reserves for: Term Conversions ................ 7,279 6,744 Deferred and Payout Annuities ... 1,712,871 1,236,537 ------------ ------------ Contingency Reserves, NAIC SAP .......... $ 11,958,562 $ 10,526,922 ============ ============ Subsequent to the filing of its 2002 New York SAP financial statements, TIAA made certain revisions, primarily relating to the estimates of other than temporary impairments for invested assets. Reconciliations of TIAA's net income and contingency reserves between the New York SAP as originally filed and these Audited Financial Statements are shown below: Contingency Net Loss Reserves ------------- -------------- New York SAP - as filed ...................................... $ (136,821) $ 9,668,539 Adjustments to Invested Asset Valuations ..................... (334,898) (334,898) Reclassification - Unrealized to Realized Capital Losses ..... (450,435) -- Adjustments to Policy Reserves and Other Liabilities ......... (50,000) (50,000) ------------- -------------- Audited Financial Statements ................................. $ (972,154) $ 9,283,641 ============= ============== ACCOUNTING POLICIES: The preparation of TIAA's statutory-basis 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: INVESTMENTS: Generally, 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. A realized loss is recorded when an impairment is considered to be other than emporary. An impairment in an investment is considered to have occurred if an event or change in circumstance indicates that the carrying value of the asset may not be recoverable or the receipt of contractual payments of principal and interest may not occur when scheduled. When an impairment has been determined to have occurred, the investment is valued at fair value except for loan-backed and structured securities, which are carried at an amount equal to the sum of their undiscounted expected future cash flows. Management considers all available evidence to evaluate the potential impairment of its investments. Unless evidence exists indicating a decline in the fair value of an investment below carrying value is temporary, a writedown is recognized as a realized loss. 10 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) VALUATION OF INVESTMENTS: SHORT-TERM INVESTMENTS: Short-term investments (debt securities with maturities of one year or less at the time of acquisition) not in default are stated at amortized cost. The interest method is used for amortizing short-term investments. Short-term investments in default are stated at the lower of amortized cost or fair value. Cash and cash equivalents includes cash on hand, amounts due from banks, and short term highly liquid investments with original maturity of three months or less. BONDS: Bonds not backed by loans and not in default are stated at amortized cost. The interest method is used for amortizing bonds that are not backed by loans. Bonds not backed by loans that are in default are valued at the lower of amortized cost or fair value. For an other-than-temporary impairment, the cost basis of the bond is written down to its fair value and the amount of the write down is recognized as a realized loss. LOAN-BACKED BONDS AND STRUCTURED SECURITIES: Loan-backed bonds and structured securities not in default are stated at amortized cost. The prospective approach is used in determining the carrying amount of interest only securities, securities for which an other-than-temporary impairment has been recognized or securities whose expected future cash flows are lower than the expected cash flows estimated at the time of acquisition. The retrospective approach is used to determine the carrying amount of all other loan-backed and structured securities. Estimated future cash flows and expected repayment periods are used in calculating amortization for loan-backed and structured securities. Loan-backed and structured securities in default are valued at the lower of amortized cost or undiscounted estimated future cash flows. COMMON STOCK: Unaffiliated common stocks are stated at fair value. PREFERRED STOCK: Preferred stocks in NAIC designations 1, 2 and 3 are stated at amortized cost. Preferred stocks in NAIC designations 4, 5 and 6 are carried at the lower of amortized cost or fair value. MORTGAGES: Mortgages are stated at amortized cost except that purchase money mortgages are stated at the lower of amortized cost or ninety percent of appraised value. A realized loss is recognized on impaired loans when a probability exists that the receipt of contractual payments of principal and interest may not occur when scheduled. REAL ESTATE: Real estate held for the production of income is carried at depreciated cost, less encumbrances. Real estate held for sale is carried at the lower of depreciated cost or fair value, less encumbrances and estimated costs to sell. TIAA utilizes the straight-line method of depreciation on real estate. Depreciation is generally computed over a forty year period. WHOLLY-OWNED SUBSIDIARIES, LIMITED PARTNERSHIPS AND LIMITED LIABILITY COMPANIES: Investments in wholly-owned subsidiaries, limited partnerships and limited liability companies are stated at TIAA's equity in the net admitted assets of the underlying entities. POLICY LOANS AND SEPARATE ACCOUNT ASSETS: Policy loans are stated at outstanding principal amounts. Separate account assets are stated at fair value. SEED MONEY INVESTMENTS: Seed money investments in the TIAA-CREF Mutual Funds, TIAA-CREF Institutional Mutual Funds and TIAA-CREF Life Funds, which are included in Other Assets in the accompanying balance sheets, are stated at fair value. 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 fair 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. 11 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION: Investments denominated in foreign currencies and foreign currency contracts are valued in U.S. dollars, based on exchange rates at the end of the period. Investment transactions in foreign currencies are recorded at the exchange rates prevailing on the respective transaction dates. All other asset and liability accounts that are denominated in foreign currencies are adjusted to reflect exchange rates at the end of the period. Realized and unrealized gains and losses due to foreign exchange transactions and translation adjustments, are not separately reported but are collectively included in realized and unrealized capital gains and losses, respectively. 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, income generation, and asset replication purposes. TIAA enters into derivatives directly with counterparties of high credit quality (i.e., rated AA or better at the date of a transaction) and monitors counterparty credit quality on an ongoing basis. TIAA's counterparty credit risk is limited to the net 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. Foreign currency swap contracts are designated as cashflow hedges and 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. Foreign currency forward contracts are designated as cashflow hedges and 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. A forward contract incorporates a swap transaction, which exchanges TIAA's fixed foreign currency cash flows into a fixed amount of U.S. dollar cash flows at a future date. A foreign exchange premium/(discount) is recorded at the time a contract is opened, 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 are designated as cashflow hedges and 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. These contracts qualify as fair value hedges and are entered into in connection with certain interest sensitive products. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date. Net payments received and net payments made under interest rate swap contracts are included in net investment income. 12 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) SWAP OPTIONS: TIAA writes (sells) swap options on selected bonds as an income generation tool. The income generated by the sale of swap options is used to purchase interest rate cap contracts. 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 created. INTEREST RATE CAP CONTRACTS: TIAA purchases interest rate cap contracts to hedge against the risk of a rising interest rate environment as part of TIAA's asset and liability management program for certain interest sensitive products. Under the terms of the interest rate cap contracts, the selling entity makes payments to TIAA on a specified notional amount if an agreed-upon index exceeds a predetermined strike rate. Interest rate cap contracts are carried at fair value. Payments received under interest rate cap contracts are included in net investment income. 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 essentially issuing "insurance" to the buyer of default protection. The carrying value of credit default swaps represents the unamortized 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 referenced 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. TIAA also purchases credit default swaps to hedge against unexpected credit events on selective investments in the TIAA portfolio. These swap contracts qualify as fair value hedges and the premium payment to the counterparty is expensed. NON-ADMITTED ASSETS: Certain investment balances and corresponding investment income due and accrued are designated as non-admitted assets by the New York State Insurance Department, based on delinquencies, defaults, and other statutory criteria, and cannot be included in life insurance company balance sheets filed with the New York State Insurance Department. Such investment-related non-admitted assets totaled $100,566 and $155,310 at December 31, 2003 and 2002, 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 the DFIT asset, furniture and fixtures and various receivables, are also designated as non-admitted assets. The non-admitted portion of the DFIT asset was $2,869,806 and $3,274,669 at December 31, 2003 and 2002, respectively. The other non-admitted assets were $242,661 and $156,830 at 2003 and 2002, respectively. Changes in such non-admitted assets are charged or credited directly to contingency reserves. FURNITURE AND EQUIPMENT: Electronic data processing equipment and software that qualify for capitalization are depreciated using the straight-line method over 3 years. Office alterations and furniture are depreciated using the straight-line method over 10 years. Office equipment is depreciated over 5 years and telephone equipment over 7 years, using the straight-line method. Depreciation expenses charged to operations in 2003 and 2002 were $29,258 and $18,521, respectively and included approximately $8,700 of accelerated depreciation on electronic data processing equipment in 2003. TIAA also adopted higher capitalization thresholds for furniture and equipment in 2003. POLICY AND CONTRACT RESERVES: TIAA offers a range of group and individual retirement annuities 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 New York State Insurance Department and are computed in accordance with standard actuarial formulae. The reserves established utilize assumptions for interest (at rates ranging from 1.50% to 6.80% 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. 13 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) DIVIDENDS DECLARED FOR THE FOLLOWING YEAR: Dividends on insurance policies and pension annuity contracts in the payout phase are generally declared by the TIAA Board of Trustees ("Board") in November of each year, and such dividends are credited to policyholders in the following calendar year. Dividends on pension annuity contracts in the accumulation phase are generally declared by the Board in February of each year, and such dividends on the various existing vintages of pension annuity contracts in the accumulation phase are credited to policyholders during the ensuing twelve month period beginning March 1. ASSET VALUATION RESERVE: The Asset Valuation Reserve ("AVR"), which covers all invested asset classes, is a reserve required by NAIC SAP 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 and derivatives. 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. Statutory formulae determine the required reserves primarily based on factors applied to asset classes, and insurance companies may also establish additional reserves for any component; however, the ultimate balance cannot exceed the statutory maximum reserve for that component. In 2002, an additional reserve was established in the amount of $276,291. No voluntary contributions were made in 2003. 