-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T/NohS+6sxFR9sXwKTMPpxVGzBEIZv5t0gD3Qaz7BMdnfXLuTjVEECSE7Vyh/8eo CrBo6nSytK+H/DlNDccCzA== 0001047469-99-019238.txt : 19990512 0001047469-99-019238.hdr.sgml : 19990512 ACCESSION NUMBER: 0001047469-99-019238 CONFORMED SUBMISSION TYPE: S-11 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19990511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVESTORS REAL ESTATE TRUST CENTRAL INDEX KEY: 0000798359 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 450311232 STATE OF INCORPORATION: ND FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: S-11 SEC ACT: SEC FILE NUMBER: 333-78223 FILM NUMBER: 99616907 BUSINESS ADDRESS: STREET 1: 12 S MAIN CITY: MINOT STATE: ND ZIP: 58701 BUSINESS PHONE: 7018374738 MAIL ADDRESS: STREET 1: 12 S MAIN CITY: MINOT STATE: ND ZIP: 58701 S-11 1 FORM S-11 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM S-11 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------------- INVESTORS REAL ESTATE TRUST ---------------------------------------------------------------- (Exact name of registrant as specified in governing instruments) 12 SOUTH MAIN STREET MINOT, ND 58701 (Address of principal executive offices, including zip code) ---------------------- TIMOTHY P. MIHALICK 12 SOUTH MAIN STREET MINOT, ND 58701 (Name and address of agent for service) Copies of communications to: THOMAS A. WENTZ, JR., ESQ. PRINGLE & HERIGSTAD, P.C. P.O. BOX 1000 MINOT, ND 58702-1000 (701) 852-0381 FAX (701) 857-1361 ---------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable on or after the effective date of this 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 of the Securities Act of 1933, check the following box. X CALCULATION OF REGISTRATION FEE
Title of securities Amount to be Proposed Maximum Proposed Maximum Amount of to be registered registered offering price aggregate offering registration fee per unit price - ---------------------------------------------------------------------------------------------------------------- Investors Real 750,000 shares $8.10 per share $6,075,000.00 $1,214.40 Estate Trust Shares aggregate offering of Beneficial price Interest
The registrant hereby amends this registration statement on such dates or date as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. I Page 1 of 183 Cross Reference Sheet Part I. Information Required in Prospectus
Page Location In Item This S-11 Filing - ---- ---------------- 1 Forepart of Registration Statement and Outside Front Cover Page of Prospectus......................................................I 2 Inside Cover Page of Prospectus.........................................N/A 3 Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges.......................................................10-17 4 Determination of Offering Price..........................................27 5 Dilution.................................................................27 6 Selling Security Holders................................................N/A 7 Plan of Distribution................................................27 & 28 8 Use of Proceeds.......................................................28-30 9 Selected Financial Data...............................................30-31 10 Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................31-40 11 General Information as to Investors Real Estate Trust.................41-44 12 Policy with Respect to Certain Activities.............................44-46 13 Investment Policies of Investors Real Estate Trust..................46 & 47 14 Description of Real Estate............................................47-51 15 Tax Treatment of IRET and Its Security Holders........................57-65 16 Market Price Of and Dividends on IRET's Shares of Beneficial Interest............................................................68-72 17 Description of IRET's Securities.........................................73 18 Legal Proceedings.......................................................N/A 19 Security Ownership of Certain Beneficial Owners and Management......................................................73-76 20 Directors and Executive Officers......................................73-76 21 Executive Compensation................................................76-80 22 Certain Relationships and Related Transactions........................76-80 23 Selection, Management and Custody of IRET's Investments..................80 24 Policies with Respect to Certain Transactions.......................80 & 81 25 Limitations of Liability..............................................81-82 26 Financial Statements and Information.................................89-130 27 Interests of Named Experts and Counsel...................................83 28 Disclosure of Commission Position on Indemnification for Securities Act Liabilities..........................................81-82 Part II. Information Not Required in Prospectus Item - ---- 30 Other Expenses of Issuance and Distribution.............................131 31 Sales to Special Parties................................................131 32 Recent Sales of Unregistered Securities.................................131 33 Indemnification of Directors and Officers...............................132 34 Treatment of Proceeds from Stock Being Registered.......................132 35 Financial Statements and Exhibits...................................132-134 36 Undertakings......................................................134 & 135
II Page 2 of 183 37 Index of Exhibits.................................................137 & 138 38 Security Sales Agreement..........................................139 & 140 39 Second Restated Declaration of Trust - Investors Real Estate Trust..........................................................141 to 176 40 Opinion RE Legality...............................................177 & 178 41 Opinion RE Tax Matters..................................................179 42 Consent Letter from Pringle & Herigstad, P.C., RE Opinion of Legality...180 43 Consent Letter from Brady Martz & Associates, P.C., RE Financial Information...........................................................181 44 Financial Data Schedule for Investors Real Estate Trust (As of January 31, 1999).....................................................182 45 Subscription Agreement - Investors Real Estate Trust....................183 III Page 3 of 183 Effective Date: ____________, 1999 Prospectus INVESTORS REAL ESTATE TRUST 12 South Main Street Minot, ND 58701 (701) 852-1756 For 750,000 Shares of Beneficial Interest $8.10 per Share ----------------------
THE OFFERING: Per Share Total --------- ----- Public Price $8.10 $6,075,000 Selling Commission $ .65 487,500 ----- ---------- Proceeds to IRET $7.45 $5,587,500
The offering price may be higher than the market price of our shares on the day of purchase. TRADING SYMBOL: NASDAQ SmallCap Market-SM- - IRETS THE COMPANY: The Trust is a Real Estate Investment Trust formed on July 31, 1970. IRET owns approximately 5,250 apartment units and 975,000 square feet of commercial property in North Dakota and nine other states. USE OF PROCEEDS: The proceeds from this offering will be added to the Trust's operating capital to be used for the construction of residential apartment buildings. See "Use of Proceeds." INVESTMENT IN THE SHARES INVOLVES MATERIAL RISKS AND THERE IS NO GUARANTEE OF RETURN ON INVESTMENT. SEE "RISK FACTORS." AMONG SUCH RISKS ARE THE FOLLOWING: - THE ESTIMATED BOOK VALUE OF TRUST SHARES AFTER THIS OFFERING WILL BE $4.51. A PURCHASER PAYING $8.10 PER SHARE WILL INCUR AN IMMEDIATE BOOK VALUE DILUTION OF $3.59 PER SHARE. - ECONOMIC CONDITIONS THAT THE TRUST CANNOT CONTROL MAY HAVE A NEGATIVE EFFECT ON THE VALUE OF THE TRUST'S INVESTMENTS AND AMOUNT OF CASH THAT THE TRUST RECEIVES FROM TENANTS. - THE TRUST INTENDS TO BORROW 70% OF THE COST OF REAL ESTATE PURCHASED OF CONSTRUCTED. - THE PUBLIC TRADING MARKET FOR THE SHARES HAS ONLY RECENTLY DEVELOPED, AND THERE IS NO ASSURANCE THAT IT WILL CONTINUE. - TAXATION OF THE TRUST AS A CORPORATION IF IT FAILS TO QUALIFY AS A REIT. - THE TRUST MUST RELY ON THE ADVISOR WITH RESPECT TO ALL INVESTMENT DECISIONS, SUBJECT TO APPROVAL BY THE BOARD OF TRUSTEES. 1 Page 4 of 183 - THE SHARE PRICE IS ARBITRARILY DETERMINED. - THE ADVISOR AND ITS AFFILIATES ARE OR MAY BE ENGAGED IN OTHER ACTIVITIES THAT MAY RESULT IN POTENTIAL CONFLICTS OF INTEREST. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE BALANCE OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK. 2 Page 5 of 183 TABLE OF CONTENTS
PROSPECTUS PAGE --------------- SUMMARY OF THE OFFERING...................................................7-14 THE COMPANY.................................................................15 BUSINESS OBJECTIVES.........................................................16 Portfolio Mix..........................................................16 Leverage...............................................................16 AVAILABLE INFORMATION CONCERNING IRET.......................................16 Securities and Exchange Commission.....................................16 Reports to Security Holders............................................17 Incorporation by Reference.............................................17 RISK FACTORS................................................................17 Price of Shares Arbitrarily Determined.................................17 High Leverage..........................................................18 Failure to Qualify as a Real Estate Investment Trust...................18 Best Efforts Sale......................................................18 Business Environment...................................................18 Risks Related to Mortgage Lending......................................19 Relationship with Advisor..............................................19 Conflict of Interest...................................................19 Environmental Liability................................................20 Competition............................................................20 Liquidity..............................................................21 Front-End Fees.........................................................21 COMPENSATION TABLE..........................................................21 CONFLICTS OF INTEREST.......................................................22 Transactions with Affiliates and Related Parties.......................23 Compensation to the Advisor and Conflicts of Interest..................23 Competition by the Trust with Affiliates...............................23 Non-Arm's Length Agreements............................................24 Lack of Separate Representation........................................24 DETERMINATION OF OFFERING PRICE.............................................24 DILUTION....................................................................24 PLAN OF DISTRIBUTION........................................................24 WHO MAY INVEST..............................................................25 USE OF PROCEEDS.............................................................25 SELECTED FINANCIAL DATA - ANNUAL............................................27 3 Page 6 of 183 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................................28 General................................................................28 Nine Months Ended January 31, 1999.....................................28 Fiscal Year 1998 Compared to Fiscal Year 1997..........................30 Fiscal Year 1997 Compared to Fiscal Year 1996..........................35 GENERAL INFORMATION AS TO INVESTORS REAL ESTATE TRUST.......................38 Organization of Iret...................................................38 Governing Instruments of IRET..........................................38 Independent Trustees...................................................38 Shareholder Meetings...................................................39 STRUCTURE OF IRET...........................................................40 POLICY WITH RESPECT TO CERTAIN ACTIVITIES...................................41 To Issue Senior Securities.............................................41 To Borrow Money........................................................41 To Make Loans To Other Persons.........................................41 Mortgage Loans Receivable..............................................42 To Invest in the Securities of Other Issuers for the Purpose of Exercising Control...............................................42 To Underwrite Securities of Other Issuers..............................42 To Engage in the Purchase and Sale (or Turnover) of Investments........42 To Offer Securities in Exchange for Property...........................42 To Repurchase or Otherwise Reacquire Its Shares or Other Securities....42 To Make Annual and Other Reports to Shareholders.......................42 INVESTMENT POLICIES OF IRET.................................................43 Investments in Real Estate or Interests in Real Estate.................43 Investments in Real Estate Mortgages...................................43 Investments in Other Securities........................................44 Investments in Securities Of or Interests In Persons Primarily Engaged in Real Estate Activities................................44 DESCRIPTION OF REAL ESTATE..................................................44 INVESTMENT PORTFOLIO - INVESTORS REAL ESTATE TRUST AS OF JULY 31, 1998..............................................44 Real Estate Owned................................................44 to 48 Title..................................................................48 Insurance..............................................................48 Planned Improvements...................................................48 Contracts or Options to Sell...........................................48 Occupancy and Leases...................................................48 SHARES AVAILABLE FOR FUTURE SALE............................................49 OPERATING PARTNERSHIP AGREEMENT.............................................50 Management.............................................................50 Transferability of Interests...........................................50 Capital Contribution...................................................51 4 Page 7 of 183 Exchange Rights........................................................52 Registration Rights....................................................52 Operations.............................................................52 Distributions..........................................................53 Allocations............................................................53 Term...................................................................53 Fiduciary Duty.........................................................53 Tax Matters............................................................53 TAX TREATMENT OF IRET AND ITS SECURITY HOLDERS..............................54 Federal Income Tax.....................................................54 North Dakota Income Tax................................................55 Taxation of IRET's Shareholders........................................56 Taxation of Tax-Exempt Shareholders....................................56 Tax Considerations for Foreign Investors...............................57 Backup Withholding.....................................................57 State and Local Taxes..................................................58 Other Tax Considerations...............................................58 Tax Aspects of the Operating Partnership...............................58 Classification as a Partnership........................................58 Income Taxation of the Operating Partnership and Its Partners..........60 Partners, Not Partnerships, Subject To Tax.............................60 Partnership Allocations................................................60 Tax Allocations With Respect To Contributed Property...................60 Basis in Operating Partnership Interest................................61 Sale of Operating Partnership's Property...............................61 ERISA CONSIDERATIONS........................................................62 MARKET PRICE OF AND DIVIDENDS ON IRET'S SHARES OF BENEFICIAL INTERESTS......65 Market for the Shares of Beneficial Interest...........................65 Dividend and Share Price History.......................................67 DIVIDEND REINVESTMENT PLAN..................................................69 DESCRIPTION OF IRET'S SECURITIES............................................70 Description of Shares of Beneficial Interest...........................70 Restrictions on Transfer...............................................70 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............70 EXECUTIVE COMPENSATION AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...73 ADVISORY AGREEMENT..........................................................74 Basic Compensation.....................................................75 Additional Compensation................................................75 Limitation.............................................................76 Roger R. Odell.........................................................76 Thomas A. Wentz, Sr....................................................76 5 Page 8 of 183 SELECTION, MANAGEMENT AND CUSTODY OF IRET'S INVESTMENTS.....................77 Management of IRET's Investments.......................................77 POLICIES WITH RESPECT TO CERTAIN TRANSACTIONS...............................77 LIMITATIONS OF LIABILITY....................................................78 LEGAL MATTERS...............................................................79 EXPERTS.....................................................................80 GLOSSARY OF TERMS...........................................................80 CONSOLIDATED FINANCIAL STATEMENTS - AS OF APRIL 30, 1998 AND 1997 AND INDEPENDENT AUDITOR'S REPORT.......................................F-1 to F-37 - NINE MONTHS ENDED JANUARY 31, 1999 (UNAUDITED)......................F-38 to F-42
6 Page 9 of 183 SUMMARY OF THE OFFERING THIS SECTION SUMMARIZES INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND IS INTENDED FOR QUICK REFERENCE ONLY. THIS IS NOT A COMPLETE DESCRIPTION OF THE INVESTMENT. YOU SHOULD READ AND EVALUATE ALL OF THIS PROSPECTUS BEFORE YOU PURCHASE OUR SHARES. THE PLACE IN THE PROSPECTUS WHERE YOU CAN FIND MORE INFORMATION ABOUT EACH TOPIC IS IDENTIFIED AT THE END OF EACH PARAGRAPH. A GLOSSARY OF TERMS IS PROVIDED AT THE END OF THIS DOCUMENT. RISK FACTORS. An investment in our shares involves risk, including the risk of loss of your entire investment. See "Risk Factors" at page 17 for a more complete discussion of factors that you should consider before purchasing our shares. These risks include: - - BOOK VALUE: The book value of IRET shares of beneficial interest is substantially less than the purchase price to new shareholders under this Offering. As of January 31, 1999, the book value of the 18,134,700 shares then outstanding was $4.40. Assuming all of the shares registered under this Offering are sold, the estimated resulting book value will be $4.51 per share. Thus, a purchasing shareholder paying $8.10 per share under this Offering will incur an immediate book value dilution of $3.59 per share. - - PRICE OF SHARES ARBITRARILY DETERMINED: The price of our shares has been arbitrarily determined by us and is a higher price than the price paid by the current holders of our shares and may be higher than the current market price of the shares. - - FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST: We intend to continue to qualify as a real estate investment trust under the Internal Revenue Code, but may fail to do so. - - BEST EFFORTS SALE: The shares are being sold by the Soliciting Dealers on a "best efforts" basis. The selling agents are only required to use their best efforts to locate purchasers of the shares, but are not obligated to ensure that a minimum number or that even any shares are sold. - - BUSINESS ENVIRONMENT: The results of our operations will depend upon the availability of opportunities for the profitable investment and reinvestment of the funds available to us and general economic conditions over which we have no control. - - HIGH LEVERAGE: We seek to borrow approximately 70% of the cost of real estate purchased or constructed. - - RELATIONSHIP WITH ADVISOR: Our operating expenses, including compensation to the advisor and the trustees, must be met regardless of profitability. - - CONFLICTS OF INTEREST: We are subject to various conflicts of interest with the Advisor or Trustees which may negatively impact operations. 7 Page 10 of 183 - - ENVIRONMENTAL LIABILITY: Investments in real property create a potential for environmental liability on the part of the owner of or any mortgage lender on such real property. - - COMPETITION: Investments of the types in which we are interested may be purchased on a negotiated basis by many kinds of institutions, including other REITs, mutual savings banks, savings and loan associations, commercial banks, insurance companies and, to a lesser extent, pension funds, credit unions and individuals. - - LIQUIDITY: No assurance can be given that a purchaser of our shares under this Offering would be able to resell such shares when desired. Since October 17, 1997, our shares have been listed for trading on the National Association of Securities Dealers Automated Quotation System Small Capitalization Index (NASDAQ), but no assurance can be given that such listing will continue. FRONT-END FEES. For the money that is being raised by this offering, there are front-end fees. A front-end fee is a cost or expense of the offering which must be paid regardless of the number of shares sold. The fees are capped in that under no situation shall they exceed the capped amount:
TYPE Minimum Cap Maximum Percentage - ---- ------- --- ------------------ Selling agent commission 8% of the amount sold -0- $ 487,500 8.02% Legal Fees $15,000 $ 15,000 .00247% Advertising, Printing and Promotion Expenses $15,000 $ 136,500 .0225% Registration Fees $10,000 $ 10,000 .00165% Accounting Fees $ 1,000 $ 1,000 .0007% ------- --------- ------- $41,000 $ 650,000 10.69%
CONFLICTS. The advisory company and the trustees are able to personally invest in competing real estate and to conduct other business activities which may be in conflict with our business activities. See "Conflicts of Interest" at page 22. IRET will be subject to various conflicts of interest arising from its relationship with the Advisor, (Odell-Wentz & Associates, L.L.C.), and its affiliates. The Advisor, its affiliates and the trustees of IRET are not restricted from engaging for their own accounts in business activities of the type conducted by IRET, and occasions may arise when the interests of IRET would be in conflict with those of one or more of the trustees, the Advisor or their affiliates. Any transactions between IRET and any trustee, the Advisor or any of their affiliates, other than the purchase or sale, in the ordinary course of IRET's business, will require the approval of a majority of the trustees who are not interested in the transaction. 8 Page 11 of 183 The Advisor and its affiliates may receive compensation from IRET for providing various services. See "Compensation Table" at page 21 and "The Advisory Agreement" at page 74. The Advisor is entitled to receive an advisory fee equal to a percentage of the Net Invested Assets of IRET. See "Advisory Agreement" at page 74. The Advisor also will receive fees in connection with IRET's acquisition or construction of real properties based upon a percentage of the amount paid. Any trustee or officer may have personal business interests and may engage in personal business activities, which may include the acquisition, syndication, holding, management, development, operation or investment in, for his own account or for the account of others, of interests in entities engaged in the real estate business and any other business. Neither the Advisor nor its affiliates are prohibited from providing the same services to others, including competitors. All agreements and arrangements, including those relating to compensation, between IRET and the Advisor or any of their affiliates will not be the result of arm's-length negotiations. IRET, the Advisor and the principals of IRET and Advisor are not represented by separate counsel. IRET is represented by the law firm of Pringle & Herigstad, P.C., which has also acted and will continue to act as counsel to the Advisor and various affiliates of the Advisor with respect to other matters. Thomas A. Wentz, Jr., is a trustee of IRET and a partner in Pringle & Herigstad, P.C. See "Conflicts of Interest" at page 22. OUR OFFERING. We are offering to sell to the public 750,000 of our shares of Beneficial Interest at a price of $8.10 per share. We will be represented by brokerage firms who are members of the National Association of Securities Dealers who will use their best efforts to sell our shares to the public for an 8% commission. If you decide to buy our shares, you will pay $8.10 per share of which approximately $.65 will be paid to the selling brokerage firm and the balance of approximately $7.45 will be paid to us. See "Plan of Distribution" at page 24. WHO MAY INVEST. We are offering shares to residents of the following states: North Dakota, South Dakota, Montana, Minnesota, Iowa, Colorado, Tennessee, Michigan and Washington. Other states may be added by a supplement to this Prospectus. Special disclaimers and investor qualification standards may apply to some of the above states. See "Who May Invest" at page 25. A BRIEF DESCRIPTION OF OUR COMPANY. We are a North Dakota Real Estate Trust which has been in business since 1970. We have our only office in Minot, North Dakota, and own a diversified portfolio of apartment complexes and commercial properties in North Dakota and 9 surrounding states. We currently own over 5,250 apartment units and 975,000 square feet of commercial property the total original investment in real estate assets exceeds $300,000,000. See "The Company" at page 15. 9 Page 12 of 183 CAPITALIZATION. The following shows the amount of assets we owned on January 31, 1999, as well as the liabilities that we owed and the partnership and shareholder equity. We also show the total assets that will be owned IF we sell all of the 750,000 shares being offered.
As of January 31, 1999 After sale of 750,000 shares Total Assets $ 264,979,779 $ 270,406,279 Less Liabilities (172,555,300) (172,555,300) Less Minority Interest in Operating Partnership (12,619,372) (12,619,372) ------------- ------------- Shareholders' Equity $ 79,805,107 $ 85,230,107
(1) Reflects costs of issue of $650,000 deducted from total sale proceeds of $6,075,000 resulting in the addition of $5,425,000 to total assets. FINANCIAL INFORMATION. The following table will give you an overview of our financial performance during the past five years. See "Financial Statements" at pages F-1 to F-37. SELECTED FINANCIAL DATA - ANNUAL
Year Ended April 30 -------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------------------------- Consolidated Income Statement Data (Restated) Revenue $ 32,407,545 $ 23,833,982 $ 18,659,665 $ 13,801,123 $ 11,583,008 Operating income 4,691,198 3,499,443 3,617,807 3,560,318 3,135,426 Gain on repossession/ sale of investments 465,499 398,424 994,163 407,512 64,962 Minority interest portion of operating partnership income (141,788) (18) --- --- --- Net income 5,014,909 3,897,879 4,611,970 3,967,830 3,200,388 Balance Sheet Data Total real estate investments 213,211,369 177,891,168 122,377,909 84,005,635 63,972,042 Total assets 224,718,514 186,993,943 131,355,638 94,616,744 72,391,548 Shareholders' equity 68,152,626 59,997,619 50,711,920 37,835,654 29,997,189 Consolidated Per Share Data Net income $ .32 $ .28 $ .38 $ .38 $ .36 Gain of repossession/ sale of investments .03 .03 .08 .04 .01 Dividends .42 .39 .37 .34 .33 Tax status of dividend Capital gain 2.9% 21.0% 1.6% 11.0% 7.37% Ordinary income 97.1% 79.0% 98.4% 89.0% 92.63% Return of capital 0.0% 0.0% 0.0% 0.0% 0.00%
WE ARE A "REAL ESTATE INVESTMENT TRUST." The federal income tax code contains special provisions for companies that wish to operate as real estate investments trusts ("REITS"). A REIT will not be subject to federal income tax if it complies with tax laws. We have qualified as a REIT and intend to do so in the future. See "Tax Treatment of IRET and Its Security Holders." 10 Page 13 of 183 UPREIT. We are structured as an "Umbrella Real Estate Investment Trust" or UPREIT. This means that we conduct our business through a limited partnership - IRET Properties, a North Dakota Limited Partnership. Through our subsidiary, IRET, Inc., we act as the general partner of the limited partnership and own approximately 90% of the partnership's assets. By operating as an UPREIT, we are able to acquire real estate in exchange for limited partnership units of IRET Properties which are exchangeable on a one-for-one basis for our shares, subject to certain restrictions. See "Operating Partnership Agreement" at page 50. EXTERNALLY ADVISED. We have no employees. Instead, our business is conducted through independent contractors. Our advisor is Odell-Wentz & Associates, LLC, a North Dakota Limited Liability Company, whose members are Roger R. Odell and Thomas A. Wentz, Sr. The advisory company receives fees based on the capitalization of IRET as well as compensation for giving advice with respect to property purchases based on the purchase price of each property that is acquired. The independent trustees who serve on the Board of Trustees also receive compensation. The following is a summary of the compensation paid to the advisor and the trustees as well as other administrative expenses incurred during the past five fiscal years. See "Advisory Agreement" at page 74.
Fiscal Years Ending April 30 ---------------------------- 1994 1995 1996 1997 1998 ---------------------------------------------------------------- Advisor's and Trustees' Compensation $304,898 $336,142 $458,019 $559,149 $745,907 Advisory Investigation Fee 89,514 49,836 117,506 177,834 141,465 Other Administrative Expenses 46,557 79,974 162,588 158,627 271,738 -------- -------- -------- -------- ---------- TOTAL FEES $366,406 $440,969 $465,952 $895,610 $1,159,110 Fees as Percent of Net Invested Assets of the Trust .68% 0.55% 0.6% 0.5% 0.5%
PROPERTY MANAGEMENT. We hire independent property managers to provide the day-to-day management of each real estate investment that we own. See "Management of IRET's Investments" at page 77. OFFERING PRICE. The offering price of $8.10 has been arbitrarily determined by our Board of Trustees. The price is higher than the price at which our shares have traded and have been sold in the past. See "Market Price of and Dividends on IRET's Shares of Beneficial Interest" at page 65. DIVIDENDS. We have paid 112 consecutive quarterly dividends beginning June 30, 1971. Dividends are paid in mid-January, April 1st, July 1st and October 1st of each year. The dividend paid on April 1, 1999, was $.1225 per share. See "Dividend History" at page 67. USE OF PROCEEDS. We will use the net proceeds from the sale of shares under this offering to continue our apartment building program. We are currently building apartments in Bismarck, Jamestown and Grand Forks, North Dakota, and Billings, Montana. See "Use of Proceeds" at page 25. 11 Page 14 of 183 SHAREHOLDER DEMOCRACY RIGHTS. The following is a brief summary of the rights afforded to shareholders pursuant to the Declaration of Trust: - - SHARES: CERTIFICATES OF BENEFICIAL INTEREST. The units into which the beneficial interest in IRET will be divided shall be designated as SHARES. The certificates evidencing ownership of SHARES in IRET will be designated as Certificates of Beneficial Interest or SHARES and shall be in such form as the TRUSTEES may from time to time prescribe. - - SALE OF SHARES. The TRUSTEES may from time to time issue and sell by private or public offering, or exchange SHARES in IRET in such number or for such sums of money, real estate assets, or other considerations, and on such terms as they deem proper. The SHAREHOLDERS shall have no preemptive rights. - - OFFERING OF SHARES. The TRUSTEES are authorized to cause to be made from time to time offerings of the SHARES of IRET to the public at public offering prices deemed appropriate. - - SHARES PURCHASED BY IRET. IRET may repurchase or otherwise acquire its own SHARES on such terms and conditions as the TRUSTEES deem appropriate. - - TRANSFERABILITY OF SHARES. SHARES in IRET shall be transferable in accordance with the procedure prescribed from time to time in the TRUSTEES' Regulations. - - REDEMPTION AND PROHIBITION ON TRANSFER. To insure compliance with the Internal Revenue Code provision that no more than 50% of the outstanding SHARES may be, owned by five or fewer individuals, the TRUSTEES may at any time redeem SHARES from any Shareholder at the fair market value thereof. Also, the TRUSTEE may refuse to transfer SHARES to any PERSON whose acquisition of additional SHARES might, in the opinion of the TRUSTEES, violate the above requirement. - - MEETINGS. 1. There shall be an annual meeting of the SHAREHOLDERS of IRET. 2. Special meetings of the SHAREHOLDERS may be called by the chief executive officer, by a majority of the TRUSTEES or by a majority of the INDEPENDENT TRUSTEES, and shall be called by an officer of IRET upon written request of the SHAREHOLDERS holding in the aggregate not less than 10% of the outstanding SHARES of the IRET entitled to vote at such meeting. 12 Page 15 of 183 - - VOTING RIGHTS OF SHAREHOLDERS. 1. The voting rights per share of equity securities of IRET (other than the publicly held equity securities of IRET) sold in a private offering shall not exceed voting rights which bear the same relationship to the voting rights of the publicly held SHARES of IRET as the consideration paid to IRET for each privately offered IRET share bears to the book value of each outstanding publicly held share. 2. The majority of the outstanding SHARES may, without the necessity of concurrence by the TRUSTEES, vote to: a. amend the DECLARATION OF TRUST; b. terminate IRET; c. remove the TRUSTEES. 3. The majority of SHAREHOLDERS present in PERSON or by proxy at an Annual Meeting at which a quorum is present, may vote to elect the TRUSTEES. A quorum shall be 50% of the then outstanding SHARES. 4. Without concurrence of a majority of the outstanding SHARES, the TRUSTEES may not: a. amend the DECLARATION OF TRUST, except for amendments which do not adversely affect the rights, preferences and privileges of SHAREHOLDERS; b. sell all or substantially all of the IRET's assets other than in the ordinary course of the IRET's business or in connection with liquidation and dissolution; c. cause the merger or other reorganization of IRET; or d. dissolve or liquidate IRET. - - LIABILITY OF SHAREHOLDERS. The SHARES of IRET shall be non-assessable by IRET. - - REPORTS. IRET shall cause to be prepared and mailed or delivered to each SHAREHOLDER as of a record date after the end of the fiscal year and each holder of other publicly held securities of IRET within 120 days after the end of the fiscal year to which it relates an annual report. 13 Page 16 of 183 - - ACCESS TO RECORDS. Any SHAREHOLDER and any designated representative thereof shall be permitted access to the records of IRET at all reasonable times, and may inspect and copy any of them. - - ELECTION OF TRUSTEES. All TRUSTEES shall be elected annually by the vote of the SHAREHOLDERS. Each Shareholder shall be entitled to one vote in PERSON or by proxy for each Share registered in his name for as many PERSONS as there are TRUSTEES to be elected. The candidates receiving the highest respective numbers of votes up to the number of trusteeships to be filled in the election shall be elected. A PROSPECTIVE PURCHASER SHOULD ALSO REVIEW THE ATTACHED FULL PROSPECTUS. THE BALANCE OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK. THIS IS THE END OF THE SUMMARY SECTION. 14 Page 17 of 183 THE COMPANY Investors Real Estate Trust (hereinafter "IRET"), a registered real estate trust, was organized under the laws of the State of North Dakota on July 31, 1970. IRET has qualified and operated as a "real estate investment trust" under Sections 856-858 of the Internal Revenue Code since its inception. Since February 1, 1997, IRET carries on its activities through IRET Properties, a North Dakota Limited Partnership. See "Structure of IRET" at page 40. IRET, pursuant to the requirements of Sections 856-858 of the Internal Revenue Code which govern real estate investment trusts, invests in real estate, real estate equities and real estate mortgages. IRET has its only office at 12 South Main, Minot, North Dakota 58701, (701) 852-1756, and operates principally within the State of North Dakota, although it has real estate investments in the states of Minnesota, South Dakota, Nebraska, Montana, Georgia, Colorado, Wisconsin, Idaho, Washington and Arizona. IRET operates on a fiscal year ending April 30. For its past three fiscal years, its sources of operating revenue, total expenses, net real estate investment income, capital gain income, total income, and dividend distributions are as follows:
Fiscal Year Ending 4/30 1998 1997 1996 ---------- ----------- ----------- REVENUE FROM OPERATIONS Real Estate Rentals $31,694,586 $22,972,368 $17,635,297 Interest, Discount & Fees 712,959 861,613 1,024,368 ----------- ----------- ----------- $32,407,545 $23,833,981 $18,659,665 EXPENSE $27,716,347 $20,334,538 $15,041,858 ----------- ----------- ----------- NET REAL ESTATE INVESTMENT INCOME $ 4,691,198 $ 3,499,443 $ 3,617,807 GAIN ON SALE OF INVESTMENTS (CAPITAL GAIN) 465,499 398,424 994,163 MINORITY INTEREST PORTION OF OPERATING PARTNERSHIP INCOME (141,788) (18) -0- ----------- ----------- ----------- NET INCOME $ 5,014,909 $ 3,897,849 $ 4,611,970 ----------- ----------- ----------- ----------- ----------- ----------- PER SHARE Net Income $ .32 $ .28 $ .38 Dividends Paid $ .42 $ .39 $ .37
As indicated above, IRET's principal source of operating revenue is rental income from real estate properties owned by IRET. A minor amount of revenue is derived from interest on short-term investments in government securities and interest on savings deposits. In addition to operating income, IRET has received capital gain 15 Page 18 of 183 income when real estate properties have been sold at a price in excess of the depreciated cost of said properties. IRET has no employees. Its business is conducted through the services of an independent contractor (Odell-Wentz & Associates L.L.C., a North Dakota Limited Liability Company having as its members Roger R. Odell and Thomas A. Wentz, Sr.) which serves as the advisor to IRET. Since the inception of IRET and until January 1, 1986, Roger R. Odell, 12 South Main, Minot, North Dakota, served as advisor to IRET, providing office facilities, administering day-to-day operations of IRET, and advising with respect to investments and investment policy. Effective January 1, 1986, IRET entered into a revised advisory agreement with Mr. Odell and Thomas A. Wentz, Sr., and on January 1, 1994, with Odell-Wentz & Associates, L.L.C. Mr. Odell is a graduate of the University of Texas, receiving his B.A. degree in 1947. He has been a resident of Minot, North Dakota since 1947. From 1947 to 1954, he was employed by Minot Federal Savings & Loan Association, serving as secretary of the association from 1952 to 1954. Since 1954, Mr. Odell has been a realtor in Minot, serving as an officer and stockholder of Watne Realty Company from 1954 to January 1, 1970, and since that time has been the advisor to IRET. Mr. Wentz is a graduate of Harvard College and Harvard Law School, receiving his A.B. degree in 1957 and his L.L.B. degree in 1960. He has been a resident of Minot, North Dakota, since 1962. From 1962 to August 1, 1998, Mr. Wentz was a practicing attorney with Pringle & Herigstad, P.C. He has been a member of Odell-Wentz & Associates since 1985. BUSINESS OBJECTIVES IRET seeks to realize shareholder value by regular increases in the quarter-yearly cash dividends paid to its shareholders and in appreciation in the value of its shares of Beneficial Interest. See "Market Price and Dividends on IRET's Shares of Beneficial Interest" at page 65 for a description of share prices and dividends during its 29 year history. PORTFOLIO MIX. IRET's investment strategy is to maintain its real estate investment portfolio at approximately 75% invested in multi-family apartment complexes located in North Dakota and surrounding states and the remaining 25% of real estate owned in commercial property (warehouses, retirement homes, manufacturing plants, offices, and retail properties) leased to single tenants for 14 years or longer. LEVERAGE. An essential ingredient of IRET's investment strategy is to leverage its equity capital by borrowing up to 70% of the cost of real estate properties acquired for its portfolio. IRET seeks to acquire real estate that will yield net operating income in an amount that will exceed the interest rate payable on the mortgage indebtedness. AVAILABLE INFORMATION CONCERNING IRET SECURITIES AND EXCHANGE COMMISSION: IRET is currently a reporting company pursuant to the Securities Exchange Act of 1934 and in accordance therewith annually files a Form 10-K and quarterly Forms 10-Q for the first three quarters of each year with 16 Page 19 of 183 the Securities and Exchange Commission. The information filed by IRET can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission in Washington, DC, at 450 Fifth Street NW, Room 1024, Washington, DC 20549, (202-272-3100). Copies of said information can be obtained from the Public Reference facility at the above location at prescribed rates. IRET has filed with the Securities and Exchange Commission a Registration Statement on Form S-11 under the Securities Act of 1933 and the rules and regulations promulgated thereunder, with respect to the Shares of Beneficial Interest offered pursuant to this Prospectus. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and financial statement schedules thereto. For further information with respect to IRET and the Shares, reference is made to the Registration Statement and such exhibits and financial statement schedules, copies of which may be examined without charge at or obtained upon payment of prescribed fees from, the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for inspection and copying at the regional offices of the Commission located at 13th Floor, 7 World Trade Center, New York, New York, 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. The Commission maintains a Website at http://www.sec.gov. Reports, proxy and information statements and other information regarding registrants that file electronically with the Commission (including IRET) can be obtained from that site. Statements contained in this Prospectus as to the contents of any contract or other document that is filed as an exhibit to the Registration Statement are not necessarily complete, and each such statement is qualified in its entirety by reference to the full text of such contract or document. REPORTS TO SECURITY HOLDERS: IRET shall furnish shareholders with annual reports on or about July 25th of each year containing financial statements audited by IRET's independent accountants, with quarterly reports for the first three quarters of each year containing unaudited summary financial and other information, and with such other reports as IRET deems appropriate or as required by law. INCORPORATION BY REFERENCE: Copies of any document or part thereof incorporated by reference in this prospectus but not attached is available free of charge upon request to Timothy P. Mihalick, 12 South Main Street, Minot, ND 58701 (701-852-1756). RISK FACTORS An investment in the shares involves various risks. You should carefully consider the following risks: PRICE OF SHARES ARBITRARILY DETERMINED: The price of the shares has been arbitrarily determined by IRET and is a higher price than the price paid by most of the current holders of IRET's shares. The offering price set forth on the cover page of this Prospectus should not be considered an indication of the actual value of the shares. The price may be higher than the price at which IRET shares trade on the NASDAQ Small-Cap Market. 17 Page 20 of 183 PRICE EXCEEDS BOOK VALUE: The book value of IRET shares of beneficial interest is substantially less than the purchase price to new shareholders under this Offering. As of January 31, 1999, the book value of the 18,134,700 shares then outstanding was $4.40. Assuming all of the shares registered under this Offering are sold, the estimated resulting book value will be $4.51 per share. Thus, a purchasing shareholder paying $8.10 per share under this Offering will incur an immediate book value dilution of $3.59 per share. HIGH LEVERAGE: IRET seeks to borrow approximately 70% of the cost of real estate purchased or constructed. This amount of leverage may expose IRET to cash flow problems in the event rental income decreases. Such a scenario may require IRET to sell properties at a loss or default on the mortgage, thus losing the property through foreclosure. FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST: IRET intends to continue operating so as to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). Although IRET believes that it is organized and will continue to operate in such a manner, no assurance can be given that IRET will remain qualified as a REIT. Qualification as a REIT involves the application of highly technical and complex code provisions for which there are only limited judicial or administrative interpretations. No assurance can be given that legislation, new regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualifications as a REIT or the federal income tax considerations of such qualifications. If in any taxable year IRET failed to qualify as a REIT, IRET would not be allowed a deduction for distribution to shareholders in computing its taxable income and would be subject to federal income tax on its taxable income at regular corporate rates. Unless entitled to relief under certain statutory provisions, IRET also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. As a result, the funds available for distribution to IRET's shareholders would be reduced for each of the years involved. Although IRET currently intends to continue to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause IRET's Board of Trustees to revoke the REIT election. BEST EFFORTS SALE: The shares are being sold by the Soliciting Dealers on a "best efforts" basis whereby the selling agent is only required to use its best efforts to locate purchasers of the shares, but is not obligated to ensure that a minimum number or that even any shares are sold. Therefore, no assurance is given as to the amount of proceeds that will be available for investment by IRET. In the event fewer than all the Shares are sold during the offering period (which is 365 days from the date of this document), IRET would have fewer cash assets to apply toward its business plan. In such event, the fixed operating expenses of IRET, as a percentage of gross income, would be higher and consequently reduce the taxable income distributable to shareholders. BUSINESS ENVIRONMENT: The results of operations of IRET will depend, among other things, upon the availability of opportunities for the investment and reinvestment of the funds of IRET. The yields available from time to time on mortgages and other real estate investments depend to a large extent on the type of security involved, the type of investment, the condition of the money market, the geographical location 18 Page 21 of 183 of the property, general economic conditions, competition, and other factors, none of which can be predicted. Trust funds are presently invested in real estate in North Dakota and several other states. As a result, IRET may be subject to substantially greater risk than if its investments were more dispersed geographically. Local conditions, such as competitive overbuilding or a decrease in employment, may adversely affect the performance of IRET's investments. In the area in which IRET operates, the economy is dependent on the areas of agriculture and mineral development. If these areas do not perform satisfactorily, the ability of IRET to realize profits from its business of real estate investments will be adversely affected. RISKS RELATED TO MORTGAGE LENDING: All real property investments are subject to some degree of risk, which, in some cases, varies according to the size of the investment as a percentage of the value of the real property. In the event of a default by a borrower on a mortgage loan, it may be necessary for IRET to foreclose its mortgage or engage in negotiations which may involve further outlays to protect IRET's investment. The mortgages securing IRET's loans may be, in certain instances, subordinate to mechanics' liens, materialmen's liens, or government liens and, in instances in which IRET invests in a junior mortgage, to liens of senior mortgages, and IRET may be required to make payments in order to maintain the status of the prior lien or to discharge it entirely. In certain areas, IRET might lose first priority of its lien to mechanics' or materialmen's liens by reason of wrongful acts of the borrower. It is possible that the total amount which may be recovered by IRET in such cases may be less than its total investment, with resultant losses to IRET. Loans made by IRET may, in certain cases, be subject to statutory restrictions limiting the maximum interest charges and imposing penalties, which may include restitution of excess interest, and, in some cases, may affect enforceability of the debt. There can be no assurance that all or a portion of the charges and fees which IRET receives on its loans may not be held to exceed the statutory maximum, in which case IRET may be subjected to the penalties imposed by the statutes. RELATIONSHIP WITH ADVISOR: Certain operating expenses of IRET, including compensation to the advisor and trustees, must be met regardless of profitability. The advisor's fee is computed as a percentage of the investments of IRET. See "Advisory Agreement" at page 74. IRET will be dependent upon the Advisor for essentially all aspects of its business operations. Because the Advisor has experience in the specialized business segment in which IRET operates, the loss of the Advisor, for any reason, would likely have a material adverse affect on IRET's operations. The Advisor may terminate its relationship upon 60 days notice by either the Advisor or IRET. CONFLICT OF INTEREST: The Advisor is entitled to receive an advisory fee equal to a percentage of the Net Invested Assets of IRET. See "Advisory Agreement" at page 74. The Advisor also will receive fees in connection with IRET's acquisition or construction business based upon a percentage of the amount paid. Any trustee or officer may have personal business interests and may engage in personal business activities, which may include the acquisition, syndication, holding, management, development, operation or investment in, for his own account or 19 Page 22 of 183 for the account of others, interests in entities engaged in the real estate business and any other business. Any trustee or officer may be interested as trustee, officer, director, shareholder, partner, member, advisor or employee, or otherwise have a direct or indirect interest in any entity which may be engaged to render advice or services to IRET, and may receive compensation from such entity as well as compensation as trustee, officer or otherwise hereunder. Neither the Advisor nor its affiliates are prohibited from providing the same services to others, including competitors. These relationships may produce conflicts in the Advisor's and its affiliates' allocation of time and resources among various projects. The Advisor and its affiliates believe they have sufficient personnel to discharge their responsibilities to IRET. All agreements and arrangements, including those relating to compensation, between IRET and the Advisor or any of their affiliates will not be the result of arm's-length negotiations. However, such conflicts will be resolved by the following factors: (i) IRET intends to be in substantial compliance with the Statement of Policy Regarding Real Estate Investment Trusts adopted by the North American Securities Administrators Association, Inc. ("NASAA") which has a specific limitation on certain fees and on the amount of IRET's operating expenses, including compensation to the Advisor during the operating stage of IRET; (ii) the Advisor is aware of other programs being offered in the marketplace and intends to structure its business relationships so as to be competitive with such other programs; (iii) such agreements and arrangements are subject to approval by a majority of IRET's independent trustees. IRET, the Advisor and the principals of IRET and Advisor are not represented by separate counsel. IRET is represented by the law firm of Pringle & Herigstad, P.C., which has also acted and will continue to act as counsel to IRET and various affiliates of the Advisor with respect to other matters. ENVIRONMENTAL LIABILITY: Investments in real property create a potential for environmental liability on the part of the owner of or any mortgage lender on such real property. Under federal and state legislation, property owners are liable for cleanup expenses in connection with hazardous wastes or other hazardous substances found on their property. No assurance can be given that a substantial financial liability may not occur with respect to properties owned or acquired in the future by IRET. It is the policy of IRET to obtain a Phase I environmental survey upon purchasing property and, as of the date of this Prospectus, IRET is unaware of any environmental liability with respect to properties in its portfolio. COMPETITION: Investments of the types in which IRET is interested may be purchased on a negotiated basis by many kinds of institutions, including mutual savings banks, savings and loan associations, commercial banks, insurance companies and, to a lesser extent, pension funds, credit unions and individuals. In addition, there are a number of other real estate investment trusts in operation, some of which may be active in one or more of IRET's areas of investment. Investments must thus be made by IRET in competition with such other entities. The yields available on mortgage and other real estate investments depend upon many factors, including the supply of money available for such investments and the demand for mortgage money. The presence of the foregoing competitors increases the available supply of funds to prospective borrowers from IRET. All these factors, in turn, vary in relation to many other factors such as general and local economic conditions, conditions in the construction industry, opportunities for other types of investments, international, 20 Page 23 of 183 national and local political affairs, legislation, governmental regulation, tax laws, and other factors. IRET cannot predict the effect which such factors will have on its operations. LIQUIDITY: No assurance can be given that a purchaser of IRET shares under this Offering would be able to resell such shares when desired. Effective October 17, 1997, IRET shares of Beneficial Interest have been traded on the National Association of Securities Dealers Automated Quotation System Small Capitalization Index (NASDAQ). No assurance can be given that IRET shares will continue to be traded on such market. FRONT-END FEES. For the money that is being raised by this offering, there are front-end fees. A front-end fee is a cost or expense of the offering which must be paid regardless of the number of shares sold. The Declaration of Trust caps all front-end fees for organizational or sale purposes at no more than 15% of the total offering. In the present case, the total front-end fees will be not more than 12%, which is below the capped amount. The fees are capped in that under no situation shall they exceed the capped amount:
Type Minimum Cap Maximum Percentage ---- ------- --- ------------------ Selling agent commission 8% of the amount sold -0- $ 487,500 8.02% Legal Fees $15,000 $ 15,000 .00247% Advertising, Printing and Promotion Expenses $15,000 $ 136,500 .0225% Registration Fees $10,000 $ 10,000 .00165% Accounting Fees $ 1,000 $ 1,000 .0007% ------- --------- ------ $41,000 $ 650,000 10.69%
COMPENSATION TABLE The following table sets forth the fees and other compensation which IRET is to pay in association with this offering. The total operating expenses of IRET shall not exceed the greater of 2% of its average invested assets or 25% of its net income for any fiscal year. From the inception of IRET in 1970, this requirement has been met.
Item of Compensation Recipient Amount/Method - -------------------- --------- ------------- Advisory Fee Odell-Wentz & Associates The advisor will earn annually an additional base fee of $37,975 once the net sale proceeds of $5,425,000 are invested. (.7% of net invested assets). 21 Page 24 of 183 Advisor Additional Odell-Wentz & Associates 1/2 of 1% of the 1st Compensation $2,500,000 of value of all acquired assets, except new construction is 1/2 of 1% of the total cost. Upon investment of sale proceeds, the fee will be a minimum of $12,500 to a possible maximum of $27,130. Incentive Fees N/A While authorized by the Restated Declaration of Trust, no incentive fees shall be paid to anyone. This may be changed by a vote of the Trustees at anytime with incentive fees then payable for future transactions as limited by the Restated Declaration of Trust. Broker-Dealer Fees Selling Brokerage Firms (Eight percent or $.65 of each share sold) for a total possible commission of $487,500. Advertising and Up to an additional two Promotional Expenses percent of gross proceeds of $6,075,000 ($136,500) may be paid as compensation for advertising and promotional expenses. Experts' Fees Pringle & Herigstad, P.C. $15,000 for legal fees, plus filing fees, accounting fees and printing costs estimated to be another $16,000.
CONFLICTS OF INTEREST IRET will be subject to various conflicts of interest arising from its relationship with the Advisor, (Odell-Wentz & Associates, L.L.C.), and its affiliates. The Advisor, its affiliates and the trustees of IRET are not restricted from engaging for their own accounts in business activities of the type conducted by IRET, and occasions may arise when the interests of IRET would be in conflict with those of one or more of the trustees, the Advisor or their affiliates. These individuals and affiliates have been engaged in the business of real estate for approximately 40 years. With respect to the conflicts of interest described herein, the trustees of 22 Page 25 of 183 IRET, of which a majority are independent, will endeavor to exercise their fiduciary duties to IRET in a manner that will preserve and protect the rights of IRET and the interests of the shareholders in the event of any conflicts of interest between IRET and the Advisor or its affiliates. Any transactions between IRET and any trustee, the Advisor or any of their affiliates, other than the purchase or sale, in the ordinary course of IRET's business, will require the approval of a majority of the trustees who are not interested in the transaction. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES: The Advisor and its affiliates may receive compensation from IRET for providing various services. IRET's Board of Trustees (a majority of whom are independent of the Advisor and its affiliates) will have oversight responsibility with respect to such services to ensure that such services are provided on terms no less favorable to IRET than IRET could obtain from unrelated persons or entities and are consistent with IRET's investment objectives and policies. See "Compensation Table" at page 21 and "The Advisory Agreement" at page 74. COMPENSATION TO THE ADVISOR AND CONFLICTS OF INTEREST: The Advisor is entitled to receive an advisory fee equal to a percentage of the Net Invested Assets of IRET. (See "Advisory Agreement".) The Advisor also will receive fees in connection with IRET's acquisition or construction of real properties based upon a percentage of the amount paid. Accordingly, a conflict of interest could arise since, depending upon the circumstances, the retention, acquisition or disposition of a particular project could be advantageous to the Advisor, but detrimental to IRET, or vice-versa. The decision whether to liquidate IRET or the decision to acquire, retain or dispose of certain properties and the terms and conditions thereof, may also create conflicts of interest. In resolving conflicts of interest, the Board of Trustees has a fiduciary duty to act in the best interests of IRET as a whole. IRET and the Advisor believe that it would not be possible, as a practical matter, to eliminate these potential conflicts of interest. However, the Advisory Agreement must be renewed annually by the affirmative vote of a majority of the independent trustees. Any conflict will be resolved by a majority of the independent trustees, who may not renew the Advisory Agreement if they determine that the Advisor is not satisfactorily performing its duties. In connection with the performance of their fiduciary responsibilities, the existence of such possible conflicts will be only one of the factors for the trustees to consider in determining the appropriate action to be taken by IRET. COMPETITION BY IRET WITH AFFILIATES: Any trustee or officer may have personal business interests and may engage in personal business activities, which may include the acquisition, syndication, holding, management, development, operation or investment in, for his own account or for the account of others, of interests in entities engaged in the real estate business and any other business. Any trustee or officer of IRET may be interested as trustee, officer, director, shareholder, partner, member, advisor or employee, or otherwise have a direct or indirect interest in any entity which may be engaged to render advice or services to IRET, and may receive compensation from such entity as well as compensation as trustee, officer or otherwise hereunder. 23 Page 26 of 183 Neither the Advisor nor its affiliates are prohibited from providing the same services to others, including competitors. These relationships may produce conflicts in the Advisor's and its affiliates' allocation of time and resources among various projects. The Advisor and its affiliates believe they have sufficient personnel to discharge their responsibilities to IRET. NON-ARM'S-LENGTH AGREEMENTS: All agreements and arrangements, including those relating to compensation, between IRET and the Advisor or any of their affiliates will not be the result of arm's-length negotiations. However, such conflicts will be resolved by the following factors: (i) IRET intends to be in substantial compliance with the Statement of Policy Regarding Real Estate Investment Trusts adopted by the North American Securities Administrators Association, Inc. ("NASAA") which has a specific limitation on certain fees and on the amount of IRET's operating expenses, including compensation to the Advisor during the operating stage of IRET; (ii) the Advisor is aware of other programs being offered in the marketplace and intends to structure its business relationships so as to be competitive with such other programs; (iii) such agreements and arrangements are subject to approval by a majority of IRET's independent trustees. LACK OF SEPARATE REPRESENTATION: IRET, the Advisor and the principals of IRET and Advisor are not represented by separate counsel. IRET is represented by the law firm of Pringle & Herigstad, P.C., which has also acted and will continue to act as counsel to the Advisor and various affiliates of the Advisor with respect to other matters. Thomas A. Wentz, Jr., is a trustee of IRET and a partner in Pringle & Herigstad, P.C. DETERMINATION OF OFFERING PRICE The offering price of $8.10 per share has been arbitrarily established by IRET and is higher than the recent market price for said shares. See "Market Price Of and Dividends on IRET's Shares of Beneficial Interest" at page 65. DILUTION The book value of IRET shares of beneficial interest is substantially less than the purchase price to new shareholders under this Offering. As of January 31, 1999, the book value of the 18,134,700 shares then outstanding was $4.40. Assuming all of the shares registered under this Offering are sold, the estimated resulting book value will be $4.51 per share. Thus, a purchasing shareholder paying $8.10 per share under this Offering will incur an immediate book value dilution of $3.59 per share. PLAN OF DISTRIBUTION The shares offered by this Prospectus shall be sold by Broker-Dealers who are members of the National Association of Securities Dealers and have entered into a Sales Agreement with IRET. All shares shall be sold on a "best efforts" basis with no guarantee or requirement that any shares be sold. All sales to purchasers are subject to certain requirements as follows: 24 Page 27 of 183 For each share sold, the selling Broker-Dealer shall receive a commission of eight percent (approximately $.65 per share). No other compensation or fees other than the percentage commission shall be paid by IRET to said Broker-Dealers. The relationship between the Broker-Dealers and IRET may be terminated by either party at any time for any reason. All Broker-Dealers have the opportunity to sell the entire Offering. WHO MAY INVEST In order to purchase shares, an investor must be a resident of one of the following states: North Dakota, South Dakota, Montana, Minnesota, Colorado, Washington, Iowa, Tennessee, Michigan, and such other states as may be added by a supplement to this Prospectus. In the following states, the following disclaimers apply and the purchaser must satisfy the following investor qualifications imposed by that state: Tennessee - Either individually or with a spouse had an annual gross income of at least $65,000 during the previous calendar year, and be expected to have during the current calendar year a gross income of at lease $65,000, and a net worth of at least $250,000 (exclusive of principal residence and its furnishings and automobile), or, in the alternative, have a minimum net worth of at least $500,000. Minnesota, Iowa and Washington - 1) Either individually or with a spouse has an annual gross income of at least ($60,000 for Minnesota) and ($45,000 for Washington and Iowa) during the previous calendar year, have a net worth of at least ($60,000 for Minnesota) and ($45,000 for Washington and Iowa) (exclusive of principal residence and its furnishings and automobile), and are purchasing shares for only the investors own account or retirement plan. 2) Either individually or with a spouse have a net worth of at least ($225,000 for Minnesota) and ($150,000 for Washington and Iowa) (exclusive of the principal residence and its furnishings and automobiles), and are purchasing shares for only the investors own account or retirement plan. 3) All retirement plan purchases must be for a minimum of $2,500.00 for Iowa residents. USE OF PROCEEDS The net proceeds from the sale of the 750,000 shares offered to the public will be added to IRET's operating capital to be used to construct apartment properties in connection with its general business purposes. The following table sets forth information concerning the projected use of proceeds from the sale of units, assuming that the entire offering of 750,000 shares is sold. The figures listed cannot be precisely calculated at the present time and may vary materially from the amounts shown. 25 Page 28 of 183 Assuming all the offered shares are sold after deduction from the offering proceeds of all the front-end fees and expenses associated with the offering, approximately 89 percent of the total sale proceeds raised by this offering will be invested by IRET in real property or related investments.
DOLLARS PERCENT GROSS OFFERING PROCEEDS 6,075,000 100.00% SELLING COMMISSIONS - 487,500 8.02% LEGAL FEES - 15,000 Less than 1% (.00247) ADVERTISING, PRINTING AND PROMOTION EXPENSES - 136,500 Less than 3% (.0225) REGISTRATION FEES - 10,000 Less than 1% (.00165) ACCOUNTING FEES - 1,000 Less than 1% (.0007) ---------- CASH AVAILABLE FOR CONSTRUCTION OF PROPERTIES $5,425,000 89.31%
As of the date of this Prospectus, IRET is constructing 67-unit apartment buildings in Billings, MT, Bismarck, ND, and Grand Forks, ND, and a 27-unit apartment complex in Jamestown, ND and plans to construct the additional apartments described below. These apartments are of a design and type previously constructed by IRET during the past four years in Sioux Falls, South Dakota (98 units), Bismarck, North Dakota (183 units), Minot, North Dakota (196 units), Billings, Montana (165 units) and Grand Forks, North Dakota (183 units). The apartments constructed in Sioux Falls, Bismarck, Minot, Billings and Grand Forks have rented at projected rental rates and, in the judgment of management, will produce a satisfactory investment return. IRET intends to continue the construction of this type of apartment building as follows:
Apartments Under Construction ----------------------------- City Units Estimated Cost ---- ----- -------------- Billings, MT 67 $ 4,250,000 Bismarck, ND 67 4,250,000 Grand Forks, ND 67 4,700,000 Jamestown, ND 27 2,200,000 Planned Apartment Construction ------------------------------ City Units Estimated Cost ---- ----- -------------- Rochester, MN 67 $ 4,700,000
Total - Current and Planned Apartment Construction $20,100,000 IRET owns all of the land necessary for the planned apartment construction, but has not arranged for the financing that would be necessary. Thus, no assurance can be given that IRET will successfully complete this construction program. IRET will also continue to consider other real estate investment opportunities that are presented to it, but is not obligated at the date of this Prospectus to acquire any real estate investments other than the additions to its portfolio described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Three Months Ended January 31, 1999", and expects to concentrate its 26 Page 29 of 183 efforts and resources on the planned apartment construction projects described above during the next 18 month period. IRET will also derive funds to fund the properties under construction that are described above from the following sources: - DEPRECIATION REVENUE. As a "Real Estate Investment Trust" under the Internal Revenue Code, IRET must distribute at least 95% of its taxable income. However, in computing taxable income, a deduction for depreciation of the buildings owned by IRET is allowed. In the Fiscal year ended April 30, 1998, this depreciation deduction was $4,791,907. The amount of this depreciation is used by IRET to acquire addition real estate investments. - LOANS. IRET seeks to borrow approximately 70% of the cost of real estate purchased. The objective is to purchase real estate at a price which will yield a higher percentage return than the interest rate payable on the mortgage loan. This "leverage" is essential to producing a satisfactory return to the shareholders of IRET. (No assurance can be given that the income actually earned on real estate investments made by IRET will be higher than the interest rate paid on IRET's mortgage loans.) As of January 31, 1999, the ratio of mortgage liabilities to total Trust real estate assets was $155,942,643 of mortgage liabilities to $248,188,248 of net real estate owned or 62.9%. Thus, as much as $59,297,102 could be borrowed on the existing portfolio before reaching a debt ratio of 70% (present equity in real estate of $248,188,248, minus mortgages of $155,942,643 equals $92,245,605 divided by 30% = $307,485,350, minus present real estate owned of $248,188,248 equals $59,297,102) (no assurance can be given that this amount of borrowed funds would be available). - MARKETABLE SECURITIES/CREDIT LINE. IRET maintains an investment in marketable government insured securities ($3,169,508 as of January 31, 1999) which securities are held in brokerage accounts with Smith Barney. The current policy of said broker is to allow IRET to borrow up to 90% of the market value of these securities for short-term needs. Also, IRET may enter into short-term credit line borrowing agreements with banks if the need arises. (As of the date of this Prospectus, IRET has credit lines of $11,500,000.) No assurance can be given that either of these borrowing arrangements would be available to IRET.
SELECTED FINANCIAL DATA - ANNUAL -------------------------------- Year Ended April 30 ----------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------------------------------------------------------------- Consolidated Income Statement Data (Restated) Revenue $ 32,407,545 $ 23,833,981 $ 18,659,665 $ 13,801,123 $ 11,583,008 Operating income 4,691,198 3,499,443 3,617,807 3,560,318 3,135,426 Gain on repossession/ sale of investments 465,499 398,424 994,163 407,512 64,962 Minority interest portion of operating partnership income (141,788) (18) --- --- --- Net income 5,014,909 3,897,849 4,611,970 3,967,830 3,200,388 27 Page 30 of 183 Balance Sheet Data Total real estate investments $213,211,369 177,891,168 122,377,909 84,005,635 63,972,042 Total assets 224,718,514 186,993,943 131,355,638 94,616,744 72,391,548 Shareholders' equity 68,152,626 59,997,619 50,711,920 37,835,654 29,997,189 Consolidated Per Share Data Net income $ .32 $ .28 $ .38 $ .38 $ .36 Gain of repossession/ sale of investments .03 .03 .08 .04 .01 Dividends .42 .39 .37 .34 .33 Tax status of dividend Capital gain 2.9% 21% 1.6% 11.0% 7.37% Ordinary income 97.1% 79% 98.4% 89.0% 92.63% Return of capital 0.0% 0.0% 0.0% 0.00% 0.00%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS GENERAL: IRET has operated as a "real estate investment trust" under Sections 856-858 of the Internal Revenue Code since its formation in 1970. IRET is in the business of owning income producing real estate investments. On February 1, 1997, IRET restructured itself as an Umbrella Partnership Real Estate Investment Trust (UPREIT). No other major changes in IRET's business has occurred from the organization of IRET in 1970 to the date of this Prospectus, and none are planned at this time. This discussion and analysis should be read in conjunction with the audited financial statements prepared by Brady Martz and Associates who have served as the auditor for IRET since its inception. Certain matters included in this discussion are forward-looking statements within the meaning of federal securities laws. Although IRET believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that the expectations expressed will actually be achieved. Many factors may cause actual results to differ materially from IRET's current expectations, including general economic conditions, local real estate conditions, the general level of interest rates and the availability of financing, timely completion and lease up of properties under construction, and various other economic risks inherent in the business of owning and operating investment real estate. NINE MONTHS ENDED JANUARY 31, 1999: RESULTS OF OPERATION. We are pleased to report excellent operating results for IRET'S Fiscal 1999 Third Quarter which ended January 31, 1999. Revenues, Net Income, Funds from Operations and Real Estate Owned all reached new highs and we were successful in finding attractive properties to add to our rapidly expanding investment portfolio. FUNDS FROM OPERATIONS. Funds from Operations for the Third Quarter of Fiscal 1999 increased to $3,132,268 from the $2,593,851 reported for the prior year, an increase of $538,417 or 21%. On a per share basis, Funds from Operations for the Third Quarter were $.18, compared to $.16 per share earned in the same period of Fiscal 28 Page 31 of 183 1998, an increase of 13%. For the first nine months of Fiscal 1999, Funds from Operations increased to $8,689,640 from the year earlier figure of $7,033,924, an increase of $1,655,716 or 24%. On a per share basis, Funds from Operations for the nine month period were $.50 per share compared to the year earlier figure of $.45 per share, an increase of 11%. Occupancy rates continue at a good level and we continue to experience good results from the new properties we are adding to our portfolio. NET INCOME. Net Income for the Third Quarter rose slightly from the year earlier figureto $1,654,228 from $1,636,644. For the nine month period, Net Income was $6,028,620 compared to $3,873,276. As noted in our prior quarterly report, the change in Net Income is attributable to the increase in the Gain on Sale of Investments. In the Third Quarter, the gain was $80,121 compared to the year earlier figure of $326,138. However, for the full nine month period, capital gain income was $1,788,038 compared to $448,786, reflecting the large gain from the sale of the 90 Unit Bison Apartment Complex in Jamestown, ND, in the Second Quarter. OPERATIONS. The Third Quarter saw a slight increase in vacancies in certain of our apartment communities. Overall, the occupancy rates for our apartments are still at or above normal levels and we continue to implement periodic rental increases as conditions allow. The new properties that we have been adding to our portfolio are performing very well. We continue our apartment building program in Billings, MT, Bismarck, Jamestown and Grand Forks, ND. We are also in the process of acquiring land in Rochester, MN to begin construction of apartments this summer. SALE OF PROPERTIES. During the Third Quarter, we completed the sale of the Fairfield Apartment Community in Marshall, MN for $466,000 resulting in a gain of $80,122. We've also entered into sales agreements for our Superpumper Convenience Stores and expect to report gains from the sale of these properties in the Fourth Quarter. PORTFOLIO ACQUISITIONS. We were successful in acquiring additional investment properties in the Third Quarter. The following properties were purchased or completed and added to our portfolio during the Third Quarter and are producing income:
Cost ---- - 165 Unit Castle Rock Apartment Complex, Billings, MT $ 5,600,000 - 67 Unit Cottonwood Apartment II, Bismarck, ND $ 4,000,000 The following properties are under construction: - 67 Unit Legacy Apartment Complex with underground parking, Grand Forks, ND $ 4,750,000 - Great Plains Software Home Office Complex, Fargo, ND $ 15,000,000 29 Page 32 of 183 - 27 Unit The Meadows Apartments, Jamestown, ND $ 2,000,000 IRET has entered into purchase agreements for the following properties: - Rimrock West, Billings, MT, Multifamily Apartment Complex $ 3,750,000 - Maplewood Square, Rochester, MN, Commercial Shopping Center $ 11,800,000 - Edgewood Vista Locations in Hermantown, MN, Belgrade, MT, and Grand Island and Columbus, NE $ 6,060,000 - Corner Express Convenience Store, East Grand Forks, ND $ 1,200,000 TOTAL $ 22,810,000
FINANCIAL CONDITION. On January 31, 1998 cash and marketable securities were $10,477,747, compared to the $6,389,446 on hand at the beginning of the current fiscal year. Total assets increased to $264,979,779 from $224,718,514 at the beginning of the current fiscal year. During that same period, liabilities increased to $172,555,299 compared to $148,276,615. IRET continues to enjoy a strong inflow of investment funds and is well positioned to continue the expansion of its investment portfolio. DIVIDENDS. IRET paid a regular dividend of 12.25 cents per share on April 1, 1999. This was an increase from the 12 cents per share dividend paid on January 15, 1999, and was the 112th consecutive quarterly dividend paid by IRET. FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997. OVERVIEW. An improvement in occupancy rates for IRET's apartment communities and good results from newly acquired properties resulted in a significant increase in Funds From Operations and earnings for IRET's 28th year, which ended April 30, 1998. Total assets and shareholder equity also increased materially and IRET Shares of Beneficial Interest were listed on the NASDAQ Small-Cap in October of 1997. FUNDS FROM OPERATIONS. Funds From Operations (taxable income increased by non-cash deductions of real estate asset depreciation and amortization, and reduced by capital gain income and other extraordinary income items) for Fiscal 1998 increased to $9,447,425 ($.60 per share), compared to $7,144,622 ($.51 per share) received in Fiscal 1997, and the $5,977,431 ($.49 per share) recognized in Fiscal 1996. EARNINGS. IRET's net taxable earnings for Fiscal Year 1998 increased to $5,014,909 from the $3,897,849 earned in Fiscal 1997 and the $4,611,970 earned in Fiscal 1996. On a per share basis, net taxable earnings increased to $.32 per share in Fiscal 1998 from $.28 in Fiscal 1997 (an 30 Page 33 of 183 increase of 14%), but a decline of $.06 per share from the $.38 earnings in Fiscal 1996. The increase in taxable earnings resulted from increased rental income which resulted from a higher occupancy level in apartment communities owned by the Operating Partnership. REVENUES. Total revenues of the Operating Partnership for Fiscal 1998 were $32,407,545, compared to $23,833,982 in Fiscal 1997 (an increase of 36%) and $18,659,665 in Fiscal 1996. The increase in revenues received during Fiscal 1998 in excess of the prior year revenues was $8,573,564. This increase resulted from: Rent from 7 properties acquired in Fiscal 1998 $ 2,658,085 Rent from 11 properties acquired in Fiscal 1997 In excess of that received in Fiscal 1997 5,310,670 An increase in rental income on existing properties 893,976 An increase in rent on Smith Home Furnishing Building (bankruptcy of tenant) 54,021 A decrease in rent - properties sold during 1997 (194,534) A decrease in interest income (148,654) ----------- $ 8,573,564 ----------- -----------
This increase in revenue resulted primarily from the addition of new real estate properties to the portfolio. Rents received on properties owned prior to the beginning of Fiscal Year 1998 saw an increase in scheduled rents of 2%, and the occupancy level for those properties increased from approximately 90% to slightly over 94% resulting in an increase in rental income from those properties of $893,976. The new properties acquired during Fiscal Years 1997 and 1998 generated nearly $8,000,000 of new revenues. Interest income continued to decline as IRET completes the repositioning of its investment portfolio from a mix of real estate equities and mortgage loans to one consisting entirely of real estate equities. Management is of the opinion that the long term yields from real estate equity investments will exceed that available from interest income on mortgage loans but, in the short run, the switch has resulted in lower immediate revenues and taxable income. Capital gain income for Fiscal 1998 was $465,499 resulting from the sale of three investment properties. This compares to $398,424 of capital gain income recognized in Fiscal 1997 and the $994,163 recognized in Fiscal 1996. IRET will continue to seek to market several of its older and smaller apartment properties. NET TAXABLE INCOME. The $1,117,060 increase in net taxable income for Fiscal 1998 over the net income earned in the prior fiscal year resulted from: An increase in gain from sale of investments $ 67,075 An increase in net rental income (rents, less utilities, maintenance, taxes, insurance and management) 5,733,442 31 Page 34 of 183 A decrease in interest income (148,654) An increase in interest expense (2,840,328) An increase in depreciation expense (1,207,316) An increase in operating expenses and advisory trustee services (299,869) An increase in amortization expense (45,520) An increase in Minority interest of Operating Partnership Income (141,770) ----------- $ 1,117,060 ----------- -----------
PROPERTY ACQUISITIONS. The Operating Partnership added nearly $40,000,000 of real estate investments to its portfolio during Fiscal 1998, including: Commercial: Edgewood Vista, East Grand Forks, MN $ 892,500 Edgewood Vista, Minot, ND 6,191,410 Apartments: Units Description 125 Jenner Properties - Grand Forks (90), Devils Lake (18) & Dickinson (17), ND $ 2,350,000 108 Kirkwood Manor - Bismarck, ND 3,175,000 248 Magic City Realty Portfolio - Minot, ND 5,270,000 67 Country Meadows - Billings, MT 4,496,134 122 Park East Apartments - Fargo, ND 4,900,000 **67 Legacy Apartments (Phase II) - Grand Forks, ND 3,489,937 67 Cottonwood Apartments - Bismarck, ND 4,522,347 64 Chateau Apartments - Minot, ND 2,364,090 *67 Cottonwood Apartments (Phase II) - Bismarck, ND 1,362,805 --- ----------------------------------------------- ----------- 935 Total $39,014,223
*PROPERTY NOT PLACED IN SERVICE AT APRIL 30, 1998. ADDITIONAL COSTS ARE STILL TO BE INCURRED. **REPRESENTS COSTS TO COMPLETE A PROJECT STARTED IN YEAR ENDED APRIL 30, 1997. PROPERTY DISPOSITIONS. During Fiscal 1998, the Operating Partnership sold three real estate properties - Superpumper Convenience Store in New Town, ND; Superpumper Convenience Store in Bottineau, ND; and a 48-unit apartment complex in Scottsbluff, NE, realizing a total capital gain of $465,499. FISCAL 1998 DIVIDENDS. The following dividends were paid during Fiscal 1998:
Date Per Share Dividend ---- ------------------ July 1, 1997 $.10125 October 1, 1997 .10300 January 16, 1998 .10500 April 1, 1998 .10700 ------- $.41625
32 Page 35 of 183 The Fiscal 1998 pay-out represented a 6.7% increase over the dividends paid during the prior Fiscal Year of $.39 per share. FUNDS FROM OPERATIONS. The funds derived during Fiscal 1998 by IRET from its operations increased by 20% over the prior year and by 34% from the Fiscal 1996 level ($9,447,425 in Fiscal 1998, versus $7,144,604 in 1997 and $5,977,431 in 1996). On a per share basis, Funds From Operations increased to $.60 per share from $.51 in Fiscal 1997 (an increase of 18%) and the $.49 generated in Fiscal 1996. IRET uses the definition of "Funds From Operations" recommended by the National Association of Real Estate Investment Trusts which is "net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures calculated on the same basis." It is emphasized that funds from operations as so calculated and presented does not represent cash flows from operations as defined under generally accepted accounting principles and should not be considered as an alternative to net income as an indication of operating performance or to cash flows as a measure of liquidity or ability to fund all cash needs. (See the Consolidated Statements of Cash Flows in the Consolidated Financial Statements attached hereto.) The following is a comparison of dividends paid during the past five fiscal years to Funds From Operations (as defined above):
Fiscal Fiscal Fiscal Fiscal 1995 Fiscal 1994 Item 1998 1997 1996 (Restated) (Restated) ---------------------------------------------------------------------------------------- Net Income (GAAP) $ 5,014,909 $ 3,897,849 $ 4,611,970 $ 3,967,830 $ 3,200,388 Adjustments Gain from Property Sales (465,499) (398,424) (994,163) (407,512) (64,962) ---------------------------------------------------------------------------------------- Operating Income $ 4,549,410 $ 3,499,425 $ 3,617,807 $ 3,560,318 $ 3,135,426 Plus Depreciation 4,791,907 3,584,591 2,261,724 1,767,294 1,323,474 Plus Amortization 106,108 60,588 97,900 20,659 28,199 ---------------------------------------------------------------------------------------- Funds from Operations $ 9,447,425 $ 7,144,604 $ 5,977,431 $ 5,348,271 $ 4,487,099 Dividends Paid $ 6,518,627 $ 5,508,689 $ 4,439,034 $ 3,660,986 $ 3,102,061 ---------------------------------------------------------------------------------------- $ 2,928,798 $ 1,635,915 $ 1,538,397 $ 1,687,285 $ 1,385,038 ---------------------------------------------------------------- ----------------------------------------------------------------
Management expects that the Funds From Operations (as defined above) will continue to improve during Fiscal 1999 and will continue to exceed dividends paid in the coming year. LIQUIDITY AND CAPITAL RESOURCES. Important investment and financing events in Fiscal 1998 were: The net proceeds from sale of Shares of Beneficial Interest under Best Efforts offerings were $8,421,858. An additional $8,583,519 of equity capital was contributed to the Operating Partnership in UPREIT transactions. Seven property loans were refinanced. The new loans totalled $27,000,000, were at a lower interest rate than the old loans and 33 Page 36 of 183 generated $3,245,000 of additional cash for investment in new properties. Nearly $40,000,000 of new real estate investments were acquired by the Operating Partnership. IRET's financial condition at the end of Fiscal 1997 continued at the very strong level of its prior fiscal year. IRET's shareholder equity increased to $68,152,626 from $59,997,619 on April 30, 1997, a gain of $8,155,007 (14%). Equity capital on April 30, 1996, was $50,711,920. These increases result from the sale of shares of beneficial interest and the reinvestment of dividends in new shares. Liabilities of the Operating Partnership increased to $148,276,615 from $126,995,321 on April 30, 1997. IRET's liabilities on April 30, 1996, were $80,643,718. Total assets of the Operating Partnership increased to $224,718,514 from $186,993,943 on April 30, 1997. IRET's total assets on April 30, 1996, were $131,355,638. Cash and marketable securities were $6,389,446 compared to the year earlier figure of $6,457,182 and $7,127,131 on April 30, 1996. In addition to its cash and marketable securities, IRET Properties has an unsecured line of credit agreements with First International Bank & Trust and First Western Bank & Trust, both of Minot, ND, of $6,500,000, of which $1,000,000 was in use on April 30, 1998. AFFILIATED PARTNERSHIPS. IRET sponsored and served as a general partner of seven limited partnerships. Because of IRET's position as a general partner and creditor of these partnerships and because the partnerships (with the exception of Chateau Properties) did not produce sufficient cash flow to pay debts due to IRET as scheduled prior to Fiscal Year 1996, the financial statements of IRET and the seven partnerships were consolidated for financial reporting purposes to more properly depict the financial status of IRET. During Fiscal Year 1996, a new mortgage loan was negotiated by Chateau Properties, Ltd., on its 64-unit apartment building in Minot, North Dakota. As a result of this refinancing, the partnership paid the balance that it owed to IRET on the contract for deed under which the apartment building had been purchased from IRET. Further, IRET was not required to guarantee the new mortgage loan made by the partnership. Accordingly, for Fiscal 1996 and 1997, IRET is accounting for its partnership interest in Chateau Properties under the equity method of accounting. Prior financial statements have been restated to reflect this change. On April 1, 1998, Chateau Properties was merged into the Operating Partnership. The six consolidated partnerships are as follows: 34 Page 37 of 183
Year Property IRET Name Formed Owned Ownership ---- ------ ----- --------- Sweetwater Properties, Ltd. 1981 114 Units Apts. 0% Bison Properties, Ltd. 1982 125 Units Apts. 20% First Avenue Building, Ltd. 1981 16,500 Sq. Ft. Office Bldg. 20% Eastgate Properties, Ltd. 1983 116 Units Apts. 18% Colton Heights, Ltd. 1984 18 Unit Apt. Bldg. 18.69% Hill Park Properties, Ltd. 1985 96 Units Apts. 7.14%
On May 1, 1998, all six partnerships were merged into the Operating Partnership. CONSOLIDATED FINANCIAL STATEMENTS. The financial statement included in this Prospectus consolidates the financial statements of IRET and the above six limited partnerships. All material inter-company transactions and balances have been eliminated on the consolidated statement. The principal impact of this consolidation on the statement of operations is to reduce reported income as a result of increased depreciation. On the balance sheet, related mortgage loans and the investment in partnerships is reduced and real estate owned is increased. Also, the deferred income account is decreased and the retained earnings account is also decreased. IMPACT OF INFLATION. The costs of utilities and other rental expenses continue to increase, but in most areas, IRET has been able to increase rental income sufficiently to cover inflationary increases in rental expense. Increases in rental income are not precluded by long-term lease obligations except for a few commercial properties subject to long-term net lease agreements. Thus, as market conditions allow, rents will be increased to cover inflationary expenses and to provide a better return to IRET. ECONOMIC CONDITIONS. Fiscal 1998 saw improved economic conditions in the northern plains states in which IRET operates. Occupancy rates for residential properties increased to 94% from the year earlier level of 90.5% and scheduled rent levels for Trust properties improved slightly in Fiscal 1998 by about 2%. The mild winter of 1997-98 also impacted earnings by decreasing snow removal cost, utility expenses and vacancy rates. YEAR 2000 COSTS. IRET has requested its principal vendors to inform it of any anticipated problems associated with the Year 2000 issue for computer hardware and software. IRET itself does not own or operate computer systems and will have no direct costs to up-date such systems. However, IRET could be impacted by computer failures of its third-party vendors. IRET has been informed by these service providers (including its Advisor - Odell-Wentz & Associates, LLC) that computer systems will be Year 2000 compliant by the end of 1998. IRET does not anticipate that the Year 2000 problem will have any material cost to it. FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996. IRET's Fiscal Year 1997, which ended on April 30, 1997, saw a continuation of IRET's rapid growth with assets owned increasing by more than 40%. IRET's 27th year ended with total assets, revenues, funds from operations and shareholder equity all reaching record levels. 35 Page 38 of 183 FUNDS FROM OPERATIONS. Funds from Operations (taxable income increased by non-cash deductions of depreciation and amortization, and reduced by capital gain income and other extraordinary income items) for Fiscal 1997 increased to $7,144,622 ($.51 per share), compared to $5,977,431 ($.49 per share) generated by IRET in Fiscal 1996 and the $5,434,244 ($.52 per share) recognized in Fiscal 1995. EARNINGS. IRET's net taxable earnings for Fiscal Year 1997 decreased to $3,897,849 from the $4,611,970 earned in Fiscal 1996 and the $3,967,830 earned in Fiscal 1995. Approximately one-half of the decrease in earnings from the Fiscal 1996 level resulted from a decrease in capital gain income. In Fiscal 1997, $398,424 of capital gain income was recorded, as compared to $994,163 in the prior year. The other principle reason for the decline in taxable income is the continuing acquisition by IRET of new real estate investments which result in an increase in depreciation allowance. In Fiscal 1997, $3,584,591 of depreciation was recorded as compared to $2,261,724 in the prior year. This will result in a significant portion of IRET's dividends being sheltered from income tax by the increased depreciation allowance. On a per share basis, net taxable income was $.28 per share for Fiscal 1997, compared to $.38 per share recorded in both Fiscal 1996 and 1995. REVENUES. Total revenues for Fiscal 1997 were $23,833,982, compared to $18,659,665 in Fiscal 1996 (an increase of 28%) and $13,801,123 in Fiscal 1995. The increase in revenues received during Fiscal 1997 in excess of the prior year revenues was $5,174,317. This increase resulted from: Rent from 11 properties acquired in Fiscal 1997 $4,451,266 Rent from 7 properties acquired in Fiscal 1996 in excess of that received in Fiscal 1996 1,526,453 A decrease in rental income on existing properties (-5.4%) (625,949) An increase in rent on Smith Home Furnishing Building (bankruptcy of tenant) 61,892 A decrease in rent - properties sold during 1996 (76,590) A decrease in interest income (162,755) ---------- $5,174,317
This increase in revenue resulted primarily from the addition of new real estate properties to the portfolio. Rents received on properties owned prior to the beginning of Fiscal Year 1996 saw an increase in scheduled rents of 2.25%, but the occupancy level for those properties decreased from approximately 95% to slightly over 90% resulting in a decrease in rental income from those properties of $625,949. However, the new properties 36 Page 39 of 183 acquired during Fiscal Years 1996 and 1997 generated nearly $6,000,000 of new revenues. Interest income continued to decline as IRET completes the repositioning of its investment portfolio from a mix of real estate equities and mortgage loans to one consisting entirely of real estate equities. Management is of the opinion that the long term yields from real estate equity investments will exceed that available from interest income on mortgage loans but, in the short run, the switch does result in lower immediate revenues and taxable income. Capital gain income for Fiscal 1997 was $398,424 resulting from the sale of two older and smaller investment properties. This compares to $994,163 of capital gain income recognized in Fiscal 1996 and the $407,512 recognized in Fiscal 1995. IRET will continue to seek to market several of its older and smaller apartment properties. NET TAXABLE INCOME. The $714,121 decrease in net taxable income for Fiscal 1997 over the net income earned in the prior fiscal year resulted from: A decrease in gain from sale of investments $ (595,739) An increase in net rental income (rents, less utilities, maintenance, taxes, insurance and management) 3,518,152 A decrease in interest income (162,755) An increase in interest expense (2,091,037) An increase in depreciation expense (1,322,867) An increase in operating expenses and advisory trustee services (97,169) A decrease in amortization expense 37,312 An increase in Minority interest of Operating Partnership Income (18) ----------- $ (714,121)
PROPERTY ACQUISITIONS. IRET added nearly $60,000,000 of real estate to its portfolio during Fiscal 1997, including: COMMERCIAL: Computer City, Kentwood, MI $ 2,113,574 Edgewood Vista, Missoula, MT 962,428 Wedgwood Retirement Inns, Sweetwater, GA 2,810,000 UNITS APARTMENTS 67 Circle 50, Billings, MT* $ 1,519,855 98 South Pointe II, Minot, ND** 1,024,234 60 Rosewood Court, Sioux Falls, SD 1,938,245 116 Legacy Apts., Grand Forks, ND** 3,573,057 98 Rocky Meadows, Billings, MT** 2,654,554 37 Page 40 of 183 210 Miramont Apts., Fort Collins, CO 14,235,461 192 Neighborhood Apts., Colorado Springs, CO 10,849,561 108 Woodridge Apts., Rochester, MN 6,398,096 67 Cottonwood Lake, Bismarck, ND* 1,055,862 360 Park Meadows Apts., St. Cloud, MN 10,242,747 ----------- Total $59,377,674
*Property not placed in service at April 30, 1997. Additional costs are still to be incurred. **Represents costs to complete a project started in year ending April 30, 1996. PROPERTY DISPOSITIONS. During Fiscal 1997, IRET sold a 24 plex apartment building in Hutchinson, MN, realizing a gain of $252,000. It also recognized a gain of $138,600 from the previous sale of an 18 plex apartment building in Mandan, ND. It is management's intention to continue to market IRET's older and smaller apartment projects. GENERAL INFORMATION AS TO INVESTORS REAL ESTATE TRUST ORGANIZATION OF IRET. Investors Real Estate Trust is a registered real estate investment trust organized and governed under the laws of North Dakota. IRET has qualified as a real estate investment trust under Sections 856-858 of the Internal Revenue Code during all years of its existence. GOVERNING INSTRUMENTS OF IRET. IRET was organized on July 31, 1970. IRET will continue, unless sooner terminated by a majority vote of the shareholders, until the expiration of 20 years after the death of the last survivor of the seven original trustees. All of the original Trustees are still living, the youngest being 63 years of age. The existence of IRET may be extended indefinitely by action of the Trustees approved by the vote of shareholders holding fifty per cent or more of the outstanding shares. IRET has 10 Trustees. INDEPENDENT TRUSTEES. IRET adheres to NASAA guidelines requiring a majority of the Board to be composed of independent Trustees. The Glossary at the end of this document defines independent Trustee. Pursuant to NASAA guidelines, IRET considers the following Trustees as independent: Ralph A. Christensen has served as an independent Trustee since 1970. He is a retired rancher. Mr. Christensen is a former Director of First Bank - Minot, N.A. Mr. Christensen has over 25 years experience dealing with multi-family and commercial real property. John F. Decker has served as an independent Trustee since August 18, 1998. Mr. Decker is an Investment Advisor and Managing Director with Piper, Jaffray, Inc., and resides in Everett, Washington. 38 Page 41 of 183 Mike F. Dolan has served as an independent Trustee since 1978. Mr. Dolan was owner and operator of Monarch Concrete until the company's sale in 1980. Mr. Dolan is also active as an independent oil developer. Mr. Dolan has over 25 years experience dealing with multi-family and commercial real property. J. Norman Ellison, Jr., has served as an independent Trustee since 1970. Mr. Ellison was the former owner and operator of Ellison's department store in Minot. He is a partner of Ellison Realty Co. and former Director of First Bank - Minot, ND. Mr. Ellison has over 25 years experience dealing with multi-family and commercial real property. Daniel L. Feist has served as an independent Trustee since 1985. Mr. Feist is a general contractor and President of Feist Construction and Realty Inc. Mr. Feist is a former Director of First Bank - Minot, N.A., and N.D. Holdings, Inc., of Minot, ND. Mr. Feist has over 25 years experience dealing with multi-family and commercial real property. Patrick G. Jones has served as an independent Trustee since 1986. He is the former Manager and Director of the Minot Daily News as well as former President of Central Venture Capital, Inc. Mr. Jones is an active investor. Mr. Jones has over 25 years experience dealing with multi-family and commercial real property. Jeff L. Miller has served as an independent Trustee since 1985. He is the former President of Coca-Cola Bottling Co. of Minot. He is currently President of M & S Concessions, Inc. Mr. Miller is a former Director of First Bank -Minot, N.A. Mr. Miller has over 25 years experience dealing with multi-family and commercial real property. IRET considers the following Trustees as not independent: C. Morris Anderson has served as a Trustee since 1970. He was a partner and founder of Magic City Realty, Ltd., the owner of rental properties now owned by IRET. He is also the President of North Hill Bowl, Inc., a business operating a bowling alley, restaurant and lounge in Minot. Mr. Anderson is a Director of International Inn, Inc., and Norwest Bank - Minot, N.A. Mr. Anderson has over 25 years experience dealing with multi-family and commercial real property. Roger R. Odell has served as a Trustee since 1970. He is a partner in IRET's advisor, Odell-Wentz & Associates. He is a Director of IRET's principal property management company - Investors Management & Marketing, Inc. He is also a Director of Inland National Securities, Inc., one of the broker-dealers selling IRET's common stock and was a partner with Mr. Anderson in Magic City Realty, Ltd. Thomas A. Wentz, Jr., has served as a Trustee since 1996. He is a partner in IRET's legal counsel, Pringle & Herigstad, P.C. Mr. Wentz is the general partner of WENCO, a North Dakota Limited Partnership, which owns commercial, multi-family and farm real estate. SHAREHOLDER MEETINGS. The governing provisions of IRET require the holding of annual meetings. It is the policy of the Board of Trustees to hold the annual 39 Page 42 of 183 meeting in Minot, North Dakota, during the month of August. All shareholders shall be given not less than 30 days prior written notice. Special meetings of the shareholders may be called by the chief executive officer, by a majority of the trustees or by a majority of the Independent Trustees, and shall be called by an officer of IRET upon written request of the shareholders holding in the aggregate of not less than 10% of the outstanding shares of IRET entitled to vote at such meeting. Upon receipt of a written request, either in person or by mail, stating the purpose or purposes of the meeting, IRET shall provide all shareholders within ten days after receipt of said request, written notice, either in person or by mail, of a meeting and the purpose of such meeting to be held on a date not less than fifteen nor more than sixty days after the distribution of such notice, at a time and place specified in the request, or if none if specified, at a time and place convenient to shareholders. The holders of a majority of shares in IRET, present in person or by proxy, shall constitute a quorum at any meeting. STRUCTURE OF IRET IRET carries on its activities directly and through subsidiaries and an Operating Partnership. IRET Properties, a North Dakota Limited Partnership, was organized on January 31, 1997, and, since February 1, 1997, is the principle entity through which IRET operates. All assets (except for Qualified REIT Subsidiaries) and liabilities of IRET have been contributed to the Operating Partnership in exchange for a general partnership interest in the Operating Partnership. IRET, INC., a North Dakota corporation, and a wholly owned subsidiary of IRET acts as the general partner of the Operating Partnership. As the sole shareholder of IRET, INC., which in turn is the sole general partner of the Operating Partnership, IRET has the exclusive power under the Operating Partnership Agreement to manage and conduct the business of the Operating Partnership, subject to certain limitations contained in the Operating Partnership Agreement. See "Operating Partnership Agreement." IRET's interest in the Operating Partnership will entitle it to receive all quarterly or yearly cash distributions from the Operating Partnership and to be allocated its pro-rata share of the profits and losses of the Operating Partnership. IRET owned in excess of 91.2% of the Operating Partnership on January 31, 1999. It is expected that the Operating Partnership will merge with other partnerships or acquire real estate from other persons in exchange for limited partnership units. When certain properties were acquired by IRET, the lender financing the properties required, as a condition of the loan, that the properties be owned by a "single asset entity." Accordingly, IRET organized three wholly owned subsidiary corporations for the purpose of holding title to these investment properties in order to comply with the conditions of the lender. They are: Pine Cone - IRET, INC., a Colorado corporation, formed to own the 195-unit Pine Cone apartment complex located in Fort Collins, Colorado; Miramont - IRET, INC., a Colorado corporation, formed to own the 210-unit Miramont apartment complex located in Fort Collins, Colorado; and West Stonehill - IRET, INC., a Minnesota corporation, formed to own the 313-unit West Stonehill apartment complex located in St. Cloud, Minnesota. IRET formerly was the general partner and held investment interests in 7 limited partnerships. They were: Eastgate Properties, Ltd.; Bison Properties, Ltd.; First 40 Page 43 of 183 Avenue Building, Ltd.; Sweetwater Properties, Ltd.; Hill Park Properties, Ltd.; Colton Heights, Ltd.; and Chateau Properties, Ltd. All of the above limited partnerships, except Chateau Properties, Ltd., were consolidated with IRET for financial reporting purposes. All of these partnerships have been merged into IRET Properties, with Chateau on April 1, 1998, and the other six on May 1, 1998. POLICY WITH RESPECT TO CERTAIN ACTIVITIES The following information is a statement of IRET's policy as it pertains to the described activities. TO ISSUE SENIOR SECURITIES. IRET has issued and outstanding Investment Certificates which are senior to the shares of Beneficial Interest being offered under this Prospectus. The Investment Certificates are issued for a definite term and annual interest rate (currently 61/2% for 6 months; 7% for 1 year; 71/2% for 3 years and 8% for 5 years). In the event of dissolution of IRET, the Investment Certificates would be paid in preference to the shares of Beneficial Interest. As of January 31, 1999, the Investment Certificates outstanding totaled $12,358,251. The Trust does not plan on issuing other senior securities in the future. TO BORROW MONEY. IRET plans to continue to borrow money. IRET relies on borrowed funds in pursuing its investment objectives and goals. The policy concerning borrowed funds is vested solely with the Board of Trustees and may be changed by a majority of the Board without a vote of the shareholders. IRET intends to continue borrowing funds in the future. Over the past three fiscal years, IRET has borrowed funds as follows:
Fiscal Fiscal Fiscal 1998 1997 1996 ---- ---- ---- Cost of Property Acquired $39,014,223 $59,377,674 $40,660,975 Net Increase in Mortgages Payable $18,325,028 $44,035,887 $21,702,852 Percent of Acquisition Price Represented by Net Increase in Mortgages Payable 47% 74% 53%
TO MAKE LOANS TO OTHER PERSONS. As part of IRET's business plan, Trust funds have been loaned to third parties. The loans are in the form of mortgages secured by real estate. The decision to make loans is vested solely with the Board of Trustees and may be changed by a majority of the Board without a vote of the shareholders. IRET has no present plans to make additional loans of Trust funds, but may do so in the future. IRET had the following outstanding mortgage loans at the end of its most recent Fiscal Year: 41 Page 44 of 183
MORTGAGE LOANS RECEIVABLE: Real Estate 4/30/98 Location Security Balance Rate - -------- -------- ------- ---- Fargo, ND - --------- Great Plains Software Office Complex $1,701,308 9.5% Gilbert, AZ - ----------- NE1/4-27-2-6 Commercial Land 678,700 8% Other Mortgages - --------------- Over $100,000 $ 938,196 8-9% $20,000 to $99,999 78,474 8-9% Less than $20,000 41,630 7-9% ---------- TOTAL $3,438,308 Unearned Discounts (4,818) Allowance for Losses (120,314) Deferred Gain (2,000) ---------- $3,311,176 ---------- ----------
TO INVEST IN THE SECURITIES OF OTHER ISSUERS FOR THE PURPOSE OF EXERCISING CONTROL. Other than the formation of its Operating Partnership - IRET Properties - and its three Qualified REIT Subsidiaries, IRET has not invested in the securities of other issuers for the purpose of exercising control over such issuer and has no plans to do so. The decision to do so is vested solely in the Board of Trustees and may be changed without a vote of the shareholders. TO UNDERWRITE SECURITIES OF OTHER ISSUERS. IRET has no plans to engage in such an activity. TO ENGAGE IN THE PURCHASE AND SALE (OR TURNOVER) OF INVESTMENTS. IRET has no plans to engage in such an activity. TO OFFER SECURITIES IN EXCHANGE FOR PROPERTY. Commencing on February 1, 1997, IRET operates principally through IRET Properties, a North Dakota Limited Partnership, of which IRET is the sole general partner. Such a structure allows IRET to offer Limited Partnership Units in exchange for real estate. IRET currently has plans to offer Limited Partnership Units in exchange for real estate on a continuous and ongoing basis. All exchanges shall be subject to approval by the Board of Trustees on such terms and conditions which are deemed reasonable by the trustees. TO REPURCHASE OR OTHERWISE REACQUIRE ITS SHARES OR OTHER SECURITIES. As a "real estate investment trust" under federal income tax laws, IRET intends to invest only in real estate assets. IRET is authorized, but not obligated, to repurchase its own shares and has and may do so from time to time if the trustees deem such action to be appropriate. See "Determination of Offering Price" at page 24. TO MAKE ANNUAL AND OTHER REPORTS TO SHAREHOLDERS. IRET is required to provide an annual report to shareholders during the month of July. The annual report contains a financial statement certified by an independent public accountant. Provision of the annual report to shareholders may only be changed by a vote of a majority of the 42 Page 45 of 183 shareholders. IRET has a policy of providing quarterly reports to the shareholders during January, April, July and October. The quarterly reports do not contain a financial statement certified by an independent public accountant. The provision of a quarterly report to the shareholders may be changed by a majority of the Board without a vote of the shareholders. INVESTMENT POLICIES OF REGISTRANT INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE. IRET currently owns real estate located in 10 states. The company may invest in real estate or interests in real estate which is located anywhere in the United States. IRET may invest in any type of real estate or interest in real estate including, but not limited to, office buildings, apartment buildings, shopping centers, industrial and commercial properties, special purpose buildings and undeveloped acreage, except IRET may not invest more than 10% of net assets in unimproved real estate, excluding property being developed or property where development will be completed within a reasonable period. The method of operating IRET's real estate shall be delegated to a management company as it pertains to the day-to-day management. All major operating decisions concerning IRET's operation of its real estate shall be made by the Board. The method of financing the purchase of real estate investments shall be primarily from borrowed funds and the sale of shares. The income generated from rental income and interest income is planned to be distributed to shareholders as dividends. IRET will rely on proceeds from the sale of shares offered by this Prospectus to expand its portfolio of real estate investments. There is no limitation on the number or amount of mortgages which may be placed on any one piece of property, provided that the overall ratio of liabilities to assets for IRET must not exceed 80%. As of January 31, 1999, the ratio of total liabilities ($172,555,300) to total assets ($264,979,779) was 65%. It is not IRET's policy to acquire assets primarily for possible capital gain. Rather, it is the policy of IRET to acquire assets primarily for income. IRET has no limitation on the amount or percentage of assets which will be invested in any specific property, except that not more than 10% of assets can consist of unimproved real estate. Any Trust policy as it relates to investments in real estate or interests in real estate may be changed by the Board at anytime without a vote of the shareholders. INVESTMENTS IN REAL ESTATE MORTGAGES. While IRET has made mortgage loans in the past, it is the current policy of IRET not to make any further mortgage loans. Any Trust policy as it relates to mortgage loans may be changed by the Board at anytime without a vote of the shareholders. 43 Page 46 of 183 INVESTMENTS IN OTHER SECURITIES. IRET has purchased and now owns United States guaranteed obligations and shares of five other real estate investment trusts. These purchases are made solely for the purpose of holding cash until future real estate investments are identified. No investments in other types of securities are planned. Any Trust policy as it relates to investments in other securities may be changed by the Board at anytime without a vote of the shareholders. INVESTMENTS IN SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE ACTIVITIES. IRET owns shares in five publicly traded REITs, acquired at a cost of $791,318. No other purchases of such securities are contemplated at this time. Any Trust policy as it relates to investments in other securities may be changed by the Board at anytime without a vote of the shareholders. DESCRIPTION OF REAL ESTATE IRET owned the following properties as of January 31, 1999:
COMMERCIAL PROPERTIES FISCAL 1999 STATE PROPERTY SQ. FEET INVESTMENT OCCUPANCY Georgia - Douglasville - Wedgewood Retirement Center - Assisted Living 29,408 $ 3,971,878 100.00% -------- ----------- ------- GEORGIA TOTALS 29,408 $ 3,971,878 100.00% -------- ----------- ------- -------- ----------- ------- Idaho - Boise - America's Best Furniture - Retail 139,198 $ 5,792.182 28.75% -------- ----------- ------- IDAHO TOTALS 139,198 $ 5,792,182 28.75% -------- ----------- ------- -------- ----------- ------- Michigan - Kentwood - COMP USA - Retail 16,000 $ 2,113,574 100.00% -------- ----------- ------- MICHIGAN TOTALS 16,000 $ 2,113,574 100.00% -------- ----------- ------- -------- ----------- ------- Minnesota - East Grand Forks - Edgewood Vista - Assisted Living 10,778 $ 899,821 100.00% 44 Page 47 of 183 - Eden Prairie - Lindberg Building - Office/Whse 40,491 $ 1,455.789 100.00% - Moorhead - Pioneer Seed Company - Office/Whse 75,900 $ 653,876 100.00% -------- ----------- ------- MINNESOTA TOTALS 127,617 $ 3,009,487 100.00% -------- ----------- ------- -------- ----------- ------- Montana - Billings - Creekside Office Building - Office 37,318 $ 1,678,663 88.63% - Edgewood Vista - Assisted Living 11,971 $ 980,218 N/A - Missoula - Edgewood Vista - Assisted Living 10,314 $ 962,428 100.00% -------- ----------- ------- MONTANA TOTALS 59,603 $ 3,621,310 90.86% -------- ----------- ------- -------- ----------- ------- Nebraska - Omaha - Barnes & Noble - Retail 27,500 $ 3,699,101 100.00% -------- ----------- ------- NEBRASKA TOTALS 27,500 $ 3,699,101 100.00% -------- ----------- ------- -------- ----------- ------- North Dakota - Bismarck - Lester Chiropractic Clinic - Office 5,400 $ 268,917 100.00% - Fargo - Barnes & Noble - Retail 30,000 $ 3,292,012 100.00% - Petco - Retail 18,000 $ 1,278,934 100.00% - Stone Container - Office/Mfg 151,850 $ 4,998,485 100.00% - Grand Forks - Carmike Theatre 28,300 $ 2,545,737 100.00% - Minot - Walter's (114 South Main Street) - Retail 3,500 $ 111,940 100.00% - 1st Ave Building - Office 15,900 $ 838,655 80.03% - 401 South Main - Office 9,200 $ 606,708 60.65% - Arrowhead Shopping Center - Retail/Office 80,000 $ 2,820,002 98.99% - Corner C Store - Retail 4,674 $ 1,196,342 N/A - Edgewood Vista - Assisted Living 91,273 $ 6,275,931 100.00% - Minot Plaza - Retail 10,020 $ 509,079 100.00% -------- ----------- ------- NORTH DAKOTA TOTALS 448,117 $24,742,741 98.11% -------- ----------- ------- -------- ----------- ------- 45 Page 48 of 183 South Dakota - Sioux Falls - Edgewood Vista - Assisted Living 11,971 $ 974,739 N/A - Hutchinson Technology - Office/Mfg 94,176 $ 4,429,026 100.00% -------- ----------- ------- SOUTH DAKOTA TOTALS 106,147 $ 5,403,765 100.00% -------- ----------- ------- -------- ----------- ------- Other Commercial Prop. Crookston Superpumper - Convenience Store 6,000 $ 428,777 100.00% Grand Forks Superpumper - Convenience Store 7,000 $ 485,007 100.00% Langdon Superpumper - Convenience Store 5,500 $ 239,212 100.00% Sidney Superpumper - Convenience Store 4,000 $ 120,600 100.00% -------- ----------- ------- OTHER COMMERCIAL PROP. 22,500 $ 1,273,596 100.00% -------- ----------- ------- -------- ----------- ------- FISCAL 1999 SQ. FEET INVESTMENT OCCUPANCY TOTAL COMMERCIAL PROPERTIES 976,092 $53,627,634 95.45% -------- ----------- ------- -------- ----------- -------
N/A = PROPERTY HELD LESS THAN 12 MONTHS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
APARTMENT PROPERTIES APARTMENT FISCAL 1999 STATE COMMUNITIES BY IRET UNITS INVESTMENT OCCUPANCY Colorado - Colorado Springs - Neighborhood by IRET 192 $11,070,317 96.51% - Fort Collins - MiraMont by IRET 210 $14,282,727 97.55% - Pine Cone by IRET 195 $13,212,798 95.73% --- ----------- -------- COLORADO TOTALS 597 $38,565,842 96.50% --- ----------- -------- --- ----------- -------- Idaho - Boise - Clearwater 60 $ 3,821,829 N/A --- ----------- -------- IDAHO TOTALS 60 $ 3,821,829 N/A --- ----------- -------- --- ----------- -------- 46 Page 49 of 183 Minnesota - Moorhead - Terrace on the Green 116 $ 2,036,388 95.19% - Rochester - Woodridge 108 $ 6,527,800 99.77% - Heritage Manor 182 $ 7,421,015 N/A - St. Cloud - West Stonehill 313 $11,469,854 97.85% - Waite Park - Park Meadows 360 $11,094,823 93.46% --- ----------- -------- MINNESOTA TOTALS 897 $38,549,879 96.98% --- ----------- -------- --- ----------- -------- Montana - Billings - Castle Rock 165 $ 5,653,623 N/A - Country Meadows 67 $ 4,679,349 98.19% - Rocky Meadows 98 $ 6,671,043 95.39% --- ----------- -------- MONTANA TOTALS 330 $17,004,014 96.73% --- ----------- -------- --- ----------- -------- North Dakota - Bismarck/Mandan - Cottonwood Lake 134 $ 9,763,096 96.28% - Crestview 152 $ 4,795,533 92.02% - Hill Park 92 $ 3,018,033 99.91% - Kirkwood Manor 108 $ 3,574,298 94.82% - North Pointe 49 49 $ 2,402,303 95.90% - Pleasantview (Man) 18 $ 285,776 97.94% - Westwood Park 67 $ 2,107,386 N/A - Dickinson - 41 East 38 $ 426,061 86.27% - Century 120 $ 2,031,306 91.57% - Oak Manor 27 $ 347,336 96.99% - Fargo - Candlelight 44 $ 984,477 98.08% - Park East 122 $ 4,945,018 97.66% - Sunchase 36 $ 1,017,923 95.58% - Grand Forks - Forest Park 270 $ 7,077,138 97.02% - Jenner Properties 121 $ 2,495,137 91.24% - Legacy 183 $ 7,032,452 99.41% - Southwinds 164 $ 5,688,201 95.89% - Minot - Chateau 64 $ 2,397,004 92.77% - Colton Heights 18 $ 922,033 88.56% - Dakota Arms 18 $ 614,484 95.60% - Magic City 248 $ 5,413,495 91.88% - South Pointe 196 $10,281,416 95.25% - Southview 24 $ 711,807 86.53% - Virginia 15 $ 230,893 81.21% 47 Page 50 of 183 - Williston - Century 192 $ 3,895,985 82.90% - Other Communities - Beulah Condominiums 26 $ 466,038 55.54% - Bison Properties - Carrington and Cooperstown 35 $ 568,555 89.92% - Lonetree Manor - Harvey 12 $ 225,556 85.65% - Parkway - Beulah 36 $ 120,753 99.60% - Sweetwater Properties - Devils Lake 114 $ 1,822,569 84.78% ----- ----------- -------- NORTH DAKOTA TOTALS 2,743 $85,572,061 93.23% ----- ----------- -------- ----- ----------- -------- South Dakota - Rapid City - Pointe West 90 $ 3,931,009 89.54% - Sioux Falls - Oakwood Estates 160 $ 3,534,028 91.66% - Oxbow 120 $ 4,986,518 98.94% - Prairie Winds 48 $ 1,983,259 94.85% SOUTH DAKOTA TOTALS 418 $14,434,814 94.19% ----- ----------- -------- ----- ----------- -------- Washington - Vancouver - Van Mall Woods 100 $ 6,021,312 N/A ----- ----------- -------- WASHINGTON TOTALS 100 $ 6,021,312 N/A ----- ----------- -------- ----- ----------- -------- FISCAL 1999 UNITS INVESTMENT OCCUPANCY TOTAL APARTMENTS 5145 $203,969,751 94.75% ----- ------------ ------- ----- ------------ -------
N/A = PROPERTY HELD LESS THAN 12 MONTHS TITLE. The title to all of the above properties is in the name of IRET Properties, IRET or a wholly owned subsidiary, in fee simple (in each case, IRET has in its files an attorney's title opinion or a title insurance policy evidencing its title). INSURANCE. In the opinion of management, all of said properties are adequately covered by casualty and liability insurance. PLANNED IMPROVEMENTS. There are no plans for material improvements to any of the above properties. CONTRACTS OR OPTIONS TO SELL. As of January 31, 1999, IRET had not entered into any contracts or options to sell any of the above properties. OCCUPANCY AND LEASES. Occupancy rates shown above are for the nine months ended January 31, 1999. In the case of apartment properties, lease arrangements with 48 Page 51 of 183 individual tenants vary from month-to-month to one year leases, with the normal term being six months. Leases on commercial properties vary from one year to 20 years. SHARES AVAILABLE FOR FUTURE SALE Under its Restated Declaration of Trust, IRET is authorized to issue an unlimited number of its shares of Beneficial Interest. See "Description of Shares of Beneficial Interest" at page 70. The shares of Beneficial Interest issued in connection with this offering and two prior registrations of 5,600,000 shares of Beneficial Interest will be freely tradable by persons other than "affiliates" of IRET without restriction under the Securities Act of 1933, as amended, subject to certain limitations on ownership set forth in the Restated Declaration of Trust. See "Description of IRET's Securities - Restrictions on Transfer" at page 70. Pursuant to the Operating Partnership Agreement, the Limited Partners (other than IRET) will have exchange rights which, beginning one year after the acquisition of such limited partnership units, enabling them to cause the operating partnership to exchange their limited partnership units for cash or, at the option of the General Partner, Trust shares of Beneficial Interest on a one-for-one basis. Shares of Beneficial Interest of IRET, other than those issued under this registration and the prior registrations which were effective July 9, 1996, March 14, 1997, and December 15, 1998 respectively, will be "restricted" securities under the meaning of Rule 144 of the Securities Act of 1933 and may not be sold in the absence of registration under the Securities Act of 1933 unless an exemption from registration is available, including exemptions contained in Rule 144. In general, under Rule 144 as currently in effect, if two years have elapsed since the later of the date of acquisition of restricted securities from IRET or any "affiliate" of IRET, as that term is defined under the Securities Act of 1933, the acquiror or subsequent holder thereof is entitled to sell within any three month period a number of shares that does not exceed the greater of one percent (1%) of the then outstanding shares of Beneficial Interest or the average weekly trading volume of the shares of Beneficial Interest during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales under Rule 144 also are subject to certain manner of sale provisions, notice requirements and the availability of current public information about IRET. If three years have elapsed since the date of acquisition of restricted shares from IRET or from any affiliate of IRET and the holder thereof is deemed not to have been an affiliate of IRET at any time during the three months preceding a sale, such holder would be entitled to sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. IRET has agreed under the Operating Partnership Agreement that it will file with the Securities and Exchange Commission a shelf registration on Form S-3 under Rule 415 of the Securities Act or any similar rule adopted by the Commission with respect to any Trust shares of Beneficial Interest that may be issued upon exchange of limited partnership units in the operating partnership, pursuant to Section 8.06 of the 49 Page 52 of 183 Operating Partnership Agreement and to use its best efforts to have such registration statement declared effective under the Securities Act of 1933. No prediction can be made as to the effect, if any, that future sales of shares of Beneficial Interest, or the availability of such shares for future sale, will have on the market price of the shares of Beneficial Interest prevailing from time to time. Sales of substantial amounts of shares of Beneficial Interest, or the perception that such sales could occur, may adversely affect prevailing market prices of such shares. See "Risk Factors - - Liquidity" at page 21. OPERATING PARTNERSHIP AGREEMENT The following summary of the material terms of the Operating Partnership Agreement, and the descriptions of certain provisions thereof set forth elsewhere in this Prospectus, is qualified in its entirety by reference to the Operating Partnership Agreement, which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. MANAGEMENT. The Operating Partnership has been organized as a North Dakota limited partnership pursuant to the terms of the Agreement of Limited Partnership of the Operating Partnership (the "Operating Partnership Agreement"). Pursuant to the Operating Partnership Agreement, the General Partner, as the sole general partner of the Partnership, has full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership, and the Limited Partners have no authority in their capacity as Limited Partners to transact business for, or participate in the management activities or decisions of, the Operating Partnership except as required by applicable law. However, any amendment to the Operating Partnership Agreement that would (i) adversely affect the Exchange Rights (as defined herein), (ii) adversely affect the Limited Partners' rights to receive cash distributions, (iii) alter the Operating Partnership's allocations of capital of the Operating Partnership, requires the consent of Limited Partners (other than the General Partner) holding more than fifty percent (50%) of the Units held by such partners. TRANSFERABILITY OF INTERESTS. The General Partner may not voluntarily withdraw from the Operating Partnership or transfer or assign its interest in the Operating Partnership unless the transaction in which such withdrawal or transfer occurs results in the Limited Partners receiving property in an amount equal to the amount they would have received had they exercised their Exchange Rights immediately prior to such transaction, or unless the successor to the General Partners contributes substantially all of its assets to the Operating Partnership in return for an interest in the Operating Partnership. With certain limited exceptions, the Limited Partners may not transfer their interests in the Operating Partnership, in whole or in part, without the written consent of the General Partner, which consent the General Partner may withhold in its sole discretion. The General Partner may not consent to any transfer that would cause the Operating Partnership to be treated as a corporation for federal income tax purposes. The Company may not engage in any transaction resulting in a change of control (a "Transaction") unless in connection with the Transaction the Limited Partners receive or have the right to receive cash or other property equal to the product of 50 Page 53 of 183 the number of Shares of Beneficial Interest into which each Unit is then exchangeable and the greatest amount of cash, securities or other property paid in the Transaction to the holder of one Share of Beneficial Interest in consideration of one such Share. If, in connection with the Transaction, a purchase, tender or exchange offer shall have been made to and accepted by the holders of more than fifty percent (50%) of the outstanding Shares of Beneficial Interest, each holder of Units will receive, or will have the right to elect to receive, the greatest amount of cash, securities, or other property which such holder would have received had it exercised its right to redemption and received Shares of Beneficial Interest in exchange for its OP Units immediately prior to the expiration of such purchase, tender or exchange offer and had thereupon accepted such purchase, tender or exchange offer. Notwithstanding the foregoing paragraph, IRET may merge, or otherwise combine its assets, with another entity if, immediately after such merger or other combination, substantially all of the assets of the surviving entity, other than Units held by IRET, are contributed to the Operating Partnership as a capital contribution in exchange for Units with a fair market value, as reasonable determined by IRET, equal to the agreed value of the assets so contributed. In respect of any Transaction described in the preceding two paragraphs, IRET is required to use its commercially reasonable efforts to structure such Transaction to avoid causing the Limited Partners to recognize gain for federal income tax purposes by virtue of the occurrence of or their participation in such Transaction, provided such efforts are consistent with the exercise of the Board of Trustees' fiduciary duty under applicable law. CAPITAL CONTRIBUTION. All assets of IRET (except its Qualified REIT Subsidiaries) will be held by the Operating Partnership, including the proceeds of this Offering. Although the Operating Partnership will receive the net proceeds of the Offering, IRET and the General Partner will be deemed to have made a capital contribution to the Operating Partnership in the amount of the gross proceeds of the Offering and the Operating Partnership will be deemed simultaneously to have paid the expenses paid or incurred in connection with the Offering. The Operating Partnership Agreement provides that if the Operating Partnership requires additional funds at any time or from time to time in excess of funds available to the Operating Partnership from borrowing or capital contributions, the General Partner or IRET may borrow such funds from a financial institution or other lender and lend such funds to the Operating Partnership on the same terms and conditions as are applicable to the General Partner's or IRET's, as applicable, borrowing of such funds. Moreover, the General Partner is authorized to cause the Operating Partnership to issue partnership interests for less than fair market value if IRET (i) has concluded in good faith that such issuance is in the best interest of IRET and the Operating Partnership and (ii) the General Partner makes a capital contribution in an amount equal to the proceeds of such issuance. Under the Operating Partnership Agreement, the General Partner generally is obligated to contribute or cause IRET to contribute the proceeds of a share offering by IRET as additional capital to the Operating Partnership. Upon such contribution, the General Partner or IRET, as applicable, will receive additional Units and the General Partner's or IRET's, as applicable, percentage interest in the Operating Partnership will be increased on a proportionate basis based upon the amount of such additional capital contributions. 51 Page 54 of 183 Conversely, the percentage interests of the Limited Partners will be decreased on a proportionate basis in the event of additional capital contributions by the General Partner or IRET. In addition, if the General Partner or IRET contributes additional capital to the Operating Partnership, the General Partner will revalue the property of the Operating Partnership to its fair market value (as determined by the General Partner) and the capital accounts of the partners will be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property (that has not been reflected in the capital accounts previously) would be allocated among the partners under the terms of the Operating Partnership Agreement if there were a taxable disposition of such property for such fair market value on the date of the revaluation. EXCHANGE RIGHTS. Pursuant to the Operating Partnership Agreement, the Limited Partners (other than IRET) have exchange rights ("Exchange Rights") that enable them to cause the Operating Partnership to exchange their Units for cash, or at the option of the General Partner, Shares of Beneficial Interest on a one-for-one basis. The exchange price will be paid in cash in the event that the issuance of Shares of Beneficial Interest to the exchanging Limited Partner would (i) result in any person owning, directly or indirectly, Shares of Beneficial Interest in excess of the Ownership Limitation, (ii) result in shares of beneficial interest of IRET being owned by fewer than 100 persons (determined without reference to any rules of attribution), (iii) result in IRET being "closely held" within the meaning of Section 856(h) of the Code, (iv) cause IRET to own, actually or constructively, 10% or more of the ownership interest in a tenant of IRET's or the Operating Partnership's real property, within the meaning of Section 856(d)(2)(B) of the Code, or (v) cause the acquisition of Shares of Beneficial Interest by such redeeming Limited Partner to be "integrated" with any other distribution of Shares of Beneficial Interest for purposes of complying with the Securities Act. The Exchange Rights may be exercised by the Limited Partners at any time after the first anniversary of the date of their acquisition, provided that not more than two exchanges may occur during each calendar year and each Limited Partner may not exercise the Exchange Right for less than 1,000 Units or, if such Limited Partner holds less than 1,000 Units, all of the Units held by such Limited Partner. See "Federal Income Tax Considerations - Tax Aspects of the Operating Partnership." The number of Shares of Beneficial Interest issuable upon exercise of the Exchange Rights will be adjusted upon the occurrence of share splits, mergers, consolidations or similar pro rata share transactions, which otherwise would have the effect of diluting the ownership interests of the Limited Partners or the shareholders of the Company. REGISTRATION RIGHTS. For a description of certain registration rights held by the Limited Partners, see "Shares Available for Future Sale." OPERATIONS. The Operating Partnership Agreement requires that the Operating Partnership be operated in a manner that will enable IRET to satisfy the requirements for being classified as a REIT for federal tax purposes, to avoid any federal income or excise tax liability imposed by the Code, and to ensure that the Operating Partnership will not be classified as a "publicly traded partnership" for purposes of Section 7704 of the Code. 52 Page 55 of 183 In addition to the administrative and operating costs and expenses incurred by the Operating Partnership, the Operating Partnership will pay all administrative costs and expenses of IRET and the General Partner (collectively, the "Trust Expenses") and IRET Expenses will be treated as expenses of the Operating Partnership. IRET Expenses generally will include (i) all expenses relating to the operation and continuity of existence of IRET and the General Partner, (ii) all expenses relating to the public offering and registration of securities by IRET, (iii) all expenses associated with the preparation and filing of any periodic reports by IRET under federal, state or local laws or regulations, (iv) all expenses associated with compliance by IRET and the General Partner with laws, rules and regulations promulgated by any regulatory body and (v) all other operating or administrative costs of the General Partner incurred in the ordinary course of its business on behalf of the Partnership. DISTRIBUTIONS. The Operating Partnership Agreement provides that the Operating Partnership shall distribute cash from operations (including net sale or refinancing proceeds, but excluding net proceeds from the sale of the Operating Partnership's property in connection with the liquidation of the Operating Partnership) on a quarterly (or, at the election of the General Partner, more frequent) basis, in amounts determined by the General Partner in its sole discretion, to the partners in accordance with their respective percentage interests in the Operating Partnership. Upon liquidation of the Operating Partnership, after payment of, or adequate provision for, debts and obligations of the Operating Partnership, including any partner loans, any remaining assets of the Operating Partnership will be distributed to all partners with positive capital accounts in accordance with their respective positive capital account balances. If IRET has a negative balance in its capital account following a liquidation of the Operating Partnership, it will be obligated to contribute cash to the Operating Partnership equal to the negative balance in its capital account. ALLOCATIONS. Income, gain and loss of the Operating Partnership for each fiscal year generally is allocated among the partners in accordance with their respective interests in the Operating Partnership, subject to compliance with the provisions of Code Sections 704(b) and 704(c) and Treasury Regulations promulgated thereunder. TERM. The Operating Partnership shall continue until April 30, 2050, or until sooner dissolved upon (i) the bankruptcy, dissolution or withdrawal of the General Partner (unless the Limited Partners elect to continue the Operating Partnership), (ii) the sale or other disposition of all or substantially all the assets of the Operating Partnership, (iii) the redemption of all limited partnership interests in the Partnership (other than those held by IRET, if any), or (iv) the election by the General Partner. FIDUCIARY DUTY. The Limited Partners have agreed that in the event of any conflict in the fiduciary duties owed by IRET to its shareholders and by the General Partner to such Limited Partners, the General Partner will fulfill its fiduciary duties to such limited partnership by acting in the best interests of IRET's shareholders. TAX MATTERS. Pursuant to the Operating Partnership Agreement, the General Partner is the tax matters partner of the Operating Partnership and, as such, has authority 53 Page 56 of 183 to handle tax audits and to make tax elections under the Code on behalf of the Operating Partnership. TAX TREATMENT OF IRET AND ITS SECURITY HOLDERS FEDERAL INCOME TAX. Since its organization, IRET has operated in a manner to qualify as a real estate investment trust under Sections 856-858 of the Internal Revenue Code. Under such Sections a real estate investment trust which, in any taxable year, meets certain requirements will not be subject to Federal income tax with respect to income which it distributes to shareholders. To be considered a real estate investment trust for purposes of the Federal income tax laws, IRET must continue to meet the following requirements, among others: (1) At the end of each fiscal quarter at least 75% of the total assets of IRET must consist of real estate assets (including interests in mortgages on real property and shares in other real estate investment trusts meeting the requirements for taxation in accordance with Sections 856-858 of the Internal Revenue Code), cash, cash items including receivables and government securities. As to non-real estate investments, which may not exceed 25% of the total assets of IRET, the securities of any one issuer acquired by IRET may not represent more than 5% of the value of IRET's assets or more than 10% of the outstanding voting securities of such issuer. (2) At least 75% of the gross income of IRET for the taxable year must be derived from real property rents, interest on obligations secured by mortgages on real property, abatements and refunds of real estate taxes, gains from the sale or other disposition of real estate interests or mortgages on real property and dividends or other distributions on, and gains from the sale of shares of other real estate investment trusts meeting the requirements for taxation in accordance with Sections 856-868 of the Internal Revenue Code. An additional 15% of the gross income of IRET must be derived from the same sources or from dividends, or interest, or gains from the sale or other disposition of stock or securities, or any combination of the foregoing. (3) Gross income for the taxable year from sales or other disposition of stock or securities held for less than six months and of real property (or interests in real property) held for less than four years must be less than 30% of gross income. IRET may not hold any property primarily for sale to customers in the ordinary course of its trade or business. (4) Beneficial ownership of IRET must be held by 100 or more persons during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. More than 50% of the outstanding capital stock may not be owned, directly or indirectly, by or for, five or fewer individuals, at any time during the last half of the taxable year. 54 Page 57 of 183 As a real estate investment trust, IRET will not be taxed on that portion of its taxable income (including capital gains) which is distributed to shareholders, if at least 95% of its real estate investment trust taxable income (taxable income adjusted as provided in Section 857 of the Internal Revenue Code) is distributed. However, to the extent that there is undistributed taxable income or undistributed capital gain, IRET will be taxed as a corporation at corporate income tax rates. IRET will not be entitled to carry back or carry forward any net operating losses. So long as IRET has met the statutory requirements for taxation as a real estate investment trust, distributions made to IRET's shareholders will be taxed to them as ordinary income or long term capital gain, as the case may be. Distributions will not be eligible for the dividend exclusion for individuals, or for the 85% dividends received deduction for corporations. IRET will notify each shareholder as to what portion of the distributions in the opinion of its counsel constitutes ordinary income or capital gain. The shareholders may not include in their individual income tax returns any operating or extraordinary losses of IRET, whether ordinary or capital losses. If, in any taxable year, IRET should not qualify as a real estate investment trust, it would be taxed as a corporation and distributions to its shareholders would not be deductible by IRET in computing its taxable income. Such distributions, to the extent made out of IRET's current or accumulated earnings and profits, would be taxable to the shareholders as dividends, but would be eligible for the dividend exclusion, or the 85% dividends received deduction for corporations. The foregoing, while summarizing some of the more significant provisions of the Internal Revenue Code which govern the tax treatment of IRET, is general in character. For a complete statement, reference should be made to the pertinent Code Sections and the Regulations issued thereunder. In the opinion of the law firm of Pringle & Herigstad, P.C., counsel for IRET, the contemplated method of operation of IRET complies with the requirements of the Internal Revenue Code for qualification as a real estate investment trust. The Regulations of the Treasury Department require that the trustees have continuing exclusive authority over the management of IRET, the conduct of its affairs and, with certain limitations, the management and disposition of IRET property. It is the intention of the trustees to effect any amendments to the Declaration of Trust that may be necessary in the opinion of counsel for IRET to meet the requirements of any modification or interpretation of the Regulations. Provision for such amendment by the trustees, without the vote or consent of the shareholders, is contained in the Declaration of Trust. NORTH DAKOTA INCOME TAX. In the opinion of counsel for IRET, since IRET qualifies as a Real Estate Investment Trust for purposes of the Federal income tax laws, it will not be subject to the North Dakota Corporate Income Tax on that portion of its taxable income (including capital gains) which is distributed to shareholders, provided that the 95 percent distribution requirement outlined above is met. To the extent there is undistributed taxable income or undistributed capital gain, IRET will be taxed as a corporation for North Dakota income tax purposes. IRET will not be entitled to carry back or carry forward any net operating losses. Distributions 55 Page 58 of 183 to IRET shareholders of capital gains or taxable income will be subject to the North Dakota income tax. TAXATION OF IRET'S SHAREHOLDERS. If IRET qualifies as a REIT, and so long as IRET so qualifies, distributions made to IRET's shareholders out of current or accumulated earnings and profits will be taken into account by them as ordinary income (which will not be eligible for the dividends received deduction for corporations). Distributions that are designated as capital gain dividends will be taxed as long-term capital gains to the extent they do not exceed IRET's actual net capital gain dividend for the taxable year, although corporate shareholders may be required to treat up to 20% of any such capital gain dividend as ordinary income. Distributions in excess of current or accumulated earnings and profits will not be taxable to a shareholder to the extent that they do not exceed the adjusted basis of the shareholder's shares of stock, but rather will reduce the adjusted basis of such shares of stock. To the extent that such distributions exceed the adjusted basis of shareholder's shares of stock they will be included in income as long-term or short-term capital gain assuming the shares are held as a capital asset in the hands of the shareholder. IRET will notify shareholders at the end of each year as to the portions of the distributions which constitute ordinary income, net capital gain or return of capital. In addition, any dividend declared by IRET in October, November or December of any year payable to a shareholder of record on a specified date in any such month shall be treated as both paid by IRET and received by the shareholder on December 31 of such year, despite that the dividend is actually paid by IRET during January of the following calendar year. Shareholders may not include in their individual income tax returns any net operating losses or capital losses of IRET. In general any gain or loss upon a sale or exchange of shares by a shareholder who has held such shares as a capital asset will be long-term or short-term depending on whether the stock was held for more than one year; provided, however, any loss on the sale or exchange of shares that have been held by such shareholder for six months or less will be treated as a long-term capital loss to the extent of distributions from IRET required to be treated by such shareholders as long-term capital gain. TAXATION OF TAX-EXEMPT SHAREHOLDERS. The IRS has ruled that amounts distributed as dividends by a qualified REIT do not constitute unrelated business taxable income ("UBTI") when received by a tax-exempt entity. Based on that ruling the dividend income from IRET should not, subject to certain exceptions described below, be UBTI to a qualified plan, IRA or other tax-exempt entity (a "Tax-Exempt Shareholder") provided that Tax-Exempt Shareholder has not held its shares as "debt financed property" within the meaning of the Code and the shares are not otherwise used in an unrelated trade or business of the Tax-Exempt Shareholder. Similarly, income from the sale of Common Stock should not, subject to certain exceptions described below, constitute UBTI unless the Tax-Exempt Shareholder has held such Common Stock as a dealer (under Section 512(b)(5)(B) of the Code) or as "debt financed property" within the meaning of Section 514 of the Code. For Tax-Exempt Shareholders which are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal 56 Page 59 of 183 services plans exempt from federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code respectively, income from an investment in IRET will constitute UBTI unless the organization is able to deduct properly amounts set aside or placed in reserve for certain purposes so as to offset the income generated by its investment in IRET. Such prospective investors should consult their tax advisors concerning these "set-aside" and reserve requirements. Notwithstanding the above, however, the recently enacted Omnibus Budget Reconciliation Act of 1993 (the "1993 Act") provides that, effective for taxable years beginning in 1994, a portion of the dividends paid by a "pension held REIT" shall be treated as UBTI as to any trust which (i) is described in Section 401(a) of the Code, (ii) is tax-exempt under Section 501(a) of the Code, and (iii) holds more than 10% (by value) of the interests in the REIT. Tax-exempt pension funds that are described in Section 401(a) of the Code are referred to below as "qualified trusts." A real estate investment trust is a "pension held REIT" if (i) it would not have qualified as a real estate investment trust but for the fact that Section 856(h)(3) of the Code (added by the 1993 Act) provides that stock owned by qualified trusts shall be treated, for purposes of the "not closely held" requirements, as owned by the beneficiaries of IRET (rather than by IRET itself), and (ii) either (a) at least one such qualified trust holds more than 25% (by value) of the interests in the REIT, OR (b) one or more such qualified trusts, each of whom owns more than 10% (by value) of the interests in the REIT, hold in the aggregate more than 50% (by value) of the interests in the REIT. TAX CONSIDERATIONS FOR FOREIGN INVESTORS. The preceding discussion does not address the federal income tax considerations to foreign investors of an investment in IRET. Foreign investors in the Shares should consult their own tax advisors concerning those provisions of the Code which deal with the taxation of foreign taxpayers. In particular, foreign investors should consider, among other things, the impact of the Foreign Investors Real Property Tax Act of 1980. In addition, various income tax treaties between the United States and other countries could affect the tax treatment of an investment in the Shares. Furthermore, the backup withholding and information reporting rules are under review by the United States Treasury, and their application to the shares could be changed prospectively or retroactively by future Treasury Regulations. BACKUP WITHHOLDING. IRET will report to its domestic shareholders and the IRS the amount of dividends paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a shareholder may be subject to backup withholding at the rate of 31% with respect to dividends paid unless such holder (a) is a corporation or comes within certain other exempt categories and when required, demonstrates this fact, or (b) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A shareholder that does not provide IRET with a correct taxpayer identification number may also be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the shareholder's income tax liability. In addition, IRET may be required to withhold a portion of capital gain distributions to any shareholders who fail to certify their non-foreign status to IRET. 57 Page 60 of 183 STATE AND LOCAL TAXES. IRET or its shareholders may be subject to state or local taxation in the state or local jurisdiction in which IRET's investments or loans are located or in which the shareholders reside. Prospective shareholders should consult their tax advisors for an explanation of how state and local tax laws could affect their investment in the Shares. OTHER TAX CONSIDERATIONS. In the event IRET enters into any joint venture transactions, special tax risks might arise. Such risks include possible challenge by the IRS of (i) allocations of income and expense items, which could affect the computation of taxable income of IRET and (ii) the status of the joint venture as a partnership (as opposed to a corporation). If a joint venture were treated as a corporation, the joint venture would be treated as a taxable entity and if IRET's ownership interest in the joint venture exceeds 10%, IRET would cease to qualify as a REIT. Furthermore, in such a situation even if IRET ownership does not exceed 10%, distributions from the joint venture to IRET would be treated as dividends, which are not taken into account in satisfying the 75% gross income test described above and which could therefore make it more difficult for IRET to qualify as a REIT for the taxable year in which such distribution was received and the interest in the joint venture held by IRET would not qualify as a "real estate asset" which could make it more difficult for IRET to meet the 75% asset test described above. Finally, in such a situation IRET would not be able to deduct its share of losses generated by the joint venture in computing its taxable income. See "Failure of IRET to Qualify as a Real Estate Investment Trust" above for a discussion of the effect of IRET's failure to meet such tests for a taxable year. IRET will not enter into any joint venture, however, unless it has received from its counsel an opinion to the effect that the joint venture will be treated for tax purposes as a partnership. Such opinion will not be binding on the IRS and no assurance can be given that the IRS might not successfully challenge the status of any such joint venture as a partnership. TAX ASPECTS OF THE OPERATING PARTNERSHIP. The following discussion summarizes certain federal income tax considerations applicable to IRET's investment in the Operating Partnership. The discussion does not cover state or local tax laws or any federal tax laws other than income tax laws. CLASSIFICATION AS A PARTNERSHIP. IRET will include in its income its distributive share of the Operating Partnership's income and deduct its distributive share of the Partnership's losses only if the Partnership is classified for federal income tax purposes as a partnership rather than as a corporation or an association taxable as a corporation. An organization formed as a partnership will be treated as a partnership, rather than as a corporation, for federal income tax purposes if it (i) has no more than two of the four corporate characteristics that the Treasury Regulations use to distinguish a partnership from a corporation for tax purposes and (ii) is not a "publicly traded" partnership. Those four corporate characteristics are continuity of life, centralization of management, limited liability, and free transferability of interests. A publicly traded partnership is a partnership whose interests are traded on an established securities market or are readily tradable on a secondary market (or the substantial equivalent thereof). A publicly traded partnership will be treated as a corporation for federal income tax purposes unless at least 90% of such partnership's gross income for a taxable year consists of 58 Page 61 of 183 "qualifying income" under Section 7704(d) of the Code, which generally includes any income that is qualifying income for purposes of the 95% gross income test applicable to REITs (the "90% Passive-Type Income Exception"). See "Federal Income Tax." The U.S. Treasury Department recently issued regulations effective for taxable years beginning after December 31, 1995 (the "PTP Regulations") that provide limited safe harbors from the definition of a publicly traded partnership. Pursuant to one of those safe harbors, (the "Private Placement Exclusion"), interests in a partnership will not be treated as readily tradable on a secondary market or the substantial equivalent thereof if (i) all interests in the partnership were issued in a transaction (or transactions) that was not required to be registered under the Securities Act of 1933, and (ii) the partnership does not have more than 100 partners at any time during the partnership's taxable year. In determining the number of partners in a partnership, a person owning an interest in a flow-through entity (I.E., a partnership, grantor trust, or S corporation) that owns an interest in the partnership is treated as a partner in such partnership only if (a) substantially all of the value of the owner's interest in the flow-through entity is attributable to the flow-through entity's interest (direct or indirect) in the partnership, and (b) a principal purpose of the use of the tiered arrangement is to permit the partnership to satisfy the 100-partner limitation. At the date of this Prospectus, the Operating Partnership qualifies for the Private Placement Exclusion. If the Operating Partnership is considered a publicly traded partnership under the PTP Regulations because it is deemed to have more than 100 partners, such Partnership should not be treated as a corporation because it should be eligible for the 90% Passive-Type Income Exception. IRET has not requested, and does not intend to request, a ruling from the Service that the Operating Partnership will be classified as a partnership for federal income tax purposes. Instead, Pringle & Herigstad, P.C., is of the opinion that, based on certain factual assumptions and representations, the Operating Partnership does not possess more than two corporate characteristics and will not be treated as a publicly traded partnership and, thus, will be treated for federal income tax purposes as a partnership and not as a corporation or an association taxable as a corporation, or a publicly traded partnership. Unlike a tax ruling, an opinion of counsel is not binding upon the Service, and no assurance can be given that the Service will not challenge the status of the Operating Partnership as a partnership for federal income tax purposes. If such challenge were sustained by a court, the Operating Partnership would be treated as a corporation for federal income tax purposes, as described below. In addition, the opinion of Pringle & Herigstad, P.C., is based on existing law, which is to a great extent the result of administrative and judicial interpretation. No assurance can be given that administrative or judicial changes would not modify the conclusions expressed in the opinion. If for any reason the Operating Partnership was taxable as a corporation, rather than a partnership, for federal income tax purposes, IRET would not be able to qualify as a REIT. See "Federal Income Tax Considerations." In addition, any change in the Partnership's status for tax purposes might be treated as a taxable event, in which case IRET might incur a tax liability without any related cash distribution. See "Federal Income Tax Considerations - Requirements for 59 Page 62 of 183 Qualification - Distribution Requirements." Further, items of income and deduction of the Partnership would not pass through to its partners, and its partners would be treated as shareholders for tax purposes. Consequently, the Partnership would be required to pay income tax at corporate tax rates on its net income, and distributions to its partners would constitute dividends that would not be deductible in computing such Partnership's taxable income. INCOME TAXATION OF THE OPERATING PARTNERSHIP AND ITS PARTNERS. PARTNERS, NOT PARTNERSHIPS, SUBJECT TO TAX. A partnership is not a taxable entity for federal income tax purposes. Rather, IRET will be required to take into account is allocable share of the Operating Partnership's income, gains, losses, deductions, and credits for any taxable year of the Partnership ending within or with the taxable year of IRET, without regard to whether IRET has received or will receive any distribution from the Partnership. PARTNERSHIP ALLOCATIONS. Although a partnership agreement generally will determine the allocation of income and losses among partners, such allocations will be disregarded for tax purposes under section 704(b) of the Code if they do not comply with the provisions of section 704(b) of the Code and the Treasury Regulations promulgated thereunder. If an allocation is not recognized for federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners' interests in the partnership, which will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item. The Operating Partnership's allocations of taxable income and loss are intended to comply with the requirements of section 704(b) of the Code and the Treasury Regulations promulgated thereunder. TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTY. Pursuant to section 704(c) of the Code, income, gain, loss, and deductions attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership must be allocated for federal income tax purposes in a manner such that the contributor is charged with, or benefits from, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss is generally equal to the difference between the fair market value of the contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution. The Treasury Department recently issued regulations requiring partnerships to use a "reasonable method" for allocating items affected by section 704(c) of the Code and outlining several reasonable allocation methods. The Operating Partnership plans to elect to use the traditional method for allocating Code section 704(c) items with respect to the Properties it acquires in exchange for Units. Under the Operating Partnership Agreement, depreciation or amortization deductions of the Operating Partnership generally will be allocated among the partners in accordance with their respective interests in the Operating Partnership, except to the extent that the Operating Partnership is required under Code section 704(c) to use a method for allocating tax depreciation deductions attributable to the Properties that results in IRET receiving a disproportionately large share of such deductions. In addition, gain on the sale of a Property contributed to the 60 Page 63 of 183 Operating Partnership by a Limited Partner in exchange for Units will be specially allocated to such member to the extent of any "built-in" gain with respect to such Property for federal income tax purposes. Depending on the allocation method elected under Code section 704(c), it is possible that IRET (i) may be allocated lower amounts of depreciation deductions for tax purposes with respect to contributed Properties than would be allocated to IRET if such Properties were to have a tax basis equal to their fair market value at the time of contribution and (ii) may be allocated taxable gain in the event of a sale of such contributed Properties in excess of the economic profit allocated to IRET as a result of such sale. These allocations may cause IRET to recognize taxable income in excess of cash proceeds, which might adversely affect IRET's ability to comply with the REIT distribution requirements, although IRET does not anticipate that this event will occur. The foregoing principles also will affect the calculation of IRET's earnings and profits for purposes of determining which portion of IRET's distributions is taxable as a dividend. The allocations described in this paragraph may result in a higher portion of IRET's distributions being taxed as a dividend than would have occurred had IRET purchased the Properties for cash. BASIS IN OPERATING PARTNERSHIP INTEREST. IRET's adjusted tax basis in its partnership interest in the Operating Partnership generally is equal to (i) the amount of cash and the basis of any other property contributed to the Operating Partnership by IRET, (ii) increased by (A) its allocable share of the Operating Partnership's income and (B) its allocable share of indebtedness of the Operating Partnership, and (iii) reduced, but not below zero, by (A) IRET's allocable share of the Operating Partnership's loss and (B) the amount of cash distributed to IRET, including constructive cash distributions resulting from a reduction in IRET's share of indebtedness of the Operating Partnership. If the allocation of IRET's distributive share of the Operating Partnership's loss would reduce the adjusted tax basis of IRET's partnership interest in the Operating Partnership below zero, the recognition of such loss will be deferred until such time as the recognition of such loss would not reduce IRET's adjusted tax basis below zero. To the extent that the Operating Partnership's distributions, or any decrease in IRET's share of the indebtedness of the Operating Partnership (such decrease being considered a constructive cash distribution to the partners), would reduce IRET's adjusted tax basis below zero, such distributions (including such constructive distributions) will constitute taxable income to IRET. Such distributions and constructive distributions normally will be characterized as capital gain, and, if IRET's partnership interest in the Operating Partnership has been held for longer than the long-term capital gain holding period, the distributions and constructive distributions will constitute long-term capital gain. SALE OF THE OPERATING PARTNERSHIP'S PROPERTY. Generally, any gain realized by the Operating Partnership on the sale of property held for more than one year will be long-term capital gain, except for any portion of such gain that is treated as depreciation or cost recovery recapture. Any gain recognized by the Operating Partnership on the disposition of the Properties contributed by a partner (including IRET) in exchange for Units will be allocated first to such contributing partner under section 704(c) of the Code to the extent of such contributing partner's "built-in gain" on those Properties for federal income tax purposes. The Limited Partners' "built-in gain" on the Properties sold will equal the excess of the 61 Page 64 of 183 Limited Partners' proportionate share of the book value of those Properties over the Limited Partners' tax basis allocable to those Properties at the time of the sale. Any remaining gain recognized by the Operating Partnership on the disposition of contributed Properties, and any gain recognized upon the disposition of the Properties acquired by the Operating Partnership for cash, will be allocated among the partners in accordance with their respective percentage interests in the Operating Partnership. IRET's Declaration of Trust provides that any decision to sell any real estate asset in which a trustee, or officer of IRET, the Advisor, or any Affiliate of the foregoing, has a direct or indirect interest, will be made by a majority of the trustees including a majority of the Independent Trustees. See "Policies with Respect to Certain Activities" at page 41. IRET's share of any gain realized by the Operating Partnership on the sale of any property held by the Operating Partnership as inventory or other property held primarily for sale to customers in the ordinary course of the Operating Partnership's trade or business will be treated as income form a prohibited transaction that is subject to a 100% penalty tax. Such prohibited transaction income also may have an adverse effect upon IRET's ability to satisfy the income tests for REIT status. See "Federal Income Tax Considerations" above. IRET, however, does not presently intend to allow the Operating Partnership to acquire or hold any property that represents inventory or other property held primarily for sale to customers in the ordinary course of IRET's or the Operating Partnership's trade or business. ERISA CONSIDERATIONS The following is a summary of material considerations arising under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the prohibited transaction provisions of section 4975 of the Code that may be relevant to a prospective purchaser. The discussion does not purport to deal with all aspects of ERISA or section 4975 of the Code that may be relevant to particular shareholders (including plans subject to Title I of ERISA, other retirement plans and IRAs subject to the prohibited transaction provisions of section 4975 of the Code, and governmental plans or church plans that are exempt from ERISA and section 4975 of the Code but that may be subject to state law requirements) in light of their particular circumstances. The discussion is based on current provisions of ERISA and the Code, existing and currently proposed regulations under ERISA and the Code, the legislative history of ERISA and the Code, existing administrative rulings of the Department of Labor ("DOL") and reported judicial decisions. No assurance can be given that legislative, judicial, or administrative changes will not affect the accuracy of any statements herein with respect to transactions entered into or contemplated prior to the effective date of such changes. A FIDUCIARY MAKING THE DECISION TO INVEST IN THE SHARES OF BENEFICIAL INTEREST ON BEHALF OF A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED RETIREMENT PLAN, OR AN IRA IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE SHARES BY SUCH PLAN OR IRA. 62 Page 65 of 183 EMPLOYEE BENEFIT PLAN, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS. Each fiduciary of a pension, profit-sharing, or other employee benefit plan (an "ERISA Plan") subject to Title I of ERISA should consider carefully whether an investment in the Shares of Beneficial Interest is consistent with his fiduciary responsibilities under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of ERISA require an ERISA Plan's investments to be (i) prudent and in the best interests of the ERISA Plan, its participants, and its beneficiaries, (ii) diversified in order to minimize the risk of large losses, unless it is clearly prudent not to do so, and (iii) authorized under the terms of the ERISA Plan's governing documents (provided the documents are consistent with ERISA). In determining whether an investment in the Shares is prudent for purposes of ERISA, the appropriate fiduciary of a ERISA Plan should consider all of the facts and circumstances, including whether the investment is reasonably designed, as a part of the ERISA Plan's portfolio for which the fiduciary has investment responsibility, to meet the objectives of the ERISA Plan, taking into consideration the risk of loss and opportunity for gain (or other return) from the investment, the diversification, cash flow, and funding requirements of the ERISA Plan's portfolio. A fiduciary also should take into account the nature of IRET's business, the management of IRET, the length of IRET's operating history, the fact that certain investment properties may not have been identified yet, and the possibility of the recognition of UBTI. The fiduciary of an IRA or of a qualified retirement plan not subject to Title I of ERISA because it is a governmental or church plan or because it does not cover common law employees (a "Non-ERISA Plan") should consider that such an IRA or Non-ERISA Plan may only make investments that are authorized by the appropriate governing documents and under applicable state law. Fiduciaries of ERISA Plans and persons making the investment decision for an IRA or other Non-ERISA Plan should consider the application of the prohibited transaction provisions of ERISA and the Code in making their investment decision. A "party in interest" or "disqualified person" with respect to an ERISA Plan or with respect to a Non-ERISA Plan or IRA subject to Code section 4975 is subject to (i) an initial 5% excise tax on the amount involved in any prohibited transaction involving the assets of the plan or IRA and (ii) an excise tax equal to 100% of the amount involved if any prohibited transaction is not corrected. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA is maintained (or his beneficiary), the IRA will lose its tax-exempt status and its assets will be deemed to have been distributed to such individual in a taxable distribution (and no excise tax will be imposed) on account of the prohibited transaction. In addition, a fiduciary who permits an ERISA Plan to engage in a transaction that the fiduciary knows or should know is a prohibited transaction may be liable to the ERISA Plan for any loss the ERISA Plan incurs as a result of the transaction or for any profits earned by the fiduciary in the transaction. STATUS OF IRET AND THE OPERATING PARTNERSHIP UNDER ERISA. The following section discusses certain principles that apply in determining whether the fiduciary requirements of ERISA and the prohibited transaction provisions of ERISA and the Code apply to an entity because one or more investors in the equity interests in the entity is an ERISA Plan or is a Non-ERISA Plan or IRA subject to section 4975 of the Code. An ERISA Plan fiduciary also should consider the relevance of those principles to ERISA's prohibition on improper delegation of control over or 63 Page 66 of 183 responsibility for "plan assets" and ERISA's imposition of co-fiduciary liability on a fiduciary who participates in, permits (by action or inaction) the occurrence of, or fails to remedy a known breach by another fiduciary. If the assets of IRET are deemed to be "plan assets" under ERISA, (i) the prudence standards and other provisions of Part 4 of Title I of ERISA would be applicable to any transactions involving IRET's assets, (ii) persons who exercise any authority over IRET's assets, or who provide investment advise to IRET, would (for purposes of fiduciary responsibility provisions of ERISA) be fiduciaries of each ERISA Plan that acquires Shares, and transactions involving IRET's assets undertaken at their direction or pursuant to their advise might violate their fiduciary responsibilities under ERISA, especially with regard to conflicts of interest, (iii) a fiduciary exercising his investment discretion over the assets of an ERISA Plan to cause it to acquire or hold the Shares could be liable under Part 4 of Title I of ERISA for transactions entered into by IRET that do not conform to ERISA standards of prudence and fiduciary responsibility, and (iv) certain transactions that IRET might enter into in the ordinary course of its business and operations might constitute "prohibited transactions" under ERISA and the Code. Regulations of the Department of Labor (DOL) defining "plan assets" (the "Plan Asset Regulations") generally provide that when an ERISA Plan or Non-ERISA Plan or IRA acquires a security that is an equity interest in an entity and the security is neither a "publicly-offered security" nor a security issued by an investment company registered under the Investment Company Act of 1940, the ERISA or Non-ERISA Plan's or IRA's assets include both the equity interest and an undivided interest in each of the underlying assets of the issuer of such equity interest, unless one or more exceptions specified in the Plan Asset Regulations are satisfied. The Plan Asset Regulations define a publicly-offered security as a security that is "widely-held," "freely transferable," and either part of a class of securities registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an effective registration statement under the Securities Act (provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred). The Shares are being sold in an offering registered under the Securities Act and are registered under the Exchange Act. The plan Asset Regulations provide that a security is "widely-held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A security will not fail to be widely held because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. IRET currently has in excess of 3,500 shareholders and is of the opinion that the Shares are now and will be "widely held." The Plan Asset Regulations provide that whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. The Plan Asset Regulations further provide that where a security is part of an offering in which the minimum investment is $10,000 or less (as is the case with this Offering), certain restrictions ordinarily will not, alone or in combination, affect a finding that such securities are freely transferable. The restrictions on transfer enumerated in the Plan Asset Regulations as not affecting that finding include: (i) any restriction on or prohibition against any transfer or 64 Page 67 of 183 assignment that would result in the termination or reclassification of an entity for federal or state tax purposes, or that otherwise would violate any federal or state law or court order, (ii) any requirement that advance notice of a transfer or assignment be given to the issuer, (iii) any administrative procedure that establishes an effective date, or an event (such as completion of an offering), prior to which a transfer or assignment will not be effective, and (iv) any limitation or restriction on transfer or assignment that is not imposed by the issuer or a person acting on behalf of the issuer. IRET believes that the restrictions imposed under the Declaration of Trust on the transfer of IRET's Shares of Beneficial Interest will not result in the failure of the Shares to be "freely transferable." IRET also is not aware of any other facts or circumstances limiting the transferability of the Shares that are not enumerated in the Plan Asset Regulations as those not affecting free transferability, and IRET does not intend to impose in the future (or to permit any person to impose on its behalf) any limitations or restrictions on transfer that would not be among the enumerated permissible limitations or restrictions. The Plan Asset Regulations only establish a presumption in favor of a finding of free transferability, and no assurance can be given that the DOL or the Treasury Department will not reach a contrary conclusion. Assuming that the Shares will be "widely held" and that no other facts and circumstances other than those referred to in the preceding paragraph exist that restrict transferability of the Shares, the Shares should be publicly offered securities and the assets of IRET should not be deemed to be "plan assets" of any ERISA Plan, IRA, or Non-ERISA Plan that invests in the Shares. The Plan Asset Regulations also will apply in determining whether the assets of the Operating Partnership will be deemed to be "plan assets." The partnership interests in the Operating Partnership will not be publicly-offered securities. Nevertheless, if the Shares constitute publicly-offered securities, the indirect investment in the Partnership and the Subsidiary Partnerships by ERISA Plans, IRAs, or Non-ERISA Plans subject to section 4975 of the Code through their ownership of Shares will not cause the assets of the Operating Partnership or the subsidiary Partnerships to be treated as "plan assets" of such shareholders. MARKET PRICE OF AND DIVIDENDS ON IRET'S SHARES OF BENEFICIAL INTEREST MARKET FOR IRET SHARES OF BENEFICIAL INTEREST. Since October 17, 1997, IRET shares of Beneficial Interest have traded on the NASDAQ Small-Cap market under the symbol "IRETS." The following sets forth high and low closing sale prices for the fiscal periods indicated as well as the total volume and total number of trades during such periods:
Fiscal Quarter Ended High Low Total Volume Total Trades - -------------------- ---- --- ------------ ------------ 10-31-97* $7.125 $6.563 35,154 45 1-31-98 7.313 6.625 339,857 204 4-30-98 7.344 7.031 437,487 196 7-31-98 7.250 7.000 359,835 118 10-31-98 7.500 7.000 489,586 232 1-31-99 7.688 7.000 343,128 249
*FROM 10-20-97 - FIRST TRADING DAY 65 Page 68 of 183 IRET also offered primary Shares of Beneficial Interest for sale to the public under Best Efforts offerings through various brokers registered with the National Association of Securities Dealers. Primary shares were sold at $7.20 per share from 5-01-97 to 12-31-97, at $7.45 per share from 1-05-98 to 11-20-98 and at $7.85 from December. IRET also repurchased its shares during this period. Following is a summary, by quarter-year, of the sale of primary shares and repurchase of shares by IRET:
Shares Dollars ------ ------- 5-01-97 Beginning Balance 14,940,513 $65,073,951 Quarter Ended 7-31-97 - Shares sold 356,722 $ 2,920,162 - Commissions paid (163,102) - Shares repurchased (20,393) (386,062) 15,276,842 $67,444,949 Quarter Ended 10-31-97 - Shares sold 630,937 $ 4,422,125 - Commissions paid (243,432) - Shares repurchased (101,548) (807,573) 15,806,231 $70,816,070 Quarter Ended 1-31-98 - Shares sold 340,640 $ 2,415,531 - Commissions paid (99,850) - Shares repurchased (108,903) (777,871) 16,037,969 $72,353,880 Quarter Ended 4-30-98 - Shares sold 505,062 $ 3,656,419 - Commissions paid (195,456) - Shares repurchased (151,618) (1,106,285) 16,391,412 $74,708,559 Quarter Ended 7-31-98 - Shares sold 573,081 $ 4,075,505 - Commissions paid (148,902) - Shares repurchased (197,124) (1,389,936) 16,767,369 $77,245,225
As of January 31, 1999, IRET had 4,072 shareholder accounts, compared to 3,568 on the same date in 1998. No shareholder held 5% or more of the 16,391,412 Shares of Beneficial Interest outstanding on 4-30-98. IRET has no other classes of stock and there were no warrants, stock options or other contractual arrangements requiring the issuance of its stock. IRET has paid quarterly dividends since July 1, 1971. Dividends paid during the past two fiscal years and the current fiscal year to date were as follows: 66 Page 69 of 183
Fiscal Year --------------------------------- 1997 1998 1999 --------------------------------- July 1st $.0925 $.10125 $.11 October 1st .0950 .10300 .115 January 5th .0975 .10500 .12 April 1st .1000 .10700 .125 -------------------------------------------------------------- Total $.385 $.41625 $46.75
DIVIDEND AND SHARE PRICE HISTORY. The following is the history of cash dividends declared and paid by IRET and the share price on each dividend payment date from the organization of IRET on July 31, 1970, to the date of this Prospectus:
Dividend/ Date Share Price(1) ------------------------------------------------------------------- 6/30/71 $ .0125 $1.00 10/30/71 $ .015 $1.00 1/1/72 $ .015 $1.00 4/1/72 $ .015 $1.10 7/1/72 $ .016 $1.10 10/1/72 $ .016 $1.10 1/1/73 $ .016 $1.10 4/1/73 $.0165 $1.30 7/1/73 $.0165 $1.30 10/1/73 $.0165 $1.30 1/1/74 $.0175 $1.30 4/1/74 $.0175 $1.40 7/1/74 $.0175 $1.40 10/1/74 $.0185 $1.40 1/1/75 $ .02 $1.40 4/1/75 $ .02 $1.50 7/1/75 $ .02 $1.50 10/1/75 $ .02 $1.50 1/1/76 $ .021 $1.50 4/1/76 $ .021 $1.60 7/1/76 $.0225 $1.60 10/1/76 $.0225 $1.70 1/1/77 $.0225 $1.70 4/1/77 $.0225 $1.80 7/1/77 $ .025 $1.80 10/1/77 $ .025 $1.80 1/1/78 $ .025 $1.80 4/1/78 $ .025 $1.80 7/1/78 $.0275 $1.90 10/1/78 $.0275 $1.90 1/1/79 $.0275 $2.00 4/1/79 $.0275 $2.10 7/1/79 $.0275 $2.00 10/1/79 $ .03 $2.00 1/1/80 $ .03 $1.70 4/1/80 $.0325 $1.70 7/1/80 $ .035 $1.70 67 Page 70 of 183 10/1/80 $ .035 $1.80 1/1/81 $ .035 $1.80 4/1/81 $ .035 $1.80 7/1/81 $ .035(2) $1.70 10/1/81 $ .035(2) $1.70 1/1/82 $ .035(2) $1.70 4/1/82 $ .035(2) $1.70 7/1/82 $.0375 $1.70 10/1/82 $ .04 $1.70 1/1/83 $.0425 $1.90 4/1/83 $.045 $2.07 7/1/83 $.0475 $2.20 10/1/83 $ .05 $2.61 1/1/84 $.0525 $2.66 4/1/84 $ .055 $2.75 7/1/84 $.05625 $2.75 10/1/84 $.0575 $2.79 1/1/85 $.05875 $2.84 4/1/85 $ .06 $2.88 7/1/85 $.06125 $2.97 10/1/85 $ .0625 $3.11 1/1/86 $.06375 $3.15 4/1/86 $ .065 $3.20 7/1/86 $ .066 $3.29 10/1/86 $ .067 $3.38 1/1/87 $ .068 $3.47 4/1/87 $ .069 $3.56 7/1/87 $ .0695 $3.56 10/1/87 $ .07 $3.65 1/1/88 $ .07 $3.65 4/1/88 $ .071 $3.74 7/1/88 $ .075 $3.74 10/1/88 $ .071 $3.83 1/1/89 $ .072 $3.92 4/1/89 $ .0725 $4.01 7/1/89 $ .073 $4.10 10/1/89 $.0735 $4.19 1/1/90 $ .074 $4.28 4/1/90 $.0745 $4.28 7/1/90 $ .075 $4.37 10/1/90 $.0755 $4.50 1/5/91 $.076 $4.50 4/1/91 $.0765 $4.59 7/1/91 $.077 $4.68 10/1/91 $.0775 $4.77 1/5/92 $.078 $4.86 4/1/92 $.0785 $4.95 7/1/92 $.079 $4.95 10/1/92 $.0795 $5.04 1/5/93 $ .08 $5.13 4/1/93 $.0805 $5.22 68 Page 71 of 183 7/1/93 $.081 $5.31 10/1/93 $.0815 $5.31 1/5/94 $.082 $5.40 4/1/94 $.0825 $5.49 7/1/94 $.088 $5.49 10/1/94 $.084 $5.63 1/1/95 $.085 $5.89 4/1/95 $.08625 $5.89 7/1/95 $.0925 $6.03 10/1/95 $.08875 $6.16 1/5/96 $ .09 $6.16 4/1/96 $.09125 $6.30 7/1/96 $.0975 $6.30 10/1/96 $ .095 $6.44 1/5/97 $.0975 $6.44 4/1/97 $ .10 $6.62 7/1/97 $.10125 $6.62 10/1/97 $.103 $6.62 1/16/98 $.105 $6.85 4/1/98 $.107 $6.85 7/1/98 $ .11 $6.85 10/1/98 $.115 $6.85 1/15/99 $ .12 $7.25 4/1/99 $.1225 $7.3125
(1)The stock prices shown are the prices at which Trust Shares of Beneficial Interest were available for purchase on the date shown by then shareholders under IRET's Dividend Reinvestment Plan (after 1/1/80) or from IRET (prior to 1/1/80). (2)In addition to the cash dividend shown, a stock dividend of .0175 share for each share then owned. DIVIDEND REINVESTMENT PLAN IRET will separately register its shares of Beneficial Interest for sale to its shareholders who elect to participate in its Dividend Reinvestment Plan. Pursuant to its Dividend Reinvestment Plan, IRET may, from time to time, repurchase shares of Beneficial Interest in the open market for purposes of fulfilling its obligations under the Plan or, if sufficient shares are not available on the open market, IRET will issue additional shares of Beneficial Interest. Each shareholder shall have the option to use cash dividends to purchase additional shares. In order to participate in the Dividend Reinvestment Plan, the shareholder must affirmatively elect to do so by notifying the Transfer Agent and Registrar, Odell-Wentz & Associates, L.L.C., 12 South Main, Minot, ND 58701, (701) 852-1756. The shareholder may terminate participation at any time by notifying the Transfer Agent. The Shares are traded on the NASDAQ Small Cap Market. The price at which the Shares will be purchased will be the aggregate weighted average price of all shares purchased with the total amount of reinvested dividends. Since the agent responsible for purchasing the shares is also able to purchase newly issued shares 69 Page 72 of 183 directly from IRET under this Registration without payment of the full commission, it is unlikely that the price of shares purchased under the Plan will exceed price of newly issued shares offered under a primary offering. If the reinvestment price involves a fraction, it will be expressed in one-eighth of a point, with a rounding out to the next higher one-eighth of a point. The dividend is taxable to the shareholders whether received in cash or shares. DESCRIPTION OF IRET'S SECURITIES DESCRIPTION OF SHARES. The shares of beneficial interest of IRET are of one class without par value. There is no limit on the number of shares that may be issued. All shares participate equally in dividends and distributions when and as declared by the trustees and in net assets upon liquidation. The shares of beneficial interests offered hereby will be fully paid and non-assessable by IRET upon issuance and will have no preference, conversion, exchange, pre-emptive or redemption rights. Annual meetings of shareholders are held on the second Wednesday of August and special meetings may be called by the Chairman of the trustees or by a majority of the trustees or upon written request of shareholders holding not less than 10% of the issued and outstanding shares. At any meeting a shareholder is entitled to one vote for each share of beneficial interest owned. The shares of beneficial interests are transferable in the same manner as are shares of a North Dakota business corporation, subject to certain restrictions. See "Shares Available for Future Sale" at page 49. With respect to the election of trustees, the shares have cumulative voting rights which allow each shareholder one vote in person or by written proxy for each share registered in his name for as many persons as there are trustees to be elected. RESTRICTIONS ON TRANSFER. Section 7 of Article 2 of the Declaration of Trust provides: "To insure compliance with the Internal Revenue Code provision that no more than 50% of the outstanding Shares may be owned by five or fewer individuals, the Trustees may at any time redeem Shares from any Shareholder at the fair market value thereof (as determined in good faith by the Trustees based on an independent appraisal of Trust assets made within six months of the redemption date). Also, the Trustee may refuse to transfer Shares to any Person who acquisition of additional Shares might, in the opinion of the Trustees, violate the above requirement." SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of date of this prospectus, no persons, or any Trustee or officer individually was known by IRET to own beneficially more than 5% of the outstanding shares of Beneficial Interest. Collectively, the Trustees owned 8.23% of such shares on May 31, 1998. 70 Page 73 of 183
Name and Position Principal Occupations Trustee Shares Beneficially With Trust During Past 5 Years Since Owned As Of 5-31-98 C. Morris Anderson President of North Hill Trustee, Age 69 Bowl, Inc.; Director of Dakota Boys Ranch (25 years); Director of International Inn, Inc., and Norwest Bank - Minot, N.A. and a Partner in Magic City Realty, Ltd. 1970 14,209(1) Ralph A. Christensen Retired Rancher; Former Trustee and Chairman Director of First Bank Age 69 - Minot, N.A.; Chairman of IRET 1970 42,314(2) John F. Decker Investment Advisor and Trustee, Age 56 Managing Director, Piper Jaffray, Inc. 1998 7,210 Mike F. Dolan Investor; Trustee and Vice Vice-Chairman of IRET 1978 225,559 Chairman, Age 87 J. Norman Ellison, Jr. Businessman; Managing Trustee, Age 75 Partner of Ellison Realty Co.; Former Director of First Bank - Minot, N.A. 1970 18,636(3) Daniel L. Feist Realtor, Broker, Real Estate Trustee, Age 66 Developer, Builder, General Contractor; President-Owner of Feist Construction & Realty, Inc.; Investor; Businessman; Former Director of First Bank System - Minot, N.A.; Director N.D. Holdings, Inc., Minot, ND 1985 501,110(4) Patrick G. Jones Investor 1986 85,251(5) Trustee, Age 50 Jeff L. Miller Investor; Businessman; Trustee and Vice President of M & S Chairman, Age 54 Concessions, Inc., and former president of Coca-Cola Bottling Co. of Minot; Former Director of First Bank - Minot 1985 146,095(6) 71 Page 74 of 183 Roger R. Odell Realtor; President of IRET; Trustee and Partner in Odell-Wentz & President, Age 72 Associates (Advisor of IRET); Director of Investors Manage- ment & Marketing, Inc. and Inland Securities, Inc. 1970 135,804(7) Thomas A. Wentz, Jr. Attorney, Pringle & Herigstad, Trustee, Age 33 P.C.; Sole General Partner of WENCO, Ltd. 1996 170,841(8)
(1) 10,807 shares are owned by Mr. Anderson and his wife as Joint Tenants. 3,402 shares are owned by Mr. Anderson's wife; he disclaims beneficial ownership of these shares. (2) Includes shares held in Mr. Christensen's IRA, and also his wife's IRA, which is comprised of 641 shares; the balance is owned by Mr. Christensen and his wife as Joint Tenants. (3) Includes 4,985 shares held by Mr. Ellison's wife. Mr. Ellison disclaims beneficial ownership of such shares. (4) Includes 130,409 shares held in Mrs. Feist's name and in her IRA of which Mr. Feist disclaims beneficial ownership. Also includes shares held in Mr. Feist's IRA's. (5) Includes 42,531 shares held by Mrs. Jones and in her IRA. Mr. Jones disclaims beneficial ownership of such shares. Also includes shares held in Mr. Jones' IRA. (6) 48,281 of such shares are owned by Mr. Miller's wife. Mr. Miller disclaims beneficial ownership of such shares. Also includes shares held in Mr. Miller's IRA. (7) Includes 23,133 shares owned by Investors Management & Marketing, Inc. Also includes 67,897 shares owned by Mr. Odell's wife, as to which shares Mr. Odell disclaims beneficial ownership. (8) Includes 168,387 shares owned by WENCO, Ltd., of which Mr. Wentz, Jr., is Sole General Partner. Also includes 957 shares owned by his minor daughter, with Mr. Wentz as custodian. As of May 31, 1998, all of the above trustees as a group owned or held voting control of 1,347,029 shares of Beneficial Interest of IRET, representing 8.23% of the 16,359,568 shares then outstanding. During the fiscal year ending April 30, 1998, there were twelve regular meetings of the Board of Trustees. All of the Trustees attended 75% or more of the meetings held during said fiscal year. The Audit Committee consists of Ralph A. Christensen, Mike F. Dolan and Jeff L. Miller, all of whom are independent trustees and are appointed by the Board of Trustees. 72 Page 75 of 183 There are no separate nominating or compensation committees of the Board of Trustees, which duties are performed by the Board as a whole. The last shareholder meeting at which Trustees were elected was held on August 18, 1998, at which meeting shareholders owning 60.8% of the shares of IRET entitled to vote were present in person, or by proxy. The ten nominees received 100% of the total shares voted at such meeting. EXECUTIVE COMPENSATION AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS IRET has no employees and has contracted with Odell-Wentz & Associates, L.L.C., to provide management services for it. See "Advisory Agreement." In addition to the advisory fee paid for these managements services, IRET also incurs administrative expenses for trustees' fees, accountants' fees, printing and postage, filing fees and other related expenses incurred in connection with administering IRET assets and its communications with its shareholders and regulatory authorities. During the past five fiscal years, the following is a summary of the administrative expenses of IRET paid to the Advisor, the trustees and the other administrative expenses:
Fiscal Years Ending April 30 ---------------------------- 1994 1995 1996 1997 1998 Advisor's and Trustees' Compensation $304,898 $336,142 $458,019 $559,149 $ 745,907 Other Administrative Expenses 46,557 79,974 162,588 158,627 271,738 -------- -------- -------- -------- ---------- TOTAL $351,455 $416,116 $620,607 $717,776 $1,017,645
The Advisor also received fees from IRET for investigating and recommending investments. See "Advisory Agreement." These fees are considered as part of the cost of such investments and are capitalized and added to the cost of the investment property and, thus, are not included in the above described administrative expenses. For the Fiscal Years 1994-1998, the amount of these acquisition fees were $89,514, $49,836, $117,506, $177,834 and $141,468, respectively. The following tabulation shows the cash compensation paid by IRET to its trustees and officers during its fiscal year ending April 30, 1998. IRET has no retirement, bonus, or deferred compensation plan and no other compensation will accrue, directly or indirectly, to any of the Trustees except as noted below.
Cash Compensation Capacity in for Year Ending Name Which Served April 30, 1998 - ---- ------------ -------------- C. Morris Anderson Trustee $ 9,880.50 Ralph A. Christensen Trustee & Chairman 12,349.75 John D. Decker Trustee 9,980.50 Mike F. Dolan Trustee & Vice Chairman 11,166.25 J. Norman Ellison, Jr. Trustee 9,980.50 Daniel L. Feist Trustee 9,980.50 73 Page 76 of 183 Jeff L. Miller Trustee & Vice Chairman 11,166.25 Patrick G. Jones Trustee 9,880.50 Thomas A. Wentz, Jr. Trustee (2) Roger R. Odell Trustee & President (1) Thomas A. Wentz, Sr. Vice President (1 & 2) Timothy P. Mihalick Vice President Diane K. Bryantt Secretary
(1) Mr. Odell and Mr. Wentz, Sr., are members of Odell-Wentz & Associates, L.L.C., the Advisor to IRET. Mr. Mihalick is Vice-President and Principal Operating Officer of the Advisor. Diane Bryantt is Secretary to IRET and Controller of the Advisor. Under the Advisory Contract between IRET and Odell-Wentz & Associates, L.L.C., IRET pays an Advisor's fee based on the net assets of IRET and, in addition, a percentage fee for investigating and negotiating the acquisition of new investments. For the year ending April 30, 1998, Odell-Wentz & Associates received compensation and reimbursement of disbursements under said Agreement of $740,393. The terms of said Advisory Agreement are explained below. Investors Management & Marketing, Inc., a firm in which Mr. Odell is a minority shareholder also furnishes real estate management services to IRET and receives as compensation four percent (4%) of rents received from such real estate. For the fiscal year ending April 30, 1998, Investors Management & Marketing, Inc., received $530,678 as real estate management commissions. In addition, Inland National Securities, Inc., a corporation in which Mr. Odell and members of his family are shareholders, acts as a broker-dealer for the sale of Trust securities. During the fiscal year ending April 30, 1998, IRET paid Inland National Securities, Inc. $171,755 as security sales fees. (2) Mr. Wentz, Jr., is a member of the law firm of Pringle & Herigstad, P.C., counsel for IRET. During the fiscal year ending April 30, 1998, IRET paid Pringle & Herigstad, P.C., the sum of $62,293 for legal services rendered and disbursements made on behalf of IRET. Until August 1, 1998, Mr. Wentz, Sr., was also a member of the law firm of Pringle & Herigstad, P.C., counsel for IRET. ADVISORY AGREEMENT Roger R. Odell has served as advisor to IRET since its formation in 1970. As of January 1, 1986, a revised Advisory Agreement was entered into between IRET and Odell-Wentz & Associates, a partnership of Roger R. Odell and Thomas A. Wentz, Sr., and on January 1, 1994, with Odell-Wentz & Associates, L.L.C., a North Dakota Limited Liability Company. Mr. Odell serves as president and Mr. Wentz serves as vice president of IRET. Under the Advisory Agreement, the advisor has the following duties and responsibilities: Advisor, at its expense, shall provide suitable office facilities for IRET in Minot, North Dakota, and shall provide sufficient staff and other equipment to conduct the day-to-day operations of IRET. Advisor shall furnish a computer and all other office equipment necessary to conduct the operations of IRET and shall pay for all routine supplies, postage, and other costs of operating said office. IRET shall be billed by the Advisor for stationery and other forms and documents printed especially for IRET, the printing of the annual report and quarterly reports and 74 Page 77 of 183 other communications to shareholders, and also for the postage for mailing reports, checks and other documents to shareholders. The Advisor, under the direction of Trustees, shall be responsible to conduct all operations of IRET, including: Collection of rent, contract and mortgage payments and depositing the same in IRET bank accounts; Payment of bills; Disbursement of dividends; Preparing monthly reports to the Trustees; Preparing quarterly and annual reports to shareholders; Preparing notices of shareholders' meetings and proxies and proxy statements; and Advising the Trustees as to investment decisions, including acquisition and disposition of real estate and other permissible investments. For providing the above services, the Advisor is compensated as follows: BASIC COMPENSATION. Advisor shall receive monthly as its basic compensation for the above described services a percentage of "net invested assets" of IRET held on the last day of the month for which the payment is made as follows: 1/12th of .9% of net invested assets up to $10,000,000; and, 1/12th of .8% of net invested assets over $10,000,000, but less than $20,000,000; and, 1/12th of .7% of net invested assets in excess of $20,000,000. For the purpose of this agreement, "net invested assets" shall be determined as follows: Add: +total assets at cost +depreciation reserve +unearned contract receivable discount +deferred gain account Subtract: -cash -marketable securities, less margin accounts -total liabilities ADDITIONAL COMPENSATION. For its services in investigating and negotiating the acquisition of real estate equities, mortgages or contracts for deed by IRET, the Advisor shall receive a fee of 1/2 of 1 percent of the first $2,500,000 of value of 75 Page 78 of 183 any such asset which is recommended to and acquired by IRET, except on new construction projects for which the fee is 1/2 of 1 percent of the total cost. LIMITATION. Notwithstanding the foregoing, the total compensation received by the Advisor set forth above during any one fiscal year of IRET when added to trustees' fees and other administrative costs of IRET shall not exceed the lesser of the following: 2 percent of net invested assets (as set forth above) or 25 percent of the net taxable income of IRET for such fiscal year. Said Advisory Agreement is for a term of one year to continue for successive terms on the same conditions until terminated by written notice of either party and is also subject to a 60 day termination by either party and by the shareholders holding a majority interest in IRET. The Agreement is renewable annually and was last renewed for the calendar year 1999 by action of the Board of Trustees at its December, 1998 regular meeting. ROGER R. ODELL. Mr. Odell's address is 1445 SW 15th St., Minot, North Dakota 58701, (701) 839-4631. Mr. Odell is a graduate of the University of Texas, receiving his B.A. degree in 1947. He has been a resident of Minot, North Dakota, since 1947. From 1947 to 1954, he was employed by Minot Federal Savings & Loan Association, serving as Secretary of the Association from 1952 to 1954. Since 1954, Mr. Odell has been a realtor in Minot, serving as an officer and stockholder of Watne Realty Trust from 1954 to January 1, 1970, and since that time as the owner of his own realty firm. Mr. Odell is President and a member of Odell-Wentz & Associates, L.L.C., the Advisor to IRET. Under the Advisory Contract between IRET and Odell-Wentz & Associates, L.L.C., IRET pays an Advisor's fee based on the net assets of IRET and, in addition, a percentage fee for investigating and negotiating the acquisition of new investments. For the year ending April 30, 1998, Odell-Wentz & Associates, L.L.C., received compensation and reimbursement of disbursements under said Agreement of $740,393. The terms of said Advisory Agreement are explained above. Investors Management & Marketing, Inc., a firm in which Mr. Odell is a minority shareholder also furnishes real estate management services to IRET and receives as compensation four percent (4%) of rents received from such real estate. For the fiscal year ending April 30, 1998, Investors Management & Marketing, Inc., received $530,678 as real estate management commissions. In addition, Inland National Securities, Inc., a corporation in which Mr. Odell and members of his family are shareholders, acts as the broker-dealer for the sale of Trust securities. During the fiscal year ending April 30, 1998, IRET paid Inland National Securities, Inc., $171,755 as security sales fees. THOMAS A. WENTZ, SR.. Mr. Wentz's address is 505 8th Ave. SE, Minot, North Dakota 58701, (701) 838-0811. Mr. Wentz is a graduate of Harvard College and Harvard Law School, receiving his A.B. degree in 1957 and his L.L.B. degree in 1960. He has been a resident of Minot, North Dakota, since 1962. Mr. Wentz is Vice-President and a member of Odell-Wentz & Associates, L.L.C., the Advisor to IRET. Under the Advisory Contract between IRET and Odell-Wentz & Associates, L.L.C., IRET pays an Advisor's fee based on the net assets of IRET and, in addition, a percentage fee for investigating and negotiating the acquisition of 76 Page 79 of 183 new investments. For the year ending April 30, 1998, Odell-Wentz & Associates, L.L.C., received compensation and reimbursement of disbursements under said Agreement of $740,393. The terms of said Advisory Agreement are explained above. Until August 1, 1998, Mr. Wentz was also a member of the law firm of Pringle & Herigstad, P.C., counsel for IRET. During the fiscal year ending April 30, 1998, IRET paid Pringle & Herigstad, P.C., the sum of $62,293 for legal services rendered and disbursements made on behalf of IRET. SELECTION, MANAGEMENT AND CUSTODY OF TRUST'S INVESTMENTS MANAGEMENT OF TRUST'S INVESTMENTS. IRET contracts with various local management companies for the sole purpose of leasing, maintaining and monitoring IRET's interests. All other management is the responsibility of the Advisor. POLICIES WITH RESPECT TO CERTAIN TRANSACTIONS No trustee, officer or advisor of IRET, or any person affiliated with any such persons, shall sell any property or assets to IRET or purchase any property or assets from IRET, directly or indirectly, nor shall any such person receive any commission or other remuneration, directly or indirectly, in connection with the purchase or sale of Trust assets, except pursuant to transactions that are fair and reasonable to the Shareholders and that relate to: a. the acquisition of property or assets at the formation of IRET or shortly thereafter and fully disclosed in the prospectus filed with the North Dakota State Securities Commissioner; b. The acquisition of federally insured or guaranteed mortgages at prices not exceeding the currently quoted prices at which the Federal National Mortgage Association is purchasing comparable mortgages; c. The acquisition of other mortgages on terms not less favorable to IRET than similar transactions involving unaffiliated parties; or, d. The acquisition by IRET of other property at prices not exceeding, or disposition of other property at prices not less than, the fair value thereof as determined by independent appraisal. All such transactions and all other transactions in which any such persons have any direct or indirect interest shall be approved by a majority of the trustees, including a majority of the independent trustees. All brokerage commissions or remuneration received by any such person from IRET in connection with any such transactions shall be deemed a part of the fee payable under any management or advisory contract. 77 Page 80 of 183 No trustee or affiliate of the trustee shall receive a brokerage commission or other such remuneration in connection with the acquisition or disposition of Trust assets, except as it may pertain to legal fees incurred in the normal course of business. LIMITATIONS OF LIABILITY Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. The governing instrument of IRET provides as follows: SECTION 12. INDEMNIFICATION. A. INDEMNIFICATION OF TRUSTEES. 1. IRET shall indemnify and hold harmless each TRUSTEE, ADVISOR or AFFILIATE from and against all claims and liabilities, whether they proceed to judgment or are settled, to which such TRUSTEE, ADVISOR or AFFILIATE may become subject by reason of his being or having been a TRUSTEE, ADVISOR or AFFILIATE, or by reason of any action alleged to have been taken or omitted by him as TRUSTEE, ADVISOR or AFFILIATE, and shall reimburse him for all legal and other expenses reasonably incurred by him in connection with any such claim or liability. IRET shall not provide for indemnification of the TRUSTEES, ADVISORS or AFFILIATES for any liability or loss suffered by the TRUSTEES, ADVISORS or AFFILIATES, nor shall it provide that the TRUSTEES, ADVISORS or AFFILIATES be held harmless for any loss or liability suffered by IRET, unless all of the following condition are met: a. The TRUSTEES, ADVISORS or AFFILIATES have determined, in good faith, that the course of conduct which caused the loss or liability was in the best interests of IRET. b. The TRUSTEES, ADVISORS or AFFILIATES were acting on behalf of or performing services for IRET. c. Such liability or loss was not the result of: i. negligence or misconduct by the TRUSTEES, excluding the INDEPENDENT TRUSTEES, ADVISORS or AFFILIATES; or ii. gross negligence or willful misconduct by the INDEPENDENT TRUSTEES. d. Such indemnification or agreement to hold harmless is recoverable only out of IRET NET ASSETS and not from SHAREHOLDERS. 78 Page 81 of 183 2. Notwithstanding anything to the contrary contained in this document or elsewhere, the TRUSTEES, ADVISORS or AFFILIATES and any PERSONS acting as a broker-dealer shall not be indemnified by IRET for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws by such party unless one or more of the following conditions are met: a. There has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee. b. Such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee. c. A court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the published position of any state securities regulatory authority in which securities of IRET were offered or sold as to indemnification for violations of securities laws. 3. The advancement of IRET funds to the TRUSTEES, ADVISORS or AFFILIATES for legal expenses and other costs incurred for which indemnification is being sought is permissible only if all of the following conditions are satisfied: a. The legal action relates to acts or omissions with respect to the performance of duties or services on behalf of IRET. b. The legal action is initiated by a third party who is not a SHAREHOLDER or the legal action is initiated by a SHAREHOLDER acting in his or her capacity as such and a court of competent jurisdiction specifically approves such advancement. c. The TRUSTEES, ADVISORS or AFFILIATES undertake to repay the advanced funds to IRET, together with the applicable legal rate of interest thereon, in cases in which such TRUSTEES, ADVISORS or AFFILIATES are found not to be entitled to indemnification. LEGAL MATTERS The validity of the Shares of Beneficial Interest offered under the Prospectus, the federal and state tax aspects of the organization and operation of IRET and the Operating Partnership and other legal matters will be passed upon for IRET by Pringle & Herigstad, P.C., Minot, North Dakota. Thomas A. Wentz, Jr., is a shareholder of said law firm (he also serves as a Trustee of IRET). See "Conflicts of Interest" at page 22. 79 Page 82 of 183 EXPERTS The balance sheets of IRET as of April 30, 1997, and April 30, 1998, the statements of income, shareholders' equity, and cash flows for each of the three years in the period ended April 30, 1998, as listed on the Index to Financial Statements on page F-1, included in this Prospectus, have been included herein in reliance on the reports of Brady-Martz & Associates, P.C., Minot, North Dakota, independent accountants, given on the authority of that firm as experts in accounting and auditing. GLOSSARY OF TERMS Unless a different definition is provided immediately following a term used in this documents, the following definitions shall apply: ADMINISTRATOR: The official or agency administering the Securities laws of a jurisdiction. ACQUISITION EXPENSES: Expenses including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on property not acquired, accounting fees and expenses, title insurance, and miscellaneous expenses related to selection and acquisition of properties, whether or not acquired. ACQUISITION FEE: The total of all fees and commissions paid by any party to any party in connection with making or investing in mortgage loans or the purchase, development or construction of property by IRET. Included in the computation of such fees or commissions shall be any real estate commission, selection fee, DEVELOPMENT FEE, CONSTRUCTION FEE, nonrecurring management fee, loan fees or points or any fee of a similar nature, however designated. Excluded shall be DEVELOPMENT FEES and CONSTRUCTION FEES paid to PERSONS not affiliated with the ADVISOR in connection with the actual development and construction of a project. ADVISOR: Odell-Wentz & Associates, L.L.C., a North Dakota Limited Liability Company, 12 South Main, Minot, North Dakota, is the advisor. The PERSON responsible for directing or performing the day-to-day business affairs of a REIT, including a PERSON to which an Advisor subcontracts substantially all such functions. To the extent the provisions of this Statement of Policy are germane they shall apply to self-administered REITs. ADVISORY AGREEMENT: The contract between IRET and the ADVISOR which is summarized in this Prospectus. See "Advisory Agreement." AFFILIATE: An AFFILIATE of another PERSON includes any of the following: a. any PERSON directly or indirectly owning, controlling, or holding, with power to vote ten percent or more of the outstanding voting securities of such other PERSON. 80 Page 83 of 183 b. any PERSON ten percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other PERSON. c. any PERSON directly or indirectly controlling, controlled by, or under common control with such other PERSON. d. any executive officer, director, trustee or general partner of such other PERSON. e. any legal entity for which such PERSON acts as an executive officer, director, trustee or general partner. AVERAGE INVESTED ASSETS: For any period the average of the aggregate book value of the assets of IRET invested, directly or indirectly, in equity interests in and loans secured by real estate, before reserves for depreciation or bad debts or other similar non-cash reserves computed by taking the average of such values at the end of each month during such period. BOARD OF TRUSTEES: The ten member BOARD OF TRUSTEES of IRET. COMPETITIVE REAL ESTATE COMMISSION: Real estate or brokerage commission paid for the purchase or sale of a property which is reasonable, customary and competitive in light of the size, type and location of such property. CONTRACT PRICE FOR THE PROPERTY: The amount actually paid or allocated to the purchase, development, construction or improvement of a property exclusive of ACQUISITION FEES and ACQUISITION EXPENSES. CONSTRUCTION FEE: A fee or other remuneration for acting as general contractor and/or construction manager to construct improvements, supervise and coordinate projects or to provide MAJOR REPAIRS OR REHABILITATION to IRET's property. DECLARATION OF TRUST: The Restated Declaration of Trust dated October 24, 1996, for IRET. The declaration of trust, by-laws, certificate, articles of incorporation or other governing instrument pursuant to which a REIT is organized. DEVELOPMENT FEE: A fee for the development of IRET's property, including negotiating and approving plans, and undertaking to assist in obtaining zoning and necessary variances and necessary financing for the specific property, either initially or at a later date. ERISA: The Employee Retirement Income Security Act of 1974, as amended. EXCHANGE RIGHT: The right of limited partners in the OPERATING PARTNERSHIP to exchange their limited partnership UNITS on a one-for-one basis for SHARES of IRET. FUNDS FROM OPERATIONS: Net income (computed in accordance with Generally Accepted Accounting Principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures calculated on the same basis. 81 Page 84 of 183 GAAP: Generally Accepted Accounting Principles. INDEPENDENT EXPERT: A PERSON with no material current or prior business or personal relationship with the ADVISOR or TRUSTEES who is engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by IRET. INDEPENDENT TRUSTEE(S): The TRUSTEE(S) of IRET who are not associated and have not been associated within the last two years, directly or indirectly, with the ADVISOR of IRET, or AFFILIATES of the ADVISOR. a. A TRUSTEE shall be deemed to be associated with the ADVISOR if he or she: - is employed by the ADVISOR or any of its AFFILIATES; or - is an officer or director of the ADVISOR or any of its AFFILIATES; or - performs services, other than as a TRUSTEE, for IRET; or - is a TRUSTEE for more than three REITS organized by or advised by the ADVISOR; or - has any material business or professional relationship with the ADVISOR, or any of its AFFILIATES. b. For purposes of determining whether or not the business or professional relationship is material, the gross revenue derived by the prospective INDEPENDENT TRUSTEE from the ADVISOR and AFFILIATES shall be deemed material per se if it exceeds 5% of the prospective INDEPENDENT TRUSTEE'S: i. annual gross revenue, derived from all sources, during either of the last two years; or ii. net worth, on a fair market value basis. c. An indirect relationship shall include circumstances in which a TRUSTEE'S spouse, parents, children, siblings, mothers-or fathers-in- laws, sons-or daughters-in-laws, or brothers-or sisters-in-law is or has been associated with the ADVISOR, any of its AFFILIATES, or the TRUST. IRET: Investors Real Estate Trust, a North Dakota Real Estate Investment Trust. IRET, INC.: The general partner of the OPERATING PARTNERSHIP. IRET, PROPERTIES: The OPERATING PARTNERSHIP. IRS: The United States Internal Revenue Service. 82 Page 85 of 183 LEVERAGE: The aggregate amount of indebtedness of IRET for money borrowed (including purchase money mortgage loans) outstanding at any time, both secured and unsecured. LIMITED PARTNERS: The limited partners of the OPERATING PARTNERSHIP. NET ASSETS: The total assets (other than intangibles) at cost before deducting depreciation or other non-cash reserves less total liabilities, calculated at least quarterly on a basis consistently applied. NET INCOME: For any period total revenues applicable to such period, less the expenses applicable to such period other than additions to reserves for depreciation or bad debts or other similar non-cash reserves. If the ADVISOR receives an incentive fee, NET INCOME, for purposes of calculation TOTAL OPERATING EXPENSES in Section IV.D shall exclude the gain from the sale of the REIT'S assets. NET OPERATING INCOME: The total gross income from a real estate property, less all operating expenses attributable to that property but excluding interest expense, depreciation and any other non-cash deductions. OFFERING: The offering of SHARES of beneficial interest of IRET to the public pursuant to this PROSPECTUS. OFFERING EXPENSES: All expenses incurred by and to be paid from the assets of IRET in connection with registration and offering and distributing its shares to the public, including, but not limited to, total underwriting and brokerage discounts and commissions (including fees of the underwriters' attorneys), expenses for printing, engraving, mailing, salaries of employees while engaged in sales activity, charges of transfer agents, registrars, trustees, escrow holders, depositories, experts, expenses of qualification of the sale of the securities under Federal and State laws, including taxes and fees, accountants' and attorneys' fees. OPERATING PARTNERSHIP: IRET Properties, a North Dakota Limited Partnership. OPERATING PARTNERSHIP AGREEMENT: The agreement of limited partnership for IRET Properties, a North Dakota Limited Partnership. PERSON: Any natural persons, partnership, corporation, association, trust, limited liability company or other legal entity. PROSPECTUS: Shall have the meaning given to that term by Section 2(10) of the Securities Act of 1933, including a preliminary Prospectus; provided however, that such term as used herein shall also include an offering circular as described in Rule 256 of the General Rules and Regulations under the Securities Act of 1933 or, in the case of an intrastate offering, any document by whatever name known, utilized for the purpose of offering and selling securities to the public. REAL ESTATE INVESTMENT TRUST ("REIT"): A corporation, trust, association or other legal entity (other than a real estate syndication) which is engaged primarily in investing in equity interests in real estate (including fee ownership and leasehold interests) or in loans secured by real estate or both. 83 Page 86 of 183 ROLL-UP: A transaction involving the acquisition, merger, conversion, or consolidation either directly or indirectly of the REIT and the issuance of securities of a ROLL-UP ENTITY. Such term does not include: a. a transaction involving securities of the REIT that have been for at least 12 months listd on a national securities exchange or traded through the National Association of Securities Dealers Automated Quotation National Market System; or b. a transaction involving the conversion to corporate, trust, or association form of only the REIT if, as a consequence of the transaction there will be no significant adverse change in any of the following: i. SHAREHOLDERS' voting rights; ii. the term of existence of the REIT; iii. SPONSOR or ADVISOR compensation; iv. the REIT'S investment objectives. SHARES: The shares of beneficial interest of IRET being offered under this PROSPECTUS. SHAREHOLDERS: The registered holders of IRET's SHARES. SPONSOR: Any PERSON directly or indirectly instrumental in organizing, wholly or in part, a REIT or any PERSON who will control, manage or participate in the management of a REIT, and any AFFILIATE of such PERSON. Not included is any PERSON whose only relationship with the REIT is as that of an independent property manager of REIT assets, and whose only compensation is as such. SPONSOR does not include wholly independent third parties such as attorneys, accountants and underwriters whose only compensation is for professional services. A PERSON may also be deemed a SPONSOR of the REIT by: a. taking the initiative, directly or indirectly, in founding or organizing the business or enterprise of the REIT; either alone or in conjunction with one or more other PERSONS; b. receiving a material participation in the REIT in connection with the founding or organizing of the business of the REIT, in consideration of services or property, or both services and property; c. having a substantial number of relationships and contacts with the REIT; d. possessing significant rights to control REIT properties; e. receiving fees for providing services to the REIT which are paid on a basis that is not customary in the industry; or 84 Page 87 of 183 f. providing goods or services to the REIT on a basis which was not negotiated at arms length with the REIT. TOTAL OPERATING EXPENSES: Aggregate expenses of every character paid or incurred by IRET as determined under Generally Accepted Accounting Principles, including ADVISORS' fees, but excluding: a. The expenses of raising capital such as ORGANIZATION AND OFFERING EXPENSES, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses, and tax incurred in connection with the issuance, distribution, transfer, registration, and stock exchange listing of IRET's SHARES; b. interest payments; c. non-real estate taxes; d. non-cash expenditures such as depreciation, amortization and bad debt reserves; e. ACQUISITION FEES, ACQUISITION EXPENSES, real estate commissions on resale of property and other expenses connection with the acquisition, disposition, and ownership of real estate interests, mortgage loans, or other property, (such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair, and improvement of property). TRUSTEE(S): The members of the BOARD OF TRUSTEES which manages IRET. UNIMPROVED REAL PROPERTY: The real property of IRET which has the following three characteristics: a. an equity interest in real property which was not acquired for the purpose of producing rental or other operating income; b. has no development or construction in process on such land; c. and no development or construction on such land is planned in good faith to commence on such land within one year. UNITS: The limited partnership units of the OPERATING PARTNERSHIP. 85 Page 88 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES MINOT, NORTH DAKOTA CONSOLIDATED FINANCIAL STATEMENTS AS OF APRIL 30, 1998 AND 1997 AND INDEPENDENT AUDITOR'S REPORT F-1 Page 89 of 183 INDEPENDENT AUDITOR'S REPORT Board of Trustees Investors Real Estate Trust and Subsidiaries Minot, North Dakota We have audited the accompanying consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended April 30, 1998, 1997 and 1996. These consolidated financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Investors Real Estate Trust and Subsidiaries as of April 30, 1998 and 1997, and the consolidated results of its operations and cash flows for the years ended April 30, 1998, 1997 and 1996, in conformity with generally accepted accounting principles. Brady, Martz & Associates, P.C. May 27, 1998 F-2 Page 90 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES Consolidated Balance Sheets April 30,1998 and 1997 ASSETS
1998 1997 ------------ ------------ REAL ESTATE INVESTMENTS Property owned $231,416,322 $191,884,509 Less accumulated depreciation (21,516,129) (16,948,156) ------------ ------------ $209,900,193 $174,936,353 Mortgage loans receivable 3,438,308 3,108,933 Less discounts and allowances (127,132) (154,118) ------------ ------------ Total real estate investments $213,211,369 $177,891,168 ------------ ------------ OTHER ASSETS Cash $ 2,132,220 $ 1,718,257 Marketable securities - held-to-maturity 3,536,538 4,055,459 Marketable securities - available-for-sale 720,688 683,466 Accounts receivable 55,326 332,814 Real estate deposits 2,493,713 100,000 Investment in partnership 6,705 78,469 Prepaid insurance 219,871 248,377 Tax and insurance escrow 1,254,068 1,250,469 Deferred charges 1,088,016 635,464 ------------ ------------ TOTAL ASSETS $224,718,514 $186,993,943 ------------ ------------ ------------ ------------ F-3 Page 91 of 183 LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 ---- ---- LIABILITIES Accounts payable and accrued expenses $ 2,847,080 $ 3,073,071 Notes payable 1,000,000 0 Mortgages payable 134,059,974 115,734,946 Investment certificates issued 10,369,561 8,187,305 ------------ ------------ Total liabilities $148,276,615 $126,995,322 ------------ ------------ MINORITY INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP $ 8,289,273 $ 1,002 ------------ ------------ SHAREHOLDERS' EQUITY Shares of beneficial interest (unlimited authorization, no par value, 16,391,412 shares outstanding in 1998 and 14,940,513 shares outstanding in 1997) $ 74,708,559 $ 65,073,951 Accumulated distributions in excess of net income (6,666,555) (5,162,837) Unrealized gain on securities available-for-sale 110,622 86,505 ------------ ------------ Total shareholders' equity $ 68,152,626 $ 59,997,619 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $224,718,514 $186,993,943 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-4 Page 92 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES Consolidated Statements of Operations for the Years Ended April 30, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- REVENUE Real estate rentals $ 31,694,586 $ 22,972,368 $ 17,635,297 Interest, discounts and fees 712,959 861,613 1,024,368 ---------------- ------------ -------------- Total revenue $ 32,407,545 $ 23,833,981 $ 18,659,665 ---------------- ------------ -------------- EXPENSES Interest $ 10,479,104 $ 7,638,776 $ 5,547,739 Depreciation 4,791,907 3,584,591 2,261,724 Utilities and maintenance 5,142,459 3,741,877 3,167,560 Taxes and insurance 3,536,147 2,720,495 2,065,017 Property management expenses 2,642,977 1,870,435 1,281,311 Advisory and trustee services 745,907 559,149 458,019 Operating expenses 271,738 158,627 162,588 Amortization 106,108 60,588 97,900 ---------------- ------------ -------------- Total expenses $ 27,716,347 $ 20,334,538 $ 15,041,858 ---------------- ------------ -------------- OPERATING INCOME $ 4,691,198 $ 3,499,443 $ 3,617,807 GAIN ON SALE OF PROPERTIES 465,499 398,424 994,163 MINORITY INTEREST PORTION OF OPERATING PARTNERSHIP INCOME (141,788) (18) 0 ---------------- ------------ -------------- NET INCOME $ 5,014,909 $ 3,897,849 $ 4,611,970 ---------------- ------------ -------------- ---------------- ------------ -------------- Net income per share: Operating income $ 0.29 $ 0.25 $ 0.30 Gain on sale of properties 0.03 0.03 0.08 ---------------- ------------ -------------- Net income $0.32 $ 0.28 $ 0.38 ---------------- ------------ -------------- ---------------- ------------ --------------
The accompanying notes are an integral part of these financial statements. F-5 Page 93 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity for the Years Ended April 30, 1998, 1997 and 1996
Unrealized Accumulated Gain on Shares of Distributions Securities Total Number of Beneficial in excess of Available- Shareholders' Shares Interest Net Income for-Sale Equity ------ -------- ---------- -------- ------ BALANCE MAY 1, 1995 11,187,786 $ 41,560,587 $ (3,724,933) $ 0 $ 37,835,654 Net income 0 0 4,611,970 0 4,611,970 Dividends distributed 0 0 (4,439,034) 0 (4,439,034) Dividends reinvested 502,599 3,100,988 0 0 3,100,988 Sale of shares 1,603,159 9,820,470 0 0 9,820,470 Shares repurchased (34,636) (218,128) 0 0 (218,128) ---------- ------------ ------------ --------- ------------ BALANCE APRIL 30, 1996 13,258,908 $ 54,263,917 $ (3,551,997) $ 0 $ 50,711,920 Net income 0 0 3,897,849 0 3,897,849 Dividends distributed 0 0 (5,508,689) 0 (5,508,689) Dividends reinvested 554,681 3,579,744 0 0 3,579,744 Sale of shares 1,403,776 9,025,706 0 0 9,025,706 Shares repurchased (276,852) (1,795,416) 0 0 (1,795,416) Increase in unrealized gain on securities available- for-sale 0 0 0 86,505 86,505 ---------- ------------ ------------ --------- ------------ BALANCE APRIL 30, 1997 14,940,513 $ 65,073,951 $ (5,162,837) $ 86,505 $ 59,997,619 Net income 0 0 5,014,909 0 5,014,909 Dividends distributed 0 0 (6,518,627) 0 (6,518,627) Dividends reinvested 636,799 4,290,541 0 0 4,290,541 Sale of shares 1,196,562 8,421,858 0 0 8,421,858 Shares repurchased (382,462) (3,077,791) 0 0 (3,077,791) Increase in unrealized gain on securities available- for-sale 0 0 0 24,117 24,117 ---------- ------------ ------------ --------- ------------ BALANCE APRIL 30, 1998 16,391,412 $ 74,708,559 $ (6,666,555) $ 110,622 $ 68,152,626
The accompanying notes are an integral part of these financial statements. F-6 Page 94 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES Consolidated Statements of Cash Flows for the Years Ended April 30, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,014,909 $ 3,897,849 $ 4,611,970 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,898,015 3,645,179 2,359,624 Minority interest portion of operating partnership income 141,788 18 0 Accretion of discount on contracts (5,706) (7,698) (16,570) Gain on sale of properties (465,499) (398,424) (994,163) Interest reinvested in investment certificates 349,791 288,517 161,813 Changes in other assets and liabilities: Increase in real estate deposits (350,000) (100,000) 0 (Increase) decrease in other assets 377,758 (415,274) (15,645) Increase in tax and insurance escrow (3,599) (98,942) (834,007) Increase in deferred charges (558,660) (180,779) (257,991) Increase (decrease) in accounts payable and accrued expenses (225,991) (69,119) 1,219,771 ------------ ------------ ------------ Net cash provided from operating activities $ 9,172,806 $ 6,561,327 $ 6,234,802 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity of marketable securities held-to-maturity $ 518,921 $ 356,398 $ 417,952 Principal payments on mortgage loans receivable 565,359 1,706,202 2,642,346 Proceeds from sale of property 1,482,046 0 389,784 Payments for acquisition and improvement of properties (22,894,602) (38,046,177) (32,462,846) Purchase of marketable securities available-for-sale 0 (596,961) 0 Investment in mortgage loans receivable (2,061,179) (2,835,212) (1,784,981) ------------ ------------ ------------ Net cash used for investing activities $(22,389,455) $(39,415,750) $(30,797,745) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of shares $ 8,421,858 $ 9,025,706 $ 9,820,470 Proceeds from investment certificates issued 3,283,248 4,225,004 1,695,924 Proceeds from mortgages payable 10,612,652 27,094,270 29,025,001 Proceeds from short-term lines of credit 12,900,000 8,450,000 0 Proceeds from sale of minority interest 0 1,000 0 Repurchase of shares (3,077,791) (1,795,416) (218,128) Dividends paid (2,228,086) (1,930,439) (1,338,046) Distributions paid to minority interest unit holders (179,185) (16) 0 Redemption of investment certificates (1,450,783) (2,128,686) (917,732) F-7 Page 95 of 183 Principal payments on mortgage loans (2,751,301) (2,634,017) (15,554,717) Payments on short-term lines of credit (11,900,000) (8,450,000) 0 ------------ ------------ ------------ Net cash provided from financing activities $ 13,630,612 $ 31,857,406 $ 22,512,772 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH $ 413,963 $ (997,017) $ (2,050,171) CASH AT BEGINNING OF YEAR 1,718,257 2,715,274 4,765,445 ------------ ------------ ------------ CASH AT END OF YEAR $ 2,132,220 $ 1,718,257 $ 2,715,274 ------------ ------------ ------------ ------------ ------------ ------------
F-8 Page 96 of 183 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
1998 1997 1996 ---- ---- ---- SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Dividends reinvested $ 4,290,541 $ 3,579,744 $ 3,100,988 Real estate investment and mortgage loans receivable acquired through assumption of mortgage loans payable and accrual of costs 10,463,677 19,575,635 8,232,568 Mortgage loan receivable transferred to property owned 1,161,878 2,810,000 0 Proceeds from sale of properties deposited directly with escrow agent 2,870,387 455,329 426,352 Properties acquired through the issuance of minority interest units in the operating partnership 8,325,652 0 0 Interest reinvested directly in investment certificates 349,791 288,517 161,813 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest paid on mortgages $ 9,613,154 $ 6,773,978 $ 4,661,065 Interest paid on investment certificates 657,966 508,686 292,660 ----------- ----------- ----------- $10,271,120 $ 7,282,664 $ 4,953,725 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-9 Page 97 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES Notes to Consolidated Financing Statements April 30, 1998, 1997 and 1996 Note 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Nature of operations - Investors Real Estate Trust qualifies under Section 856 of the Internal Revenue Code as a real estate investment trust. The Trust has properties located throughout the Upper Midwest, with principal offices located in Minot, North Dakota. The Company invests in commercial and residential real estate, real estate contracts, real estate related governmental backed securities (GNMA), and equity securities in other real estate investment trusts. Effective February 1, 1997, the Trust reorganized its structure in order to convert to Umbrella Partnership Real Estate Investment Trust (UPREIT) status. The Trust established an operating partnership (IRET Properties, a North Dakota Limited Partnership) with a wholly owned corporate subsidiary acting as its sole general partner (IRET, Inc., a North Dakota Corporation). At that date, the Trust transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. The general partner has full and exclusive management responsibility for the real estate investment portfolio owned by the operating partnership. The partnership is operated in a manner that allows IRET to continue its qualification as a real estate investment trust under the Internal Revenue Code. All limited partners of the operating partnership have "exchange rights" allowing them, at their option, to exchange their limited partnership units for shares of the Trust on a one for one basis. The exchange rights are subject to certain restrictions including no exchanges for at least one year following the acquisition of the limited partnership units. The operating partnership distributes cash on a quarterly basis in the amounts determined by the Trust which results in each limited partner receiving the same dividends as a Trust shareholder. BASIS OF PRESENTATION - The consolidated financial statements include the accounts of Investors Real Estate Trust and all of its subsidiaries in which it maintains a controlling interest. The Trust is the sole shareholder of IRET, Inc., which is the general partner of the operating partnership, IRET Properties. IRET Properties is a general partner in six limited partnerships, and due to the immaterial involvement of the limited partners, has substantial influence over their operations. These limited partnerships are as follows: Eastgate Properties, Ltd. Bison Properties, Ltd First Avenue Building, Ltd. Sweetwater Properties, Ltd. Hill Park Properties, Ltd. Colton Heights, Ltd. F-10 Page 98 of 183 Note 1 (CONTINUED) All material intercompany transactions and balances have been eliminated in the consolidated financial statements. 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 assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PROPERTY OWNED - Real estate is stated at cost. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs which do not add to the value or extend the useful life are charged to expense as incurred. DEPRECIATION is provided to amortize the cost of individual assets over their estimated useful lives using principally the straight-line method. Useful lives range from 12 years for furniture and fixtures to 20 - 40 years for buildings and improvements. MORTGAGE LOANS RECEIVABLE are shown at cost less unearned discount. Discounts on contracts are accreted using the straight-line method over the term of the contract which approximates the effective interest method. Deferred gain is recognized as income on the installment method when principal payments are received. Interest income is accrued and reflected in the related balance. ALLOWANCE FOR LOAN LOSSES - The Trust evaluates the need for an allowance for loan losses periodically. In performing its evaluation, management assesses the recoverability of individual real estate loans by a comparison of their carrying amount with their estimated net realizable value. MARKETABLE SECURITIES - The Trust's investments in securities are classified as securities "held-to-maturity" and securities "available-for-sale." The securities classified as held-to-maturity consist of Government National Mortgage Association securities for which the Trust has the positive intent and ability to hold to maturity. They are reported at cost, adjusted by amortization of premiums and accretion of discounts which are recognized in interest income using the straight- line method over the period to maturity which approximates the effective interest method. The securities classified as "available-for-sale" consist of equity shares in other real estate investment trusts and are stated at fair value. Unrealized gains and losses on securities available-for-sale are recognized as direct increases or decreases in shareholders' equity. Cost of securities sold are recognized on the basis of specific identification. F-11 Page 99 of 183 Note 1 - (CONTINUED) REAL ESTATE DEPOSITS consist of funds held by an escrow agent to be applied toward the purchase of real estate qualifying for gain deferral as a like-kind exchange of property under Section 1031 of the Internal Revenue Code. It also consists of earnest money, or "good faith deposits," to be used by the Trust toward the purchase of property or the payment of loan costs associated with loan refinancing. INVESTMENT IN PARTNERSHIP - The Trust accounted for its investment in Chateau Properties, Ltd. under the equity method of accounting, wherein the appropriate portion of the earnings or loss is recognized currently. The Operating Partnership had a general partnership interest in the limited partnership. Chateau Properties, Ltd. had invested in real estate properties. During 1998, the real estate in Chateau Properties, Ltd. was acquired through the issuance of operating partnership units. The remaining balance at April 30, 1998 represents interests in several partnerships. MINORITY INTEREST - Capital contributions, distributions and profits and losses are allocated to minority interests in accordance with the terms of the operating partnership agreement. NET INCOME PER SHARE - The Trust adopted Statement of Financial Accounting Standard No. 128, Earnings Per Share in 1998. Restating the prior years net income per share to conform to the provisions of this statement resulted in no changes to previous amounts reported as the number of outstanding shares used to calculate basic net income per share are substantially identical to those used in the prior years. Basic net income per share is computed using the weighted average number of shares outstanding. The aggregate weighted average shares outstanding used in computing net income per share was 15,636,214 in 1998, 14,044,467 in 1997 and 12,137,123 in 1996. There is no potential for dilution of net income per share as no dilutive shares have been authorized. For this reason, a separate diluted net income per share has not been disclosed. INCOME TAXES - The Trust intends to continue to qualify as a real estate investment trust as defined by the Internal Revenue Code and, as such, will not be taxed on the portion of the income that is distributed to the shareholders, provided at least 95% of its real estate investment trust taxable income is distributed and other requirements are met. The Trust intends to distribute all of its taxable income and realized capital gains from property dispositions within the prescribed time limits and, accordingly, there is no provision or liability for income taxes shown on the financial statements. UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for a partnership interest. The UPREIT concept was born when the non-recognition provisions of Section 721 of the Internal Revenue Code were combined with "Exchange Rights" which allow the contributing partner to exchange the limited partnership interest received in exchange for the appreciated real estate for the Trust stock. Upon conversion of the partnership units to Trust shares, a taxable event occurs for that limited partner. Income or loss of the operating partnership shall be allocated among its partners in compliance with the provisions of Internal Revenue Code Sections 701 (b) and 704 (c). REVENUE RECOGNITION - Residential rental properties are leased under operating leases with terms generally of one year or less. Commercial properties are leased to tenants for various terms exceeding one year. Lease terms often include renewal options. In addition, a number of the commercial leases provide for a base rent plus a percentage rent based on gross sales in excess of a stipulated amount. Rental income is F-12 Page 100 of 183 Note 1 - (CONTINUED) recognized as it is earned, which is not materially different than on a straight-line basis. Profit on sales of real estate shall be recognized in full when real estate is sold, provided: The profit is determinable, that is, the collectibility of the sales price is reasonably assured or the amount that will be collectible can be estimated. The earnings process is virtually complete, that is, the seller is not obliged to perform significant activities after the sale to earn the profit. Based on the economic climate and the terms of many contracts, the collectibility of the sales price was not reasonably assured as required by generally accepted accounting principles. Consequently, the Trust uses the installment method of accounting for profits on several property sales as it more fairly reflects earned revenue. Interest on mortgage loans receivable is recognized in income as it accrues during the period the loan is outstanding. In the case of non-performing loans, income is recognized as discussed in Note 4. INTEREST CAPITALIZATION - Interest is capitalized on accumulated expenditures relating to the acquisition and development of certain qualifying properties. RECLASSIFICATIONS - Certain previously reported amounts have been reclassified to conform with the current financial statement presentation. Note 2 - OFF-BALANCE-SHEET RISK The Trust had deposits at Norwest Bank, North Dakota, N.A., and First American Bank which exceeded Federal Deposit Insurance Corporation limits by $349,802 and $449,907, respectively, at April 30, 1998. Note 3 - PROPERTY OWNED UNDER LEASE Property consisting principally of real estate owned under lease is stated at cost less accumulated depreciation and is summarized as follows:
April 30, 1998 April 30, 1997 -------------- -------------- Residential $ 180,986,906 $ 149,643,413 Less accumulated depreciation (15,449,736) (11,845,692) -------------- -------------- $ 165,537,170 $ 137,797,721 -------------- -------------- Commercial $ 50,429,416 $ 42,241,096 Less accumulated depreciation (6,066,393) (5,102,464) -------------- -------------- $ 44,363,023 $ 37,138,632 -------------- -------------- Remaining cost $ 209,900,193 $ 174,936,353 -------------- -------------- -------------- --------------
F-10 Page 101 of 183 Note 3 - (CONTINUED) There were no repossessions during the years ended April 30, 1998 and 1997. The above cost of residential real estate owned included construction in progress of $753,680 and $2,482,849 as of April 30, 1998 and 1997, respectively. Construction period interest of $220,573, $269,513, and $690,665 has been capitalized for the years ended April 30, 1998, 1997 and 1996, respectively. Residential apartment units are rented to individual tenants with lease terms up to one year. Gross revenues from residential rentals totaled $27,231,714, $18,935,111, and $12,286,492 for the years ended April 30, 1998, 1997 and 1996, respectively. Gross revenues from commercial property rentals totaled $4,462,872, $4,037,258, and $5,348,805 for the years ended April 30, 1998, 1997 and 1996, respectively. Commercial properties are leased to tenants under terms of leases expiring at various dates through 2013. Lease terms often include renewal options. In addition, a number of the commercial leases provide for a base rent plus a percentage rent based on gross sales in excess of a stipulated amount. Rents based on a percentage of sales totaled $28,316, $16,517, and $25,054 for the years ended April 30, 1998, 1997 and 1996, respectively. The future minimum lease payments to be received under these operating leases for the commercial properties as of April 30, 1998, are as follows: Year ending April 30, 1999 $ 6,667,483 2000 6,658,627 2001 6,570,453 2002 5,724,100 2003 5,662,960 Thereafter 54,585,504 -------------- $ 85,869,127 -------------- --------------
Note 4 - MORTGAGE LOANS RECEIVABLE Mortgage loans receivable consists of fourteen contracts which are collateralized by real estate. Contract terms call for monthly payments of principal and interest. Interest rates range from 7 to 10.25%. Mortgage loans receivable have been evaluated for possible losses considering repayment history, market value of underlying collateral, deferred gains and economic conditions. F-14 Page 102 of 183 Note 4 - (CONTINUED) Future principal payments due under the mortgage loan contracts as of April 30, 1998 are as follows: Year ending April 30, 1999 $ 2,088,754 2000 88,858 2001 85,035 2002 92,040 2003 203,390 Later years 880,231 -------------- $ 3,438,308 -------------- --------------
Details concerning mortgage loans receivable from related parties can be found in Note 10. Non-performing mortgage loans receivable were $0 at April 30, 1998 and $174,911 at April 30, 1997. These loans are recognized as impaired in conformity with FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan. The total allowance for credit losses related to those loans was approximately $0 and $30,000, respectively. The average balance of impaired loans for the year ended April 30, 1998 was approximately $50,000. For impairment recognized in conformity with FASB Statement No. 114, the entire change in present value of expected cash flows is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. Additional interest income that have been earned on these loans if they had not been non-performing amounted to approximately $6,000 in 1998 and $33,000 in 1997. There was no interest income on non-performing loans recognized on a cash basis for 1998 or 1997. Note 5 - MARKETABLE SECURITIES The amortized cost and estimated market values of marketable securities held-to-maturity at April 30, 1998 and 1997 are as follows:
1998 Gross Gross ---- Amortized Unrealized Unrealized Fair Issuer Cost Gains Losses Value ------ ---- ----- ------ ----- GNMA $3,536,538 $ 22,757 $ - $3,559,295 ---------- -------- -------- ---------- ---------- -------- -------- ---------- 1997 ---- GNMA $4,055,459 $ - $166,031 $3,889,428 ---------- -------- -------- ---------- ---------- -------- -------- ----------
F-15 Page 103 of 183 Note 5 - (CONTINUED) The amortized cost and estimated market values of marketable securities available-for-sale at April 30, 1998 and 1997 are as follows:
1998 Gross ---- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Equity Shares in other REIT's $610,066 $110,622 $ - $720,688 -------- -------- ---------- -------- -------- -------- ---------- -------- 1997 ---- Equity Shares in other REIT's $596,961 $ 90,015 $ 3,510 $683,466 -------- -------- ---------- -------- -------- -------- ---------- --------
There were no realized gains or losses on sales of securities for the years ended April 30, 1998, 1997 and 1996. Marketable securities held-to-maturity consist of Governmental National Mortgage Association (GNMA) securities bearing interest from 6.5% to 9.5% with maturity dates ranging from May 15, 2016 to June 15, 2023. The following is a summary of the maturities of securities held-to-maturity at April 30, 1998 and 1997:
1998 1997 ---- ---- Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- Due after 10 years $3,536,538 $3,559,295 $4,055,459 $3,889,428 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Note 6 - NOTES PAYABLE As of April 30, 1998, the Trust had lines of credit available from two financial institutions. An unsecured line of credit was issued by First Western Bank & Trust in the amount of $4,000,000 carrying an interest rate equal to prime and maturing December 1, 1998. A second unsecured line of credit from First International Bank & Trust was issued in the amount of $2,500,000 carrying an interest rate equal to prime and maturing September 12, 1998. Interest payments are due monthly on both notes. As of April 30, 1998 the Trust had an unpaid balance of $1,000,000 on the First Western Bank & Trust line of credit and no unpaid balance on the First International Bank & Trust line of credit. As of April 30, 1997, the Trust had no unpaid balances on either line of credit. F-16 Page 104 of 183 Note 7 - MORTGAGES PAYABLE Mortgages payable as of April 30, 1998, included mortgages on properties owned totaling $134,012,050, and mortgages of $47,924 on property sold on contract. The carrying value of the related real estate owned was $190,827,346 and the carrying value of the related mortgage loans receivable was $209,260 as of April 30, 1998. Mortgages payable as of April 30, 1997, included mortgages on properties owned totaling $115,608,689, and mortgages of $126,257 on property sold on contract. The carrying value of the related real estate owned was $165,399,893 and the carrying value of the related mortgage loans receivable was $353,480 as of April 30, 1997. Monthly installments are due on the mortgages with interest rates ranging from 6.80% to 9.75% and with varying maturity dates through November 30, 2034. The aggregate amount of required future principal payments on mortgages payable is as follows: Years ending April 30, 1999 $ 3,319,048 2000 6,533,758 2001 3,671,496 2002 3,954,021 2003 4,221,911 Later years 112,359,740 ------------ Total payments $134,059,974 ------------ ------------
Note 8 - INVESTMENT CERTIFICATES ISSUED The Trust has placed investment certificates with the public. The interest rates vary from 6.5% to 11% per annum, depending on the term of the security. Total securities maturing within fiscal years ending April 30 are shown below. Interest is paid annually, semiannually, or quarterly on the anniversary date of the security. Due in years ending April 30, 1999 $ 6,444,209 2000 2,322,910 2001 690,822 2002 305,273 2003 567,747 Thereafter 38,600 -------------- $ 10,369,561 -------------- --------------
F-17 Page 105 of 183 Note 9 - DEFERRED GAIN FROM PROPERTY DISPOSITIONS Deferred gain represents gain from property dispositions that have been reported on the installment method. With the installment method of reporting, the proportionate share of the gain is recognized at the point cash is received. Deferred gain recognized on the installment basis was $16,713, $146,361, and $476,913 for the years ended April 30, 1998, 1997 and 1996, respectively. Note 10 - TRANSACTIONS WITH RELATED PARTIES Mr. Roger R. Odell and Mr. Thomas A. Wentz, Sr., officers and shareholders of the Trust, are partners in Odell-Wentz & Associates, the advisor to the Trust. Under the Advisory Contract between the Trust and Odell-Wentz & Associates, the Trust pays an advisor's fee based on the net assets of the Trust and a percentage fee for investigating and negotiating the acquisition of new investments. For the year ended April 30, 1998, Odell-Wentz & Associates received total fees under said agreement of $740,393. The fees for April 30, 1997 were $667,367, and for April 30, 1996 were $484,086. For the years ended April 30, 1998, 1997 and 1996, the Trust has capitalized $141,468, $177,834, and $115,993, respectively, of these fees, with the remainder of $598,925, $489,533, and $368,093, respectively, expensed as advisory and trustee fees on the statement of operations. The advisor is obligated to provide office space, staff, office equipment, computer services and other services necessary to conduct the business affairs of the Trust. Investors Management and Marketing (IMM) provides property management services to the Trust. Roger R. Odell is a shareholder in IMM. IMM received $530,678, $408,904, and $281,717 for services rendered for years ended April 30, 1998, 1997 and 1996, respectively. Inland National Securities is a corporation that provides underwriting services in the sale of additional shares for the Trust. Roger R. Odell is also a shareholder in Inland National Securities. Fees for services totaled $171,755 for the year ended April 30, 1998, $291,143 for the year ended April 30, 1997, and $269,656 for the year ended April 30, 1996. The Trust paid fees and expense reimbursements to the law firm in which Thomas A. Wentz, Sr. is a partner totaling $62,293, $36,045, and $23,488 for the years ended April 30, 1998, 1997 and 1996, respectively. Investment certificates issued by the Trust to officers and trustees totaled $1,219,457 and $519,528, at April 30, 1998 and 1997, respectively. The Trust issued 334,172 limited partnership units at $7.20/unit to Roger R. Odell and C. Morris Anderson upon the completion of the UPREIT transaction with Magic City Realty. Mr. Odell and Mr. Anderson owned all of Magic City Realty. Mr. Anderson is also a trustee of the Trust. F-18 Page 106 of 183 Note 11 - MARKET PRICE RANGE OF SHARES Since October 17, 1997, Investors Real Estate Trust traded shares on the NASDAQ Small Capital Market. During the period October 17, 1997 through April 30, 1998, a total of 812,498 shares were traded in 445 separate trades. The high trade price during the period was 7.406, low was 6.563, and the closing price on April 30, 1998 was 7.1888. Prior to October 17, 1998, Investors Real Estate Trust shares were traded on the Over-the-Counter Market. The price range is as follows:
Bid Ask --- --- Low High Low High --- ---- --- ---- 1996 $ 5.89 $6.30 $ 6.40 $6.85 1997 6.44 6.62 7.00 7.20 1998 6.62 6.85 7.20 7.45
Note 12 - SUBSEQUENT EVENT The owners of the six limited partnerships, that are consolidated in the financial statements (as described in Note 1), exchanged properties for limited partnership units in the operating partnership, effective May 1, 1998. The following summarizes the units exchanged and the dollar amount attributed to each partnership's property:
Number of Limited Partnership Dollar Amount Units Issued of Units Issued ------------------- --------------- Eastgate Properties, Ltd. 12,450 $ 92,753 Bison Properties, Ltd. 11,400 84,930 First Avenue Building, Ltd. 4,200 31,290 Sweetwater Properties, Ltd. 10,500 78,225 Hill Park Properties, Ltd. 19,200 143,040 Colton Heights, Ltd. 6,750 50,288
Note 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Mortgage loans receivable - Fair values are based on the discounted value of future cash flows expected to be received for a loan using current rates at which similar loans would be made to borrowers with similar credit risk and the same remaining maturities. Cash - The carrying amount approximates fair value because of the short maturity of those instruments. Marketable securities - The fair values of these instruments are estimated based on quoted market prices for these instruments. F-19 Page 107 of 183 Note 13 - (CONTINUED) Notes payable - The carrying amount approximates fair value because of the short maturity of those notes. Mortgages payable - For variable rate loans that reprice frequently, fair values are based on carrying values. The fair value of fixed-rate loans is estimated based on the discounted cash flows of the loans using current market rates. Investment certificates issued - The fair value is estimated using a discounted cash flow calculation that applies interest rates currently being offered on deposits with similar remaining maturities. Accrued interest payable - The carrying amount approximates fair value because of the short-term nature of when interest will be paid. The estimated fair values of the Company's financial instruments are as follows:
1998 1997 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial Assets Mortgage loan receivable $ 3,438,308 $ 3,438,308 $ 3,108,933 $ 3,108,938 Cash 2,132,220 2,132,220 1,718,257 1,718,257 Marketable securities held-to-maturity 3,536,538 3,559,295 4,055,459 3,889,428 Marketable securities available-for-sale 720,688 720,688 683,466 683,466 Financial Liabilities Notes payable $ 1,000,000 $ 1,000,000 $ 0 $ 0 Mortgages payable 135,059,974 129,354,699 115,734,946 113,007,861 Investment certificates issued 10,369,561 10,202,603 8,187,305 8,136,971 Accrued interest payable 1,220,177 1,220,177 1,012,193 1,012,193
F-20 Page 108 of 183 ADDITIONAL INFORMATION F-21 Page 109 of 183 INDEPENDENT AUDITOR'S REPORT ON ADDITIONAL INFORMATION Board of Trustees Investors Real Estate Trust and Subsidiaries Minot, North Dakota Our report on our audit of the basic consolidated financial statements of Investors Real Estate Trust and Subsidiaries for the years ended April 30, 1998, 1997 and 1996, appears on page 1. Those audits were made for the purpose of forming an opinion on such consolidated financial statements taken as a whole. The information on pages 20 through 35 related to the 1998, 1997 and 1996 consolidated financial statements is presented for purposes of additional anaylsis and is not a required part of the basic consolidated financial statements. Such information, except for information on page 35 that is marked "unaudited" on which we express no opinion, has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements, and, in our opinion, the information is fairly stated in all material respects in relation to the basic consolidated financial statements for the years ended April 30, 1998, 1997 and 1996, taken as a whole. We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years ended April 30, 1995 and 1994, none of which is presented herein, and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information on page 30 relating to the 1995 and 1994 consolidated financial statements is fairly stated in all material respects in relation to the basic consolidated financial statements from which it has been derived. BRADY, MARTZ & ASSOCIATES, P.C. May 27, 1998 F-22 Page 110 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 1998 and 1997 Schedule I MARKETABLE SECURITIES
April 30, 1998 April 30, 1997 -------------- -------------- Principal Principal Amount Market Amount Market ------ ------ ------ ------ GNMA Pools $ 3,536,538 $ 3,559,295 $ 4,055,459 $ 3,889,428 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ Cost Market Cost Market ---- ------ ---- ------ Equity shares in other REIT's $ 610,066 $ 720,688 $ 596,961 $ 683,466 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------
F-23 Page 111 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES For the Years Ended April 30, 1998, 1997 and 1996 Schedule X SUPPLEMENTAL INCOME STATEMENT INFORMATION
Charged to Costs and Expenses ----------------------------- 1998 1997 1996 ---- ---- ---- Item - ---- Maintenance and repairs $ 2,832,772 $ 1,812,496 $ 1,702,365 Taxes, other than payroll and income taxes Property taxes 3,162,656 2,515,631 1,873,720 Royalties * * * Advertising costs * * *
* Less than 1 percent of total revenues F-24 Page 112 of 183 INVESTORS REAL ESTATE TRUST AND AFFILIATED PARTNERSHIPS SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION
COST CAPITALIZATION INITIAL COST TO TRUST SUBSEQUENT TO ACQUISITION --------------------- -------------------------- BUILDINGS & CARRYING APARTMENTS ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COSTS - ---------- ------------ ---- ------------ ------------ ----- 1112 32ND AVE SW MINOT $ 376,788 $ 50,000 $ 543,147 $ 8,691 - 177 10TH AVE E DICKINSON 226,229 40,000 318,109 27,669 - 405 GRANT AVE HARVEY ND - 13,584 157,211 52,551 - 4301-4313 9TH AVE SW ND 463,021 52,870 908,727 49,404 - BEULAH CONDOS ND - 6,360 336,589 122,830 - BISON PROPERTIES ND 71,327 100,210 1,348,127 179,024 - CANDLELIGHT APTS, FARGO, ND 498,299 80,040 757,977 22,767 - CENTURY APTS DICKINSON 1,522,794 100,000 1,564,598 212,192 - CENTURY APTS WILLISTON ND 2,577,896 200,000 3,166,750 407,084 - CHATEAU APTS, MINOT, ND 1,670,895 122,000 2,242,090 654 - COUNTRY MEADOWS, BILLINGS, MT 2,647,777 491,247 3,701,540 184,284 120,821 COLUMBIA PARK, GRAND FORKS, ND - 725,277 - - - COLTON HEIGHTS PROPERTIES 338,464 80,000 734,286 50,514 - COTTONWOOD LAKE, BISMARCK - 1,055,862 5,077,785 0 114,353 CRESTVIEW APTS, BISMARCK 2,609,063 235,000 4,290,031 235,518 - EASTGATE PROPERTIES - 23,917 1,490,181 264,530 - FAIRFIELD APTS, MARSHALL MN 96,292 35,000 275,000 111,052 - FOREST PARK ESTS, G FORKS 3,990,430 810,000 5,579,164 564,335 - HILL PARK PROPERTIES, ND 1,403,790 224,750 2,562,296 63,376 - JENNER PROPERTIES ND 1,357,209 220,000 2,077,500 125,696 - KIRKWOOD APTS, BISMARCK ND 2,270,000 449,290 2,729,745 80,916 - LEGACY APTS GRAND FORKS 3,927,506 700,000 5,843,203 46,922 177,986 LEGACY PHASE II, GRAND FORKS, ND - 661,855 3,015,222 - 46,194 MAGIC CITY APTS, MINOT, ND 2,728,417 532,000 4,738,000 77,982 - MANDAN APTS, MANDAN ND 16,566 20,000 236,750 19,758 - MIRAMONT APT, FT COLLINS CO 11,525,814 1,470,000 12,765,460 35,501 - NEIGHBORHOOD APT, CO SPRINGS 7,400,220 1,033,592 9,811,600 134,270 - NORTH POINTE, BISMARCK 1,695,893 143,500 2,120,413 13,628 123,687 OAK MANOR APTS, DICKINSON 232,111 25,000 225,000 50,812 - OAKWOOD ESTATES, S FALLS, SD 2,148,247 342,800 2,783,950 355,918 - OXBOW, SIOUX FALLS 3,403,778 404,072 4,494,441 67,504 - PARK EAST APTS, FARGO ND 3,500,000 83,000 4,082,665 752,546 - PARK MEADOWS, WAITE PARK, MN 7,894,811 1,143,450 9,099,297 466,750 - PARK PLACE, WASECA, MN - 40,000 634,737 174,640 - PARKWAY APTS, BEULAH, ND - 7,000 40,738 70,364 - PINE CONE APTS, FT COLLINS 10,534,209 904,545 12,167,093 98,812 - POINTE WEST APTS, MINOT 2,170,254 240,000 3,537,775 82,951 - PRAIRIE WINDS APTS, S FALLS 1,336,552 144,097 1,816,011 13,726 - ROCKY MEADOWS 96, BILLINGS 2,876,562 655,985 5,588,113 293,640 103,378 ROSEWOOD/OAKWOOD, SIOUX FALLS 1,276,702 200,000 1,738,245 2,190 - SCOTTSBLUFF, NE - - - - - SOUTH POINTE, MINOT 6,484,298 550,000 9,150,975 154,007 402,872 SOUTHVIEW APTS, MINOT - 185,000 468,585 37,308 - SOUTHWIND APTS, GRAND FORKS 4,090,096 400,000 5,033,683 161,977 - SWEETWATER PROPERTIES, ND 194,812 90,767 1,208,847 363,241 - VIRGINIA APARTMENTS, MINOT - 37,600 163,036 23,460 - WEST STONEHILL, ST CLOUD, MN 7,912,344 939,000 10,167,355 250,110 - WOODRIDGE APTS, ROCHESTER, MN 4,282,154 370,000 6,028,096 82,155 - ------------ ------------ ------------ ------------ ------------ $107,751,620 $ 16,438,670 $151,742,358 $ 11,381,483 $ 1,089,291 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
F-25 Page 113 of 183
LIFE ON WHICH BUILDINGS LATEST INCOME AND ACCUMULATE DATE STATEMENT APARTMENTS LAND IMPROVEMENTS TOTAL DEPRECIATI ACQUIRED IS COMPUTED - ---------- ---- ------------ ----- ---------- -------- ------------- 1112 32ND AVE SW, Minot $ 50,000 $ 551,838 $ 601,838 $ 34,521 1996 24-40 years 177 10TH AVE E, DICKINSON 40,278 345,501 385,778 69,977 1989 24-40 years 405 GRANT AVE, HARVEY ND 14,674 208,672 223,346 31,467 1991 24-40 years 4301-4313 9TH AVE SW, FARGO 68,868 942,133 1,011,001 227,730 1988 5-40 years BEULAH CONDOS, ND 78,339 387,441 465,780 313,947 1983 15-40 years BISON PROPERTIES, ND 100,210 1,527,151 1,627,361 1,124,807 1972 25-40 years CANDLELIGHT APTS, FARGO ND 80,040 780,744 860,800 106,039 1993 24-40 years CENTURY APTS DICKINSON 126,738 1,750,052 1,876,790 548,710 1986 35-40 years CENTURY APTS, WILLISTON ND 274,971 3,498,864 3,773,834 1,158,993 1986 35-40 years CHATEAU APTS, MINOT ND 122,000 2,242,744 2,364,744 2,368 1997 12-40 years COLTON HEIGHTS PROPERTIES 80,095 784,705 864,800 341,639 1984 33-40 years COLUMBIA PARK PHASE II, GRAND FORKS 725,277 0 725,277 - 1996 40 years COUNTRY MEADOWS, BILLINGS,MT 491,247 4,006,646 4,497,893 35,249 1996 40 years COTTONWOOD LAKE, BISMARCK 1,055,862 5,192,134 6,247,996 12,850 1997 40 years CRESTVIEW APTS, BISMARCK 235,000 4,525,549 4,760,549 492,494 1994 24-40 years EASTGATE PROPERTIES 28,639 1,749,989 1,778,628 1,317,117 1970 33-40 years FAIRFIELD APTS, MARSHALL, MN 35,360 385,692 421,052 77,315 1988 24-40 years FOREST PARK ESTS, G FORKS 811,954 6,141,545 6,953,499 800,318 1993 24-40 years HILL PARK PROPERTIES, ND 245,653 2,604,769 2,850,422 1,129,069 1985 33-40 years JENNER PROP. - UPREIT 1,357,209 1,065,987 2,423,196 38,925 1996 40 years KIRKWOOD APTS, BISMARCK,ND 449,290 2,810,661 3,259,951 50,263 1997 12-40 years LEGACY APTS, GRAND FORKS 700,000 6,068,111 6,768,111 236,404 1996 24-40 years LEGACY PHASE II, GRAND FORKS 661,855 3,061,416 3,723,271 17,767 1997 12-40 years MAGIC CITY APTS, MINOT ND 532,000 4,815,982 5,347,982 57,746 1997 12-40 years MANDAN APTS, MANDAN, ND 20,000 256,508 276,508 51,204 1989 24-40 years MIRAMONT APTS, FT COLLINS, CO 1,470,000 12,800,961 14,270,961 479,779 1996 40 years NEIGHBORHOOD APT, CO SPRINGS 1,033,592 9,945,870 10,979,462 375,371 1996 40 years NORTH POINTE 49, BISMARCK 143,500 2,257,728 2,401,228 139,188 1995 24-40 years OAK MANOR APTS, DICKINSON 29,012 271,800 300,812 54,642 1989 24-40 years OAKWOOD ESTATES, S FALLS SD 342,800 3,139,868 3,482,668 410,452 1993 24-40 years OXBOW, SIOUX FALLS SD 404,073 4,561,944 4,966,017 397,138 1994 24-40 years PARK EAST APTS, FARGO ND 83,000 4,835,211 4,918,211 38,327 1997 12-40 years PARK MEADOWS,WAITE PARK MN 1,143,450 9,566,047 10,709,497 362,425 1997 40 years PARK PLACE, WASECA MN 40,000 809,377 849,377 297,433 1988 5-40 years PARKWAY APTS, BEULAH ND 11,816 106,286 118,102 13,845 1988 5-40 years PINE CONE APTS, FT COLLINS 904,545 12,265,905 13,170,450 915,217 1994 40 years POINTE WEST APTS, MINOT 240,000 3,620,726 3,860,726 401,904 1994 24-40 years PRAIRIE WINDS APTS, S FALLS 144,097 1,829,737 1,973,834 250,359 1993 24-40 years ROCKY MEADOWS 96, BILLINGS 655,985 5,985,131 6,641,116 222,118 1996 40 years ROSEWOOD/OAKWOOD, S FALLS 200,000 1,740,435 1,940,435 65,223 1996 40 years SOUTH POINTE, MINOT ND 275,000 9,982,854 10,257,854 473,332 1995 24-40 years SOUTHVIEW APTS, MINOT 185,000 505,893 690,893 45,301 1994 24-40 years SOUTHWIND APTS, GRAND FORKS 409,892 5,185,768 5,595,660 321,280 1996 24-40 years SWEETWATER PROPERTIES 94,270 1,568,585 1,662,855 969,529 1972 5-40 years VIRGINIA APARTMENTS, MINOT 37,600 186,496 224,096 63,017 1987 27 1/2-40 years WEST STONEHILL, ST CLOUD MN 939,000 10,417,465 11,356,465 646,889 1995 40 years WOODRIDGE APTS, ROCHESTER 370,000 6,110,251 6,480,251 230,048 1996 40 years ------------ ------------ ------------ ------------ $ 17,542,191 $163,399,172 $180,941,363 $ 15,449,736 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
F-26 Page 114 of 183
COST CAPITALIZATION INITIAL COST TO TRUST SUBSEQUENT TO ACQUISITION ------------------------- -------------------------- BUILDING & CARRYING OFFICE BUILDINGS ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COSTS - ---------------- ------------ ----------- ------------ ------------ ---------- 1ST AVENUE BUILDING $ - $ 30,000 $ 219,496 $ 552,126 $ - 401 SOUTH MAIN, MINOT - 70,600 334,308 188,767 - 408 1ST STREET SE, MINOT - 10,000 34,836 2,071 - CREEKSIDE OFF BLD, BILLINGS 876,346 311,310 1,088,149 257,377 - LESTER CHIROPRACTIC CLINIC - 25,000 243,916 1 - WALTERS 214 S MAIN, MINOT