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 reserve required by NAIC SAP which accumulates realized interest rate-related capital gains and losses on sales of debt securities and mortgage loans, as defined by NAIC SAP. 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 NAIC SAP as having been prepared in accordance with GAAP. The differences between GAAP and NAIC SAP 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 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 related 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. 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, other entities under the control of the parent, and certain variable interest entities 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 State taxes are included in the computation of deferred taxes, a deferred tax asset is recorded for the amount of gross deferred tax assets expected to be realized in future years, and a valuation allowance is established for deferred tax assets not realizable, rather than being limited by quantitative limitations; o For purposes of calculating postretirement benefit obligations, active participants not currently vested would also be included in determining the liability; o Derivatives are generally valued at fair value rather than being accounted for in a manner consistent with the hedged item; o Loan-backed and structured securities that are determined to have an other-than-temporary impairment are written down to fair value and not to the sum of undiscounted estimated future cash flows. 14 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONCLUDED) Management believes that the effects of these differences would significantly increase TIAA's total contingency reserves under GAAP as of December 31, 2003. RECLASSIFICATIONS: Certain amounts in the 2002 and 2001 financial statements have been reclassified to conform with the 2003 presentation. NOTE 3 - INVESTMENTS The disclosures below provide information grouped within the following asset categories: A) bonds, preferred stocks and common stocks; B) mortgage loan investments; C) real estate investments; and D) investment subsidiaries and affiliates. A. BONDS, PREFERRED STOCKS, AND COMMON STOCKS: The statutory carrying values and estimated fair values, and unrealized gains and losses of long-term bonds, preferred stocks, and common stocks at December 31, 2003 and 2002, are shown below: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ------------ ------------ ------------ ------------ DECEMBER 31, 2003 U.S. Government .................. $ 2,086,153 $ 54,121 $ (59,787) $ 2,080,487 All Other Governments ............ 885,568 88,294 (1,576) 972,286 States, Territories & Possessions 966,942 168,938 (11,101) 1,124,779 Political Subdivisions of States, Territories & Possessions ...... 18,292 4,174 -- 22,466 Special Rev. & Special Assessment, Non-guaranteed Agencies & Govt . 21,156,415 869,013 (284,346) 21,741,082 Public Utilities ................. 4,663,739 410,987 (40,782) 5,033,944 Industrial & Miscellaneous ....... 76,277,008 4,979,430 (893,768) 80,362,670 ------------ ------------ ------------ ------------ Total Bonds ................... 106,054,117 6,574,957 (1,291,360) 111,337,714 Preferred Stocks ................. 928,302 61,717 (5,043) 984,976 Common Stocks .................... 373,540 87,790 (28,270) 433,060 ------------ ------------ ------------ ------------ Total ............................ $107,355,959 $ 6,724,464 $ (1,324,673) $112,755,750 ============ ============ ============ ============ DECEMBER 31, 2002 U.S. Government .................. $ 1,784,970 $ 80,198 $ (5,886) $ 1,859,282 All Other Governments ............ 626,243 55,509 (5,556) 676,196 States, Territories & Possessions 928,921 211,385 (5) 1,140,301 Political Subdivisions of States, Territories & Possessions ...... 18,266 4,474 -- 22,740 Special Rev. & Special Assessment, Non-guaranteed Agencies & Govt . 15,081,937 1,309,246 (37,720) 16,353,463 Public Utilities ................. 5,611,179 328,898 (136,197) 5,803,880 Industrial & Miscellaneous ....... 72,818,585 4,665,981 (1,358,404) 76,126,162 ------------ ------------ ------------ ------------ Total Bonds ................... 96,870,101 6,655,691 (1,543,768) 101,982,024 Preferred Stocks ................. 1,044,559 21,648 (22,763) 1,043,444 Common Stocks .................... 1,216,770 34,601 (92,457) 1,158,914 ------------ ------------ ------------ ------------ Total ............................ $ 99,131,430 $ 6,711,940 $ (1,658,988) $104,184,382 ============ ============ ============ ============ 15 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 3 - INVESTMENTS - (CONTINUED) IMPAIRMENT REVIEW PROCESS All securities are subjected to TIAA's process for identifying other-than-temporary impairments. The impairment identification process utilizes, but is not limited to, a screening process based on declines in fair value of more than 20% over a six-month period. TIAA writes down securities that it deems to have an other-than-temporary impairment to fair value in the period the securities are deemed to be impaired, based on management's case-by-case evaluation of the decline in fair value and prospects for recovery. Management considers a wide range of factors in the impairment evaluation process, including, but not limited to, the following: (a) the extent to which and the length of time the fair value has been below amortized cost; (b) the financial condition and near-term prospects of the issuer; (c) whether the debtor is current on contractually obligated interest and principal payments; (d) the intent and ability of TIAA to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value or repayment; (e) information obtained from regulators and rating agencies; (f) the potential for impairments in an entire industry sector or sub-sector; and (g) the potential for impairments in certain economically-depressed geographic locations. Where an impairment is considered to be other than temporary, TIAA recognizes a write-down as an investment loss and adjusts the cost basis of the security accordingly. TIAA does not change the revised cost basis for subsequent recoveries in value. Once an impairment write-down has been recorded, TIAA continues to review the impaired security for appropriate valuation on an ongoing basis. UNREALIZED LOSSES ON BONDS, PREFERRED STOCKS AND COMMON STOCKS In 2003, the Emerging Issues Task Force released U.S. GAAP guidance (EITF 03-01) requiring disclosure of gross unrealized losses and estimated fair values for securities, excluding structured securities rated below AA-, by investment category and by the length of time that individual securities had been in a continuous unrealized loss position. These disclosures for TIAA are shown in the tables below: GROSS ESTIMATED DECEMBER 31, 2003 AMORTIZED UNREALIZED FAIR COST LOSS VALUE ----------- --------- ----------- LESS THAN TWELVE MONTHS: U.S. Government ........................ $ 577,402 $ (45,884) $ 531,518 All Other Governments .................. 56,929 (1,576) 55,353 States, Territories & Possessions ...... 140,105 (11,100) 129,005 Special Rev. & Special Assessment, Non-Guaranteed Agency & Gov't ........ 400,647 (46,941) 353,706 Public Utilities ....................... 713,708 (40,782) 672,926 Industrial & Miscellaneous ............. 7,587,549 (389,502) 7,198,047 Structured Securities rated above A+ ... 12,592,692 (387,852) 12,204,840 ----------- --------- ----------- Total Bonds ........................ 22,069,032 (923,637) 21,145,395 Preferred Stock ........................ 98,061 (5,031) 93,030 Common Stock ........................... 151,803 (28,270) 123,533 ----------- --------- ----------- Total less than twelve months ...... $22,318,896 $(956,938) $21,361,958 ----------- --------- ----------- 16 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 3 - INVESTMENTS - (CONTINUED) GROSS ESTIMATED AMORTIZED UNREALIZED MARKET COST LOSS VALUE ------------ ------------ ------------ TWELVE MONTHS OR MORE: Industrial & Miscellaneous ......................... $ 144,177 $ (11,956) $ 132,221 Structured Securities rated above A+ ............... 277,128 (31,529) 245,599 ------------ ------------ ------------ Total Bonds .................................... 421,305 (43,485) 377,820 Preferred Stock .................................... 2,761 (12) 2,749 ------------ ------------ ------------ Total twelve months or more .................... 424,066 (43,497) 380,569 ------------ ------------ ------------ Total .......................................... 22,742,962 (1,000,435) 21,742,527 Structured securities rated below AA- .............. 2,927,853 (324,238) 2,603,615 ------------ ------------ ------------ Total - All bonds, preferred & common stocks ... $ 25,670,815 $ (1,324,673) $ 24,346,142 ============ ============ ============ Securities where the estimated fair value declined and remained below amortized cost for less than twelve months was comprised of 1,162 securities. Non-investment grade securities represented 7% of the $21,361,958 fair value and 12% of the $956,938 unrealized loss for those securities at December 31,2003. The category of securities where the estimated fair value declined and remained below amortized cost for twelve months or greater was comprised of 30 securities and were concentrated in asset-backed securities (66%), retail & wholesale trade (12%), manufacturing (10%), other securities (12%). The preceding percentages were calculated as a percentage of the gross unrealized loss. Non-investment grade securities represented 24% of the $380,569 fair value and 23% of the $43,497 gross unrealized loss for those securities. TIAA held 9 securities where each had a gross unrealized loss greater than $1 million at December 31, 2003. Two of these securities represented 100% of the gross unrealized loss on securities where the estimated fair value declined and remained below amortized cost by 20% or more for twelve months or greater. TIAA analyzed these securities as of December 31, 2003 to determine whether the declines in value represented other-than-temporary impairments. Both of the securities were asset-backed securities and the estimated future cash flows supported the carrying value of each security. TIAA believes that the estimated fair values of these securities were temporarily depressed as a result of unusually strong negative market reaction to this sector. SCHEDULED MATURITIES FOR BONDS The statutory carrying values and estimated fair values of long-term bond investments at December 31, 2003, by contractual maturity, are shown below: CARRYING ESTIMATED VALUE FAIR VALUE ------------ ------------ Due in one year or less .................. $ 2,037,540 $ 2,101,218 Due after one year through five years .... 9,650,333 10,388,328 Due after five years through ten years ... 19,166,501 20,711,749 Due after ten years ...................... 24,029,920 25,629,576 ------------ ------------ Subtotal ............................ 54,884,294 58,830,871 Residential mortgage-backed securities ... 26,408,922 27,058,237 Asset-backed securities .................. 11,284,350 11,196,247 Commercial mortgage-backed securities .... 13,476,551 14,252,359 ------------ ------------ Total ............................... $106,054,117 $111,337,714 ============ ============ 17 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 3 - INVESTMENTS - (CONTINUED) Bonds not due at a single maturity date have been included in the preceding table based on the year of final maturity. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations, although prepayment premiums may be applicable. Included in the preceding table are long-term bonds in or near default with an original par amount of $2,511,943 that have been written down to a statutory carrying value of $846,523. The bonds are categorized based on contractual maturity as follows: $14,613 due in one year or less, $99,458 due after one year through five years, $119,453 due after five years through ten years, $144,597 due after ten years, $4,265 of residential mortgage-backed securities, $460,900 of asset-backed securities and $3,237 of commercial mortgage-backed securities. BOND CREDIT QUALITY AND DIVERSIFICATION At December 31, 2003 and 2002, 91.6% and 89.8%, respectively, of the long-term bond portfolio was comprised of investment grade securities. The carrying values of long-term bond investments were diversified by industry classification at December 31st as follows: 2003 2002 ------ ------ Residential mortgage-backed securities ..... 24.9% 25.1% Commercial mortgage-backed securities ...... 12.7 10.6 Manufacturing .............................. 11.4 11.8 Finance and financial services ............. 11.0 10.1 Asset-backed securities .................... 10.6 12.2 Public utilities ........................... 5.9 6.8 Communications ............................. 4.8 4.8 Oil and gas ................................ 3.7 3.6 Government ................................. 3.5 2.7 Retail and wholesale trade ................. 2.6 2.9 Real estate investment trusts .............. 1.8 2.3 Other ...................................... 7.1 7.1 ------ ------ Total ...................................... 100.0% 100.0% ====== ====== BOND AND EQUITY FUNDING COMMITMENTS / OTHER DISCLOSURES At December 31, 2003, outstanding forward commitments to fund future long-term bond investments were $188,646. Of this, $152,070 is scheduled for disbursement in 2004, $34,535 in 2005 and $2,041 in later years. The funding of bond commitments is contingent upon the continued favorable financial performance of the potential borrowers. At December 31, 2003, outstanding forward commitments for future equity investments were $1,861,928. Of this, $1,017,380 is scheduled for disbursement in 2004, $281,516 in 2005 and $563,032 in later years. During 2003 and 2002, TIAA acquired bonds and stocks through restructurings and other non-cash transactions aggregating $2,313,755 and $1,635,737, respectively. Debt securities of $6,661 and $6,373 at December 31, 2003 and 2002, respectively, were on deposit with governmental authorities or trustees, as required by law. 18 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 3 - INVESTMENTS - (CONTINUED) The carrying values and estimated fair values of debt securities loaned, and the associated cash collateral received were as follows: CARRYING VALUE FAIR VALUE CASH COLLATERAL -------------- ---------- --------------- December 31, 2003 ........... $2,729,251 $2,833,478 $2,985,776 December 31, 2002 ........... $3,563,954 $3,846,254 $3,973,109 B. MORTGAGE LOAN INVESTMENTS: TIAA makes mortgage loans that are principally collateralized by commercial real estate. The maximum percentage of any one loan to the value of the security at the time of the loan, exclusive of insured or guaranteed or purchase money mortgages, was 80% for commercial loans. The coupon rates for commercial mortgage loans and mezzanine loans acquired during 2003 ranged from 2.97% to 9.20% and from 5.58% to 9.78%, respectively. MORTGAGE LOAN IMPAIRMENT REVIEW PROCESS TIAA monitors the effects of current and expected market conditions and other factors on the collectibility of mortgage loans to identify and quantify any impairment in value. Any impairment is classified as either temporary, for which a recovery is anticipated, or other-than-temporary. Mortgage loans with impaired values at December 31, 2003 and 2002 have been written down to net realizable values, as shown in the table below. For impaired mortgages where the impairments were deemed to be temporary, an allowance for credit losses has been established, as indicated below: 2003 2002 ----------- --------- Recorded investment in impaired mortgages, with temporary allowances for credit losses .......................................... $ 599,836 $ 399,852 Related temporary allowances for credit losses ...................... (132,393) (116,737) Recorded investment in impaired mortgage loans, net of other-than-temporary impairment losses recognized .................. 1,015,637 45,998 Related write-downs for other-than-temporary impairments ............ (132,754) (90,329) Average recorded investments in impaired loans ........................ 980,612 751,027 Interest income recognized on impaired mortgages during the period .... 55,917 30,632 Interest income recognized on a cash basis during the period .......... 74,052 31,509 The activity affecting the allowance for credit losses on mortgage loans during 2003 and 2002 was as follows: 2003 2002 ----------- --------- Balance at the beginning of the year ..................................... $ 116,737 $ 145,974 Provisions for losses charged against surplus ............................ 93,394 38,452 Write-downs for other-than-temporary impaired assets charged against the allowance .................................................... (30,639) (67,026) Recoveries of amounts previously charged off ............................. (47,099) (663) ----------- --------- Balance at the end of the year ........................................... $ 132,393 $ 116,737 =========== ========= 19 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 3 - INVESTMENTS - (CONTINUED) At December 31, 2003 and 2002, the aggregate carrying values of mortgages with restructured or modified terms were $104,414 and $347,955, respectively. For the years ended December 31, 2003, 2002 and 2001, the investment income earned on such mortgages was $6,415, $26,281 and $29,838, respectively, which would have been approximately $10,199, $36,560 and $38,158, 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. TIAA accrues interest income on impaired loans to the extent it is deemed collectible. Due and accrued income on any mortgage in default for more than eighteen months is non-admitted. At December 31, 2003 and 2002, the carrying values of mortgages held with interest more than 180 days past due, excluding accrued interest, were $32,785 and $69,550, respectively. Total interest due on mortgages with interest more than 180 days past due was $6,058 and $6,241, respectively. During 2003, TIAA reduced the interest rate on a $45,000 loan by 4.5%. MORTGAGE LOAN DIVERSIFICATION At December 31, 2003 and 2002, the carrying values of mortgage loan investments were diversified by property type and geographic region as follows: 2003 2002 ------ ------ PROPERTY TYPE Office buildings ..................... 42.5% 42.4% Shopping centers ..................... 27.2 25.8 Industrial buildings ................. 11.4 10.8 Mixed-use projects ................... 7.5 7.7 Apartments ........................... 6.0 6.8 Hotel ................................ 3.9 4.9 Other ................................ 1.5 1.6 ------ ------ Total ................................ 100.0% 100.0% ====== ====== 2003 2002 ------ ------ GEOGRAPHIC REGION Pacific .............................. 25.2% 25.7% South Atlantic ....................... 22.6 21.9 North Central ........................ 17.5 17.8 Middle Atlantic ...................... 11.2 10.9 South Central ........................ 9.0 9.1 Mountain ............................. 6.8 7.3 New England .......................... 6.7 6.6 Other ................................ 1.0 0.7 ------ ------ Total ................................ 100.0% 100.0% ====== ====== At December 31, 2003 and 2002, approximately 18.8% and 19.2% of the mortgage portfolio, respectively, was invested in California and was included in the Pacific region shown above. 20 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 3 - INVESTMENTS - (CONTINUED) SCHEDULED MORTGAGE LOAN MATURITIES At December 31, 2003, the contractual maturity schedule of mortgage loans is shown below: CARRYING VALUE -------------- Due in one year or less ........................ $ 809,803 Due after one year through five years .......... 9,315,097 Due after five years through ten years ......... 11,853,829 Due after ten years ............................ 2,009,237 ------------ Total .......................................... $ 23,987,966 ============ Actual maturities may differ from contractual maturities because borrowers may have the right to prepay mortgage loans, although prepayment premiums may be applicable. MORTGAGE LOAN FUNDING COMMITMENTS / OTHER DISCLOSURES At December 31, 2003, outstanding forward commitments for future mortgage loan investments were $1,530,555. Of this, $1,152,443 is scheduled for disbursement in 2004 and $378,112 in later years. The funding of mortgage loan commitments is generally contingent upon the underlying properties meeting specified requirements, including construction, leasing and occupancy. Mortgages that totaled $305,656 and $406,915 at December 31, 2003 and 2002, respectively, represent amounts due from related parties that are collateralized by real estate owned by TIAA investment subsidiaries and affiliates. C. REAL ESTATE INVESTMENTS: TIAA makes investments in commercial real estate directly, through wholly-owned subsidiaries and through real estate limited partnerships. TIAA monitors the effects of current and expected market conditions and other factors on the realizability of real estate investments to identify and quantify any impairments in value. At December 31, 2003 and 2002, TIAA's real estate investments of $5,855,297 and $5,643,825, respectively, were carried net of third party mortgage encumbrances, which totaled approximately $1,595,228 and $966,976, respectively. REAL ESTATE DIVERSIFICATION At December 31, 2003 and 2002, the carrying values of real estate investments were diversified by property type and geographic region as follows: 2003 2002 ------ ------ PROPERTY TYPE Office buildings ..................... 72.0% 68.7% Industrial buildings ................. 7.0 4.6 Shopping centers ..................... 6.7 7.0 Mixed-use projects ................... 6.0 7.2 Income-producing land underlying improved real estate ............... 1.5 2.4 Land held for future development ..... 1.1 1.8 Apartments ........................... 1.0 1.0 Other ................................ 4.7 7.3 ------ ------ Total ................................ 100.0% 100.0% ====== ====== 21 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 3 - INVESTMENTS - (CONCLUDED) 2003 2002 ------ ------ GEOGRAPHIC REGION South Atlantic ....................... 31.2% 36.5% North Central ........................ 17.8 16.5 Pacific .............................. 15.1 12.1 South Central ........................ 9.0 9.4 Middle Atlantic ...................... 4.9 5.4 Mountain ............................. 2.6 2.8 New England .......................... 0.6 0.9 Other ................................ 18.8 16.4 ------ ------ Total ................................ 100.0% 100.0% ====== ====== At December 31, 2003 and 2002, approximately 12.0% and 14.6% of the real estate portfolio, respectively, was invested in Florida and was included in the South Atlantic region shown above. REAL ESTATE FUNDING COMMITMENTS / OTHER DISCLOSURES At December 31, 2003, outstanding obligations for future real estate investments were $568,208, of which $390,792 will be disbursed in 2004 and $177,416 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, 2003, 2002 and 2001, was $156,085, $151,029 and $157,515, respectively; the amount of accumulated depreciation at December 31, 2003 and 2002 was $1,067,358 and $1,081,905, respectively. During 2003 and 2002, TIAA acquired real estate via the assumption of debt or in satisfaction of debt in the amounts of $48,952 and $130,892, respectively. D. INVESTMENT SUBSIDIARIES AND AFFILIATES: TIAA's investment subsidiaries and affiliates, which have been created for legal or other business reasons, are primarily involved in real estate and securities investment activities for TIAA. TIAA's share of total assets, liabilities, net carrying values and net income of investment subsidiaries and affiliates at December 31, 2003 and 2002 and for the years then ended, was as follows: 2003 2002 ----------- ----------- Total assets ............................ $ 5,594,469 $ 5,481,061 Other-than-temporary impairments ........ (84,118) (13,453) Liabilities ............................. (1,704,576) (2,191,671) Non-admitted assets/other adjustments ... (68,260) 367,788 ----------- ----------- Net carrying value ...................... $ 3,737,515 $ 3,643,725 =========== =========== Net income .............................. $ 199,191 $ 303,881 =========== =========== The carrying values shown above are included in the Bonds, Mortgages, Real estate, Stock, and Other long-term investments captions in the accompanying balance sheets. The carrying values shown above exclude the investment subsidiaries and affiliates that held interests in the securitizations disclosed in Note 5. As of December 31, 2003 and 2002, the net amount due from investment subsidiaries and affiliates was $26,104 and $62,183, respectively. 22 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 4 - INVESTMENT INCOME AND CAPITAL GAINS AND LOSSES NET INVESTMENT INCOME: For 2003, 2002 and 2001, the components of net investment income were as follows: 2003 2002 2001 ----------- ----------- ----------- Bonds .................................... $ 7,191,950 $ 6,957,865 $ 6,555,484 Mortgages ................................ 1,820,729 1,791,516 1,791,063 Real estate (net of property expenses, taxes and depreciation) ................ 306,191 417,904 312,221 Stocks ................................... 106,153 147,820 123,062 Other long-term investments .............. 138,643 83,158 97,335 Cash and short-term investments .......... 26,485 90,181 131,971 Other .................................... (2,807) 5,043 12,686 ----------- ----------- ----------- Total gross investment income ............ 9,587,344 9,493,487 9,023,822 Less securities lending payments ........ (45,861) (68,080) (84,346) Less investment expenses ................ (188,059) (187,935) (185,335) ----------- ----------- ----------- Net investment income before amortization of net IMR gains ........ 9,353,424 9,237,472 8,754,141 Plus amortization of net IMR gains ...... 98,481 87,254 65,438 ----------- ----------- ----------- Net investment income ................... $ 9,451,905 $ 9,324,726 $ 8,819,579 =========== =========== =========== Future rental income expected to be received during the next five years under existing real estate leases in effect as of December 31, 2003 is $480,883 in 2004, $442,117 in 2005, $315,325, in 2006, $217,430 in 2007 and $222,211 in 2008. 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 7.15%, 7.57% and 7.69% in 2003, 2002 and 2001, respectively. REALIZED CAPITAL GAINS AND LOSSES: For the 2003, 2002 and 2001, the net realized capital gains/(losses) on sales, redemptions and writedowns of investments were as follows: 2003 2002 2001 ----------- ----------- ----------- Bonds .................................... $ (428,865) $(1,130,208) $ (173,653) Mortgages ................................ (107,656) (144,886) (31,806) Real estate .............................. 67,277 52,076 64,557 Stocks ................................... 20,689 16,838 64,677 Other long-term investments .............. (58,471) (421,168) 22,686 Cash and short-term investments .......... 19,670 687 (1,043) ----------- ----------- ----------- Total .................................... $ (487,356) $(1,626,661) $ (54,582) =========== =========== =========== 23 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 4 - INVESTMENT INCOME AND CAPITAL GAINS AND LOSSES - (CONCLUDED) Write-downs of investments resulting from impairments which were considered to be other than temporary and included in the preceding table as realized capital (losses) were as follows: 2003 2002 2001 ----------- ----------- ----------- Other-than-temporary impairments: Bonds ........................... $ (802,609) $(1,196,548) $ (246,641) Mortgages ....................... (135,147) (107,989) (25,882) Real estate ..................... (92,060) (18,367) -- Stocks .......................... (43,570) (86,595) -- Other long-term investments ..... (109,049) (429,326) (19,693) ----------- ----------- ----------- Total ............................. $(1,182,435) $(1,838,825) $ (292,216) =========== =========== =========== During 2003, 2002 and 2001, TIAA recognized losses in the amount of $18,683, $61,477, and $47,067 on debt securities and mortgage loans whose terms were restructured. These amounts were included in the preceding table. Proceeds from sales and redemptions of long-term bond investments during 2003, 2002 and 2001 were $27,511,033, $22,142,399 and $15,334,370, respectively. Gross gains of $602,324, $361,013 and $234,562 and gross losses, excluding impairments considered to be other than temporary, of $228,580, $294,672 and $161,574 were realized on these sales and redemptions during 2003, 2002 and 2001, respectively. UNREALIZED CAPITAL GAINS AND LOSSES: For 2003, 2002 and 2001, the net changes in unrealized capital gains/(losses) on investments, resulting in a net increase/(decrease) in the valuation of investments, were as follows: 2003 2002 2001 ----------- ----------- ----------- Bonds ............................. $ 262,919 $ 446,892 $ (229,205) Mortgages ......................... 7,972 54,436 17,375 Real estate ....................... 149,947 96,166 29,638 Stocks ............................ 160,258 (108,912) 55,602 Other long-term investments ....... (168,663) (138,133) (447,676) ----------- ----------- ----------- Total ............................. $ 412,433 $ 350,449 $ (574,266) =========== =========== =========== 24 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) 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, residual interest, or servicing rights, all of which are retained interests in the securitized receivables. TIAA's ownership of the related retained interests may be held directly by TIAA or indirectly through an investment subsidiary. The retained interests are associated with Special Purpose Entities/Qualified Special Purpose Entities, ("SPEs/QSPEs"), that issue debt and equity which is non-recourse to TIAA. Fair value used to determine gain or loss on a securitization transaction is based on quoted market prices if available; however, quotes are generally not available for retained interests, so TIAA either obtains an estimated fair value from an independent pricing service or estimates fair value internally 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. During 2003, TIAA did not enter into any securitization transactions in which it sold assets held on its balance sheet into SPEs/QSPEs. During 2002, TIAA entered into two securitization transactions in which it sold bonds with a total principal balance of $776,184 and recognized a gain of approximately $19,960. TIAA retained subordinated interests with a fair value of approximately $81,037 when the transactions closed. The table below summarizes cash flows received from securitization trusts: FOR THE YEARS ENDED DECEMBER 31, ----------------------- 2003 2002 ----------- ---------- Proceeds from new securitizations ................. $ N/A $ 690,598 Asset management fees and servicing fees: Received by TIAA ............................... 323 2,155 Received by TIAA's affiliates .................. 4,220 1,778 Other cash flows received on retained interests ... 231,863 111,404 The following table summarizes TIAA's retained interests in securitized financial assets on December 31, 2003: SENSITIVITY ANALYSIS OF FAIR VALUE ASSUMPTIONS -------------------------- TYPE OF CARRYING ESTIMATED 10% 20% COLLATERAL VALUE FAIR VALUE ADVERSE ADVERSE ---------- ----- ---------- --------- ---------- ISSUE ---------- 2003 N/A $ N/A $ N/A $ N/A $ N/A 2002 Bonds 7,631 7,631 -- -- 2002 Bonds 27,953 28,775 (1,165) (2,240) 2001 Bonds 379,887 425,942 (5,790) (11,169) 2000 Bonds 46,808 27,895 (1,904) (4,007) 2000 Bonds 60,644 70,558 (5,931) (11,641) 1999 Mortgages 336,059 369,978 (5,519) (10,949) 25 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 5 - SECURITIZATIONS - (CONCLUDED) The fair values of the retained interests on December 31, 2003 were determined using either independent pricing services or analysts employed by TIAA. The key assumptions applied discount rates based upon the current yield curve, spreads, and expected cash flows specific to the type of interest retained for each securitization. The sensitivity analysis includes an adverse change in each assumption used to determine fair value. At December 31, 2003 and 2002, the carrying values of TIAA's investments in subsidiaries that held an interest in these securitizations were $503,334 and $605,721, respectively. Total assets, liabilities and net carrying value of these TIAA subsidiaries were as follows: 2003 2002 ------------ ------------ Total assets ............................ $ 1,089,059 $ 1,145,023 Other-than-temporary impairments ........ -- (36,400) Liabilities ............................. (556,282) (502,902) Non-admitted assets/other adjustments ... (29,543) -- ------------ ------------ Net carrying value ...................... $ 503,234 $ 605,721 ============ ============ NOTE 6 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts of financial instruments presented in the following tables were determined by TIAA using market information available as of December 31, 2003 and 2002 and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data in developing the estimates of fair value for financial instruments for which there are no available market value quotations. The estimates presented are not necessarily indicative of the amounts TIAA could have realized in a market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. NOTIONAL CARRYING ESTIMATED DECEMBER 31, 2003 VALUE VALUE FAIR VALUE ----------------- ------------- ------------- ------------- Assets Bonds ................................ $ 106,054,117 $ 111,337,714 Mortgages ............................ 23,987,966 25,975,240 Common stocks ........................ 433,060 433,060 Preferred stocks ..................... 924,754 984,976 Cash and short-term investments ...... 1,076,403 1,076,403 Policy loans ......................... 504,369 504,369 Seed money investments in mutual funds 556,244 556,244 Liabilities Teachers Personal Annuity-Fixed Account 2,124,746 2,124,746 Other Financial Instruments Foreign currency swap contracts ...... $ 2,415,672 $ (402,848) $ (420,866) Foreign currency forward contracts ... 309,676 (53,146) (51,579) Interest rate swap contracts ......... 744,455 -- 13,604 Interest rate cap contracts .......... 90,300 42 42 Credit default swap contracts ........ 472,417 -- (5,612) 26 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 6 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED) NOTIONAL CARRYING ESTIMATED DECEMBER 31, 2002 VALUE VALUE FAIR VALUE ----------------- ------------- ------------- ------------- Assets Bonds ................................ $ 96,870,101 $ 101,982,024 Mortgages ............................ 23,968,793 26,675,433 Common stocks ........................ 1,158,914 1,158,914 Preferred stocks ..................... 1,025,412 1,043,444 Cash and short-term investments ...... 1,787,873 1,787,873 Policy loans ......................... 495,251 495,251 Seed money investments in mutual funds 837,392 837,392 Liabilities Teachers Personal Annuity-Fixed Account 2,044,779 2,044,779 Other Financial Instruments Foreign currency swap contracts ...... $ 1,725,263 $ (49,504) $ 18,935 Foreign currency forward contracts ... 391,654 (29,578) (25,711) Interest rate swap contracts ......... 681,355 618 23,290 Swap options ......................... 198,600 (1,151) (6,627) Interest rate cap contracts .......... 149,450 570 570 Credit default swap contracts ........ 143,417 -- (3,171) BONDS: The fair values for publicly traded long-term bond investments were determined using quoted market prices. For privately placed long-term bond investments without a readily ascertainable market value, such values were determined with the assistance of an independent pricing service utilizing a discounted cash flow methodology based on coupon rates, maturity provisions and assigned credit ratings. The aggregate carrying values and estimated fair values of publicly traded and privately placed bonds at December 31, 2003 and 2002 were as follows: 2003 2002 -------------------------------------- ----------------------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE --------------- --------------- --------------- ---------------- Publicly traded bonds.......... $ 73,074,646 $ 76,820,177 $ 65,453,501 $ 69,510,316 Privately placed bonds......... 32,979,471 34,517,537 31,416,600 32,471,708 --------------- --------------- --------------- ---------------- Total.......................... $ 106,054,117 $ 111,337,714 $ 96,870,101 $ 101,982,024 =============== =============== =============== ================ MORTGAGES: The fair values of mortgages were 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 were considered reasonable estimates of their fair values. PREFERRED STOCKS: The fair values of preferred stocks were determined using quoted market prices or valuations from the NAIC. TEACHERS PERSONAL ANNUITY - FIXED ACCOUNT: The carrying values of the liabilities were considered reasonable estimates of their fair values. 27 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 6 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONCLUDED) FOREIGN CURRENCY SWAP CONTRACTS: The fair values of foreign currency swap contracts, which are used for hedging purposes, represented the estimated net gains that TIAA would record if the foreign currency forward contracts were liquidated at year-end. The fair values of foreign currency swap contracts were estimated internally based on future cash flows and anticipated foreign exchange relationships, and such values were reviewed for reasonableness with values from TIAA's counterparties. Derivative instruments used in hedging transactions that do not meet or no longer meet the criteria of an effective hedge are accounted for at fair value. At December 31, 2003, the net unrealized (loss) from a foreign currency swap contract that no longer qualified for hedge accounting treatment was ($6,715). FOREIGN CURRENCY FORWARD CONTRACTS: The fair values of foreign currency forward contracts, which are used for hedging purposes, represented 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 were estimated internally based on future cash flows and anticipated foreign exchange relationships, and such values were 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, represented the estimated net gains that TIAA would record if the interest rate swaps were liquidated at year-end. The fair values of interest rate swap contracts were estimated internally based on anticipated interest rates and estimated future cash flows, and such values were reviewed for reasonableness with estimates from TIAA's counterparties. Derivative instruments used in hedging transactions that do not meet or no longer meet the criteria of an effective hedge are accounted for at fair value. At December 31, 2002, the net unrealized gain from an interest rate swap contract that no longer qualified for hedge accounting treatment was $618. SWAP OPTIONS: The fair values of swap options represented the estimated amounts that TIAA would receive/(pay) if the swap options were liquidated at year-end. The fair values of the swap options were estimated by external parties, including TIAA's counterparties, and such values were reviewed internally for reasonableness based on anticipated interest rates and estimated future cash flows. The average fair value of swap options held for income generation during 2003 and 2002 was ($7,293) and ($4,462), respectively. INTEREST RATE CAP CONTRACTS: The fair values of interest rate cap contracts, which are used for hedging purposes, represented 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 were estimated by external parties, including TIAA's counterparties, and such values were 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 and hedging purposes, represented the estimated amounts that TIAA would receive/(pay) if the credit default swap contracts were liquidated at year-end. The fair value of credit default swap contracts represented the net present value of the expected differences between the future premium payments and the market credit spreads reflecting the default risk of the underlying asset. The fair values of credit default swap contracts were estimated by external parties, including TIAA's counterparties, and such values were reviewed internally for reasonableness based on anticipated interest rates, estimated future cash flows, and anticipated credit market conditions. 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. 28 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 7 - OPERATING SUBSIDIARIES TIAA's operating subsidiaries primarily consist of TIAA-CREF Enterprises, Inc., ("Enterprises") and TIAA Financial Services, LLC, "(TFS") which are wholly-owned subsidiaries of TIAA. Enterprises owns TIAA-CREF Life Insurance Company, Inc. ("TIAA-CREF Life"), Teachers Advisors, Inc., ("Advisors") Teachers Personal Investors Services, ("TPIS") TIAA-CREF Trust Company, ("Trust") FSB, TIAA-CREF Tuition Financing, Inc., ("TFI") and TCT Holdings, Inc., all of which are wholly-owned subsidiaries of Enterprises. TFS consists of TIAA Global Markets, Inc. ("TGM") TIAA Advisory Services, LLC, and TIAA Realty Capital Management, LLC. TIAA's share of total assets, liabilities, net carrying values and net losses of unconsolidated operating subsidiaries at December 31, 2003 and 2002 and for the years then ended, was as follows: 2003 2002 ------------ ------------ Total assets ............................ $ 5,991,860 $ 3,473,633 Other-than-temporary impairments ........ (53,646) (233,180) Liabilities ............................. (5,486,222) (2,876,479) Non-admitted assets/other adjustments ... (1,970) 13,863 ------------ ------------ Carrying value .......................... $ 450,022 $ 377,837 ============ ============ Net loss ................................ $ (13,246) $ (51,858) ============ ============ TIAA had a revolving line of credit extended to TGM at December 31, 2003 and 2002, with an outstanding principal amount plus accrued interest of $0 and $66,500, respectively. TIAA had a net amount due from operating subsidiaries of $41,775 and $81,700, as of December 31, 2003 and 2002, respectively. NOTE 8 - 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. 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. Premiums, considerations or deposits received by TIAA's separate accounts totaled $1,401,307, $1,167,011 and $1,247,597 for the years ending December 31, 2003, 2002 and 2001, respectively. Reserves for these separate accounts totaled $5,619,975 and $4,290,964 on December 31, 2003 and 2002, respectively. Other than the guarantees disclosed in Note 16, TIAA does not make any guarantees to policyholders on its 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 fair value (directly held real estate is carried at appraised value). 29 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 9 - MUTUAL FUNDS As of December 31, 2003 and 2002, TIAA's investments in the affiliated mutual funds described below totaled approximately $556,300 and $837,400, respectively. These amounts were reported in the caption "Other long-term investments" in the accompanying balance sheets. 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, 2003, the Retail Funds had $3,452,938 in net assets. TIAA-CREF Institutional Mutual Funds ("the Institutional Funds"), a family of twenty-three funds, are currently used primarily as investment vehicles for the TFI tuition savings business and the Trust Company. As of December 31, 2003, the Institutional Funds had $4,543,172 in net assets. TIAA-CREF Life Funds ("the Life Funds"), a family of nine funds, are utilized by TIAA-CREF Life as funding vehicles for its variable annuity and variable insurance products. As of December 31, 2003, the Life Funds had $435,178 in net assets. NOTE 10 - MANAGEMENT AGREEMENTS Services necessary for the operation of College Retirement Equities Fund ("CREF"), a companion organization, are provided, at cost, by two subsidiaries of TIAA, TIAA-CREF Investment Management, 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. 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 $600,000, $568,300 and $555,100 in 2003, 2002 and 2001, respectively, are not included in the statements of operations and had no effect on TIAA's operations. Advisors provide investment advisory services for VA-1 in accordance with an Investment Management Agreement among 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 variable annuity 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 formulae 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. 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. 30 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 11 - FEDERAL INCOME TAXES By charter, TIAA is a not-for-profit organization and through December 31, 1997, was exempt from federal income taxation under the Internal Revenue Code ("IRC"). Any non-pension 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. The components of TIAA's net deferred tax asset were as follows: 2003 2002 ----------- ---------- Gross deferred tax assets .................... $ 3,780,742 $4,115,184 Gross deferred tax liabilities ............... 17,691 3,833 Deferred tax assets non-admitted ............. 2,869,806 3,274,669 Change in non-admitted deferred tax assets ... $ (404,863) $3,274,669 TIAA's gross deferred tax assets are primarily attributable to differences between tax basis and statutory basis reserves, the provision for policyholder dividends payable in the following year and net operating loss carryforwards. Gross deferred tax liabilities were primarily due to investment income due to depreciation differences on real estate. TIAA has no deferred tax liabilities that have not been recognized. The components of TIAA's income taxes incurred and the change in deferred tax assets and liabilities were as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------------ 2003 2002 ----------- ---------- Current tax/(benefit) ....................... $ 16,715 $ (20,855) Change in deferred tax assets ............... $ 70,421 $ 840,515 Change in deferred tax liabilities .......... 13,858 3,833 ----------- ---------- Net change in deferred taxes ................ $ 56,563 $ 836,682 =========== ========== 31 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 11 - FEDERAL INCOME TAXES - (CONTINUED) TIAA was subject to the domestic federal statutory income tax rate of 35%. TIAA's effective federal income tax rate was 1.3% for 2003, (2.5%) for 2002 and 3.3% for 2001. The lower effective rates were attributable to differences between statutory income and taxable income, as illustrated below: FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ 2003 2002 2001 ------------ ------------ ------------ Net gain from operations ............................ 1,317,189 $ 823,318 $ 816,314 Statutory rate ...................................... 35% 35% 35% ------------ ------------ ------------ Tax at statutory rate ............................... $ 461,016 $ 288,161 $ 285,710 Market discount deferred ............................ (126,271) (63,876) (41,877) Deferred market discount recognized on sold bonds ... 71,378 6,873 11,507 Dividends from subsidiaries ......................... (39,888) (49,676) (18,749) Prepayment premiums & mortgage writedowns ........... (92,976) (57,234) (17,422) Amortization of interest maintenance reserve ........ (34,468) (30,539) (22,903) Differences between tax & statutory reserves ........ (1,746) (19,332) 23,565 Net income from partnerships ........................ (31,564) (16,325) 14,308 Adjustment to policyholder dividend liability ....... (42,577) 10,827 58,468 Alternative minimum tax ............................. 9,194 -- 18,114 Effect of tax law change on prior year's tax ........ -- (18,114) -- Other adjustments ................................... (6,431) (25,719) 23,725 Net operating loss carryforward utilized ............ (148,952) (45,901) (307,662) ------------ ------------ ------------ Federal income tax expense/(benefit) ................ $ 16,715 $ (20,855) $ 26,784 ============ ============ ============ TIAA reported a tax loss for 2002 and expects to report a tax loss for 2003 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. As of December 31, 2003, TIAA had operating loss carryforwards of $3,640,000, as follows: YEAR INCURRED OPERATING LOSS YEAR OF EXPIRATION ------------- -------------- ------------------ 1998 $ 3,601,004 2013 1999 38,618 2014 TIAA did not incur federal income taxes in the current or preceding years that are available for recoupment in the event of future net losses. Beginning with 1998, TIAA has filed a consolidated federal income tax return with its subsidiary affiliates. The consolidated group has entered into a tax-sharing agreement that follows the current reimbursement method, whereby members of the 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. Amounts due to/(receivable from) TIAA's subsidiaries for federal income taxes were ($2,529) and $2,707 at December 31, 2003 and 2002, respectively. TIAA's tax returns are currently under audit by the Internal Revenue Service (IRS) for the tax years ended December 31, 1999 and 1998. These were the first years in which TIAA's entire business operations were subject to federal taxation. During 2003, IRS examining agents presented TIAA with two notices of proposed adjustments to deductions claimed in TIAA's returns for those years. These adjustments would disallow the write-off of certain intangible assets and would increase TIAA's tax-basis pension reserves as of January 1, 1998. 32 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 11 - FEDERAL INCOME TAXES - (CONCLUDED) TIAA's management believes that the deductions taken for intangibles to date and its opening tax basis pension reserves were appropriate and are supported by substantial authority. The IRS has not yet submitted a final Revenue Agent's Report to TIAA to formally disallow these deductions. If a report is issued by the IRS which contains these two adjustments, TIAA will contest both adjustments and intends to defend its position vigorously through applicable IRS and judicial procedures, if required. Should the IRS fully prevail in connection with both proposed adjustments, additional tax and interest due for 1998-2003 would cause a reduction in TIAA's contingency reserves in the amount of approximately $1.2 billion and would eliminate the net operating loss carryforwards disclosed above. Although the final resolution of the proposed adjustments is uncertain, based on currently available information, management believes that the ultimate outcome is unlikely to have a material adverse impact on TIAA's financial position. If the IRS were to prevail in all respects, the impact would be recognized in the results of operations for the period in which the matters are ultimately resolved or an unfavorable outcome becomes probable and reasonably estimable. NOTE 12 - PENSION PLAN AND POSTRETIREMENT BENEFITS TIAA maintains a qualified, noncontributory defined contribution pension plan covering substantially all employees. All of the 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 benefits 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 $36,100, $35,100 and $31,000 in 2003, 2002 and 2001, 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 $60,500 at December 31, 2003. The postretirement benefit obligation for non-vested employees was approximately $65,600 at December 31, 2003. The unrecognized transition obligation was $7,000 and $7,800 at December 31, 2003 and 2002, respectively. The cost of such benefits reflected in the accompanying statements of operations was approximately $5,600, $3,300 and $3,300 for 2003, 2002 and 2001, respectively. The discount rate used in determining the postretirement benefit obligations was 6.25% per year and the medical care cost trend rate was 10.00% per year for 2004, decreasing by 1.00% in each future year, to an ultimate rate of 5.00% per year in 2009. The effect of increasing the assumed medical care cost trend rate by one percentage point in each year would increase the postretirement benefit obligation as of December 31, 2003 by approximately $10,100 and the eligibility cost and interest cost components of net periodic postretirement benefit expense for 2003 by approximately $1,078. As the plan is not pre-funded, the value of plan assets is zero. The accrued postretirement benefit liability was $60,100 and $39,500 as of December 31, 2003 and 2002, respectively. 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. On December 8, 2003, President Bush signed into law the Medicare Prescription Drug Improvement and Modernization Act (the "Act") of 2003. The Act expands Medicare, primarily by adding a prescription drug benefit for Medicare-eligible individuals, starting in 2006. TIAA has chosen to defer recognition of the potential effects of the Act in these 2003 disclosures under guidance from the FASB (FSP FAS 106-1). Therefore, the retiree health obligations and costs reported in these financial statements do not yet reflect any potential impact of the Act, although such effects when estimable are not expected to be material to TIAA's financial condition. 33 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 13 - POLICY AND CONTRACT RESERVES At December 31, 2003 and 2002, TIAA's general account annuity reserves had the following characteristics: 2003 2002 ---------------------------- ------------------------------ AMOUNT PERCENT AMOUNT PERCENT -------------- ----------- -------------- ------------ Subject to discretionary withdrawal: At book value without adjustment............... $ 20,803,827 16.8% $ 18,104,197 15.6% At market value................................ -- -- -- Not subject to discretionary withdrawal......... 103,308,481 83.2 98,202,616 84.4 -------------- ----------- -------------- ------------ Reconciliation to total policy & contract reserves shown on the balance sheet: Reserves on other life policies & contracts. 421,521 405,404 Reserves on accident & health policies........ 243,301 201,226 -------------- -------------- Total policy and contract reserves.............. $ 124,777,130 $ 116,913,443 ============== ============== At December 31, 2003 and 2002, the reserve to cover premium deficiencies in the group disability block of business was $0 and $1,920, respectively, on a gross basis. At December 31, 2003 and 2002, the reserve to cover future claims settlement expenses for the group disability business was $24,700 and $23,000, respectively, on a gross basis. Both of these reserves were reinsured, and, therefore, were $0 on a net basis. TIAA continued to hold the additional long-term care insurance reserves in the amount of $10,000 that were established in accordance with regulatory actuarial asset and reserve adequacy requirements at December 31, 2001. On December 31, 2002, additional reserves in the amount of $800 were established to cover premium deficiencies in the individual major medical block of business. NOTE 14 - REINSURANCE TIAA entered into an indemnity reinsurance agreement dated October 1, 2002 with Standard Insurance Company, ("Standard") to reinsure on a 100% coinsurance basis all the liabilities associated with its group life and group disability blocks of business. The agreement was approved by the New York State Insurance Department on September 30, 2002. At closing, Standard paid TIAA $75,000 as a ceding commission, and TIAA transferred cash equal to the liabilities of $723,100 to Standard. The ceding commission was recorded as an increase in contingency reserves, net of direct expenses of $8,100 associated with the transaction, pursuant to Statement of Statutory Accounting Practices ("SSAP") #61 - LIFE, DEPOSIT-TYPE AND ACCIDENT AND HEALTH REINSURANCE, SSAP #24 - DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEMS, and Appendix 791 - LIFE AND HEALTH REINSURANCE AGREEMENTS. The net ceding commission of $66,900 will be amortized into income in subsequent periods. NOTE 15 - COMMERCIAL PAPER/LIQUIDITY FACILITY TIAA began issuing commercial paper in May 1999 and currently has a maximum authorized program of $2,000,000. TIAA had outstanding commercial paper obligations at December 31, 2003 and 2002 of $0 and $99,974, respectively. TIAA maintains a short-term revolving credit liquidity facility of approximately $1,000,000 to support the commercial paper program. This liquidity facility has not been utilized. NOTE 16 - CONTINGENCIES AND GUARANTEES SUBSIDIARY AND AFFILIATE GUARANTEES: TIAA guarantees the debt obligations of TGM. TGM's aggregate debt obligations to third parties, including accrued interest, at December 31, 2003 were $2,277,200. The carrying value of TGM's total assets at December 31, 2003 that can be used to satisfy TGM's obligations was $2,419,200. 34 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 16 - CONTINGENCIES AND GUARANTEES - (CONTINUED) 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 (i) capital and surplus of $250,000, (ii) 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 (iii) such other amount as necessary to maintain TIAA-CREF Life's financial strength rating 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 $10,000 additional capital contribution to TIAA-CREF Life during 2003 under this agreement. TIAA-CREF Life maintains a $100,000 unsecured credit facility arrangement with TIAA. As of December 31, 2003, $30,000 of this facility was maintained on a committed basis for which TIAA-CREF Life paid a commitment fee of 3 bps to TIAA on the undrawn amount. During 2003, there were twenty-nine drawdowns totaling $158,400 that were repaid by December 31, 2003. TIAA 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 also provides a $1,000,000 uncommitted line of credit to CREF, the Retail Funds and the Institutional Funds. Loans under this revolving credit facility are for 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 CREF and the Funds. It is the intent of TIAA, CREF and the Funds to use this facility as a supplemental liquidity facility, which would only be used after CREF and the Funds have exhausted the availability of the current $2,250,000 committed credit facility that is maintained with a group of banks. SEPARATE ACCOUNT GUARANTEES: 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. 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 payments 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 in REA. TIAA guarantees that participants will be able to redeem their Accumulation Units at the then current daily Accumulation Unit Value. OTHER CONTINGENCIES AND GUARANTEES: Under a risk sharing agreement with Deutsche Bank, in connection with a future securitization transaction, TIAA is obligated to bear the pricing risk of the underlying warehoused securities and associated hedges entered into by Deutsche Bank in the event that the proposed securitization transaction is not consummated. TIAA is entitled to earn the difference between the interest accrued on the warehoused securities during the warehousing period and the financing rate plus the carrying cost in connection with hedging transactions, known as the "portfolio carry." TIAA anticipates that the proposed securitization transaction will close in the third quarter of 2004. At December 31, 2003, the potential net gain on the related securities was $148. TIAA was also entitled to a portfolio net carry amount of $112 as of December 31, 2003. TIAA is a limited partner in the Hines Development Fund Limited Partnership (the "Development Fund") whose primary focus is the development and redevelopment of real estate projects in Western Europe. Each of the limited partners made a specified commitment to the fund; TIAA committed $130,000 Euros. The limited partners' commitments are pledged as collateral to facilitate the financing of the activities of the fund by third parties through equity lines of credit. The limited partners do not anticipate funding their commitments but remain committed to do so should it become necessary for the Development Fund to make cash capital calls. 35 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO STATUTORY - BASIS FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 16 - CONTINGENCIES AND GUARANTEES - (CONCLUDED) In the ordinary conduct of certain of its investment activities, TIAA provides standard indemnities covering a variety of potential exposures. For instance, TIAA provides indemnifications in connection with site access agreements relating to due diligence review for real estate acquisitions, and TIAA provides indemnification to underwriters in connection with the issuance of securities by or on behalf of TIAA or its subsidiaries. It is the opinion of TIAA's management that such indemnities do not materially affect TIAA's financial position, results of operations or liquidity. NOTE 17 - SUBSEQUENT EVENTS TIAA and TIAA-CREF Life have entered into a definitive agreement with Metropolitan Life Insurance Company ("MetLife") under which, after regulatory approval, the companies will enter into a series of agreements including an administrative agreement for MetLife to service the long-term care business of TIAA and TIAA-CREF Life, an indemnity reinsurance agreement where TIAA and TIAA-CREF Life will cede to MetLife 100% of the long-term care liability and an assumption reinsurance agreement where, after appropriate filings in each jurisdiction, MetLife will begin, in 2005, the process of offering the TIAA and TIAA-CREF Life policyholders the option of transferring the liability for policies from TIAA and TIAA-CREF Life to MetLife. NOTE 18 - SUBSEQUENT EVENT (UNAUDITED) The IRS completed its audit of TIAA's tax returns for 1998 and 1999 (see note 11) and issued its Revenue Agent's Report (RAR) on April 26, 2004. The RAR contained significant adjustments that would disallow the write-off of certain intangible assets and would adjust TIAA's tax-basis annuity reserves. The tax deficiency proposed for 1998-1999 was approximately $1.1 billion. Should the IRS fully prevail in connection with its proposed adjustments, additional tax and interest due for 1998-2003 is estimated to cause a reduction in TIAA's contingency reserves of approximately $2.3 billion as of December 31, 2003. Of the $2.3 billion, $2.0 billion would result from reserve deductions taken by TIAA through December 31, 2003 that the IRS would instead spread throughout annuitants' payout period. The remaining $300 million would cause a permanent adjustment to TIAA's taxes. TIAA will contest these adjustments and intends to defend its position vigorously through applicable IRS and judicial procedures as needed. The final resolution of the proposed adjustments is uncertain. 36
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 8th day of December, 2004.
TIAA REAL ESTATE ACCOUNT
By: TEACHERS INSURANCE AND ANNUITY | ||
ASSOCIATION OF AMERICA | ||
By: | /s/ Herbert M. Allison, Jr. | |
Herbert M. Allison, Jr. | ||
Chairman, President and Chief Executive | ||
Officer |
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/ Herbert M. Allison, Jr. | Chairman, President and Chief Executive | 12/8/04 | ||
Officer (Principal Executive Officer) and | ||||
Herbert M. Allison, Jr. | Trustee | |||
/s/ Elizabeth A. Monrad | Executive Vice President (Principal | 12/8/04 | ||
Financial and Accounting Officer) | ||||
Elizabeth A. Monrad |
SIGNATURE OF TRUSTEE | DATE | SIGNATURE OF TRUSTEE | DATE | ||||
/s/ Herbert M. Allison, Jr. | 12/8/04 | ||||||
Herbert M. Allison, Jr. | Sidney A. Ribeau | ||||||
/s/ Elizabeth E. Bailey | 12/8/04 | /s/ Leonard S. Simon | 12/8/04 | ||||
Elizabeth E. Bailey | Leonard S. Simon | ||||||
/s/ Robert C. Clark | 12/8/04 | /s/ David F. Swensen | 12/8/04 | ||||
Robert C. Clark | David F. Swensen | ||||||
/s/ Estelle A. Fishbein | 12/8/04 | /s/ Ronald L. Thompson | 12/8/04 | ||||
Estelle A. Fishbein | Ronald L. Thompson | ||||||
/s/ Marjorie Fine Knowles | 12/8/04 | ||||||
Majorie Fine Knowles | Paul R. Tregurtha | ||||||
/s/ Robert M. O’Neil | 12/8/04 | /s/ Rosalie J. Wolf | 12/8/04 | ||||
Robert M. O’Neil | Rosalie J. Wolf | ||||||
Donald K. Peterson |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, and have issued our report thereon dated February 18, 2004 (except for Note 10, as to which the date is December 20, 2004) (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 18, 2004
TIAA REAL ESTATE ACCOUNT SCHEDULE III--REAL ESTATE OWNED DECEMBER 31, 2003 COSTS CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST (INCLUDING YEAR TO ACQUIRE UNREALIZED GAINS VALUE AT CONSTRUCTION DATE DESCRIPTION ENCUMBRANCES PROPERTY AND LOSSES) DECEMBER 31, 2003 COMPLETED ACQUIRED - ------------------------------------------------------------------------------------------------------------------------------------ River Road Distribution Center $-0- $ 4,174,182 $ (24,182) $ 4,150,000 1995 11/22/95 Industrial Building Fridley, Minnesota The Greens At Metrowest Apartments -0- 12,522,047 1,477,953 14,000,000 1990 12/15/95 Apartments Orlando, Florida Butterfield Industrial Park -0- 4,456,125 50,562 4,506,687 1981 12/22/95 Industrial Building El Paso, Texas (1) Plantation Grove Shopping Center -0- 7,350,129 1,749,871 9,100,000 1995 12/28/95 Shopping Center Ocoee, Florida The Millbrook Collection -0- 6,774,711 225,289 7,000,000 1988 03/29/96 Shopping Center Raleigh, North CarolinaCOSTS CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST (INCLUDING YEAR TO ACQUIRE UNREALIZED GAINS VALUE AT CONSTRUCTION DATE DESCRIPTION ENCUMBRANCES PROPERTY AND LOSSES) DECEMBER 31, 2003 COMPLETED ACQUIRED - ------------------------------------------------------------------------------------------------------------------------------------ The Lynnwood Collection $-0- $ 6,708,120 $1,391,880 $ 8,100,000 1988 03/29/96 Shopping Center Raleigh, North Carolina Monte Vista -0- 17,663,849 2,936,151 20,600,000 1995 06/21/96 Apartments Littleton, Colorado Royal St. George -0- 16,072,612 1,627,388 17,700,000 1995 12/20/96 Apartments West Palm Beach, Florida Interstate Crossing -0- 6,454,888 (109,888) 6,345,000 1995 12/31/96 Industrial Building Eagan, Minnesota Westcreek Apartments -0- 13,488,279 8,511,721 22,000,000 1988 01/02/97 Apartments Westlake Village, California Rolling Meadows Shopping Center -0- 12,930,463 619,537 13,550,000 1957 05/28/97 Shopping Center Rolling Meadows, Illinois Eastgate Distribution Center -0- 11,952,402 4,647,598 16,600,000 1996 05/29/97 Industrial Building San Diego, California COSTS CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST (INCLUDING YEAR TO ACQUIRE UNREALIZED GAINS VALUE AT CONSTRUCTION DATE DESCRIPTION ENCUMBRANCES PROPERTY AND LOSSES) DECEMBER 31, 2003 COMPLETED ACQUIRED - ------------------------------------------------------------------------------------------------------------------------------------ Five Centerpointe $-0- $15,656,341 $(1,805,544) $13,850,797 1988 04/21/97 Office Building Lake Oswego, Oregon Longview Executive Park -0- 23,628,567 (1,428,567) 22,200,000 1988 04/21/97 Office Building Longview, Maryland Northmark Business Center -0- 8,812,644 (3,612,644) 5,200,000 1985 04/21/97 Office Building Blue Ash, Ohio Fairgate at Ballston -0- 26,977,436 1,422,564 28,400,000 1988 04/21/97 Office Building Arlington, Virginia Parkview Plaza -0- 49,412,494 987,506 50,400,000 1990 04/29/97 Office Building Oakbrook Terrace, Illinois Lincoln Woods Apartments -0- 21,564,483 5,139,517 26,704,000 1991 10/20/97 Apartments Lafayette Hill, Pennsylvania 371 Hoes Lane -0- 15,499,306 (6,999,306) 8,500,000 1986 12/15/97 Office Building Piscataway, New Jersey COSTS CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST (INCLUDING YEAR TO ACQUIRE UNREALIZED GAINS VALUE AT CONSTRUCTION DATE DESCRIPTION ENCUMBRANCES PROPERTY AND LOSSES) DECEMBER 31, 2003 COMPLETED ACQUIRED - ------------------------------------------------------------------------------------------------------------------------------------ Columbia Centre III $-0- $38,580,069 $(8,580,069) $30,000,000 1989 12/23/97 Office Building Rosemont, Illinois The Lodge at Willow Creek -0- 27,562,882 4,136,065 31,698,947 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- 60,281,860 (989,550) 59,292,310 1997 06/30/98 Industrial Building Joliet, Illinois Golfview Apartments -0- 28,066,591 (316,591) 27,750,000 1998 07/31/98 Apartments Lake Mary, Florida Indian Creek Apartments -0- 17,002,932 697,068 17,700,000 1988 10/08/98 Apartments Farmington Hills, Michigan Bent Tree Apartments -0- 14,420,590 (1,420,590) 13,000,000 1987 10/22/98 Apartments Columbus, Ohio COSTS CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST (INCLUDING YEAR TO ACQUIRE UNREALIZED GAINS VALUE AT CONSTRUCTION DATE DESCRIPTION ENCUMBRANCES PROPERTY AND LOSSES) DECEMBER 31, 2003 COMPLETED ACQUIRED - ------------------------------------------------------------------------------------------------------------------------------------ UPS Distribution Facility $-0- $10,989,393 $ 510,607 $11,500,000 1998 11/13/98 Industrial Building Fernley, Nevada Ontario Industrial Portfolio -0- 105,364,400 12,135,600 117,500,000 1997 12/17/98 Industrial Building Ontario, California IDI Kentucky Portfolio -0- 53,030,599 (1,030,599) 52,000,000 1998 12/17/98 Industrial Building Hebron, Kentucky FEDEX Distribution Facility -0- 7,828,025 (228,025) 7,600,000 1998 12/18/98 Industrial Building Crofton, Maryland Biltmore Commerce Center -0- 37,323,057 (8,683,968) 28,639,089 1985 02/23/99 Office Building Phoenix, Arizona The Colorado -0- 52,687,840 1,320,219 54,008,059 1987 04/14/99 Apartments New York, New York Sawgrass Office Portfolio -0- 52,933,368 (7,533,368) 45,400,000 1998 05/11/99 Office Building Sunrise, Florida COSTS CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST (INCLUDING YEAR TO ACQUIRE UNREALIZED GAINS VALUE AT CONSTRUCTION DATE DESCRIPTION ENCUMBRANCES PROPERTY AND LOSSES) DECEMBER 31, 2003 COMPLETED ACQUIRED - ------------------------------------------------------------------------------------------------------------------------------------ 780 Third Avenue $-0- $161,511,019 $18,488,981 $180,000,000 1984 07/08/99 Office Building New York, New York Monument Place -0- 34,597,697 (1,263,359) 33,334,338 1990 07/15/99 Office Building Fairfax, Virginia 88 Kearney Street -0- 65,795,171 (3,253,966) 62,541,205 1986 07/22/99 Office Building San Francisco, California 10 Waterview Boulevard -0- 31,063,635 (4,063,635) 27,000,000 1984 07/27/99 Office Building Parsippany, New Jersey Larkspur Courts -0- 53,038,988 1,961,012 55,000,000 1991 08/17/99 Apartments Larkspur, California Columbus Portfolio -0- 30,227,305 (8,227,305) 22,000,000 1997 11/30/99 Office Building Columbus, Ohio Konica Photo Imaging Headquarters -0- 17,049,875 1,450,125 18,500,000 1999 12/21/99 Industrial Building Mahwah, New Jersey COSTS CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST (INCLUDING YEAR TO ACQUIRE UNREALIZED GAINS VALUE AT CONSTRUCTION DATE DESCRIPTION ENCUMBRANCES PROPERTY AND LOSSES) DECEMBER 31, 2003 COMPLETED ACQUIRED - ------------------------------------------------------------------------------------------------------------------------------------ Atlanta Industrial Portfolio $-0- $39,816,868 $(2,516,868) $37,300,000 1999 04/04/00 Industrial Building Atlanta, Georgia Northpoint Commerce Center -0- 38,818,013 2,981,987 41,800,000 1994 06/15/00 Industrial Building Fullerton, California Morris Corporate Center III -0- 103,119,739 (13,119,739) 90,000,000 1990 07/12/00 Office Building Parsippany, New Jersey Ashford Meadows Apartments -0- 64,171,626 (2,171,626) 62,000,000 1998 09/28/00 Apartments Herndon, Virginia Landmark at Salt Lake City (Building #4) -0- 14,411,089 (1,911,089) 12,500,000 2000 11/03/00 Industrial Building Salt Lake City, Utah Cabot Industrial Portfolio -0- 40,713,096 11,509,986 52,223,082 2000 11/17/00 Industrial Building Rancho Cucamonga, California Maitland Promenade One -0- 36,520,162 (1,327,238) 35,192,924 1999 12/14/00 Office Building Maitland, Florida COSTS CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST (INCLUDING YEAR TO ACQUIRE UNREALIZED GAINS VALUE AT CONSTRUCTION DATE DESCRIPTION ENCUMBRANCES PROPERTY AND LOSSES) DECEMBER 31, 2003 COMPLETED ACQUIRED - ------------------------------------------------------------------------------------------------------------------------------------ Dallas Industrial Portfolio $-0- $138,389,123 $ (389,123) $138,000,000 1997 12/19/00 Industrial Building Coppell, Texas BISYS Fund Services Building -0- 32,332,485 3,167,515 35,500,000 2001 11/30/99 Office Building Columbus, Ohio Batterymarch Park II -0- 17,824,765 (7,824,765) 10,000,000 1986 05/31/01 Office Building Quincy, Massachusetts South River Road Industrial -0- 33,700,429 (2,700,429) 31,000,000 1999 06/25/01 Industrial Building Cranbury, New Jersey Needham Corporate Center -0- 28,150,986 (15,606,052) 12,544,934 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 The Fairways of Carolina -0- 17,286,931 713,069 18,000,000 1993 08/24/01 Apartments Margate, Florida COSTS CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST (INCLUDING YEAR TO ACQUIRE UNREALIZED GAINS VALUE AT CONSTRUCTION DATE DESCRIPTION ENCUMBRANCES PROPERTY AND LOSSES) DECEMBER 31, 2003 COMPLETED ACQUIRED - ------------------------------------------------------------------------------------------------------------------------------------ Quiet Waters at Coquina Lakes $-0- $19,094,415 $ (294,415) $18,800,000 1995 08/24/01 Apartments Deerfield Beach, Florida 9 Hutton Centre -0- 20,448,764 (105,088) 20,343,676 1981 10/30/01 Office Building Santa Ana, California Doral Pointe Apartments -0- 45,321,796 (2,721,796) 42,600,000 1990 11/06/01 Apartments Miami, Florida 1015 15th Street -0- 48,743,491 5,556,509 54,300,000 1978 11/09/01 Office Building Washington D.C Kenwood Mews Apartments -0- 22,686,216 13,784 22,700,000 1991 11/30/01 Apartments Burbank, California Ten & Twenty Westport Road -0- 140,178,508 3,821,492 144,000,000 2001 12/28/01 Office Building Wilton, Connecticut The Farragut Building -0- 46,170,678 (470,678) 45,700,000 1962 05/16/02 Office Building Washington, DC COSTS CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST (INCLUDING YEAR TO ACQUIRE UNREALIZED GAINS VALUE AT CONSTRUCTION DATE DESCRIPTION ENCUMBRANCES PROPERTY AND LOSSES) DECEMBER 31, 2003 COMPLETED ACQUIRED - ------------------------------------------------------------------------------------------------------------------------------------ The Legacy at Westwood Apartments $-0- $85,066,625 $ (666,625) $84,400,000 2001 09/09/02 Apartments Los Angeles, California Westwood Marketplace -0- 74,022,241 (22,241) 74,000,000 1950 09/26/02 Shopping Center Los Angeles, California The Pointe on Tampa Bay -0- 41,204,643 895,357 42,100,000 1982 10/09/02 Office Building Tampa, Florida Corporate Boulevard -0- 68,042,737 1,457,263 69,500,000 1989 10/31/02 Office Building Rockville, Maryland Regents Court Apartments -0- 49,566,014 33,986 49,600,000 2001 11/15/02 Apartments San Diego, California Oak Brook Regency Towers -0- 66,599,086 700,914 67,300,000 1977 11/26/02 Office Building Oakbrook, Illinois 701 Brickell -0- 172,058,614 4,950,951 177,009,565 1986 11/27/02 Office Building Miami, Florida COSTS CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST (INCLUDING YEAR TO ACQUIRE UNREALIZED GAINS VALUE AT CONSTRUCTION DATE DESCRIPTION ENCUMBRANCES PROPERTY AND LOSSES) DECEMBER 31, 2003 COMPLETED ACQUIRED - ------------------------------------------------------------------------------------------------------------------------------------ Mellon Financial Center at One Boston Place $-0- $261,995,246 $(13,995,246) $248,000,000 1970 12/03/02 Office Building Boston, Massachusetts Longwood Towers -0- 80,212,239 (3,812,239) 76,400,000 1926 12/12/02 Apartments Brookline, Massachusetts Alexan Buckhead -0- 45,707,820 (4,707,820) 41,000,000 2002 12/30/02 Apartments Atlanta, Georgia Capitol Place -0- 38,792,367 12,978 38,805,345 1988 8/28/03 Office Building Sacramento, California Summit Distribution Center -0- 21,961,420 0 21,961,420 2002 11/24/03 Industrial Building Memphis, Tennessee NJ CalEast Industrial Portfolio -0- 39,843,924 0 39,843,924 Various 12/22/03 Industrial Building Middlesex, New Jersey Chicago CalEast Industrial Portfolio -0- 40,232,195 0 40,232,195 Various 12/22/03 Industrial Building Chicago, Illinois COSTS CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST (INCLUDING YEAR TO ACQUIRE UNREALIZED GAINS VALUE AT CONSTRUCTION DATE DESCRIPTION ENCUMBRANCES PROPERTY AND LOSSES) DECEMBER 31, 2003 COMPLETED ACQUIRED - ------------------------------------------------------------------------------------------------------------------------------------ Memphis CalEast Industrial Portfolio $-0- $43,036,559 $ 0 $43,036,559 Various 12/22/03 Industrial Building Memphis, Tennessee Storage Portfolio I, LLC -0- 175,676,890 0 175,676,890 Various 12/23/03 Property type-Other Various locations 4200 West Cypress Street -0- 32,824,935 0 32,824,935 1989 12/29/03 Office Building Tampa, Florida 161 North Clark Street (EOP) -0- 209,051,330 0 209,051,330 1992 12/30/03 Office Building Chicago, Illinois Treat Towers (EOP) -0- 112,941,315 0 112,941,315 1999 12/30/03 Office Building Walnut Creek, California Prominence in Buckhead (EOP) -0- 92,494,922 0 92,494,922 1999 12/30/03 Office Building Atlanta, Georgia Rainier Corporate Park -0- 53,994,267 0 53,994,267 1991-1997 12/31/03 Industrial Building Fife, Washington COSTS CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST (INCLUDING YEAR TO ACQUIRE UNREALIZED GAINS VALUE AT CONSTRUCTION DATE DESCRIPTION ENCUMBRANCES PROPERTY AND LOSSES) DECEMBER 31, 2003 COMPLETED ACQUIRED - ---------------------------------------------------------------------------------------------------------------------------------- 3 Hutton Centre $-0- $39,991,353 $ 0 $ 39,991,353 1985 12/31/03 Office Building Santa Ana, California ---- -------------- ------------ -------------- $-0- $4,048,486,421 $(27,747,353) $4,020,739,068 ==== ============== ============ ============== (1) Leasehold interest only For the Years Ending December 31, --------------------------------------------------- 2003 2002 2001 -------------- -------------- -------------- Reconciliation of investment property owned: Balance at beginning of period $3,281,332,364 2,330,914,466 1,899,254,344 Acquisitions (including properties under construction) 921,314,361 1,051,818,027 538,396,767 Dispositions (154,626,452) (25,923,370) (94,797,368) (Initial Cost 146,813,313, costs capitalized 7,813,139) Capital improvements and carrying costs (including unrealized gains and losses) (27,281,205) (75,476,759) (11,939,277) -------------- -------------- -------------- Balance at end of period $4,020,739,068 3,281,332,364 2,330,914,466 ============== ============== ==============
Exhibit Index
(3 | ) | (A) | Charter of TIAA (as amended) |
(B) | Bylaws of TIAA (as amended) | ||
(5 | ) | Opinion and Consent of George W. Madison, Esquire | |
(23 | ) | (B) | Consent of Sutherland Asbill & Brennan LLP |
(C) | Consent of Ernst & Young LLP | ||
(D) | Consent of Friedman LLP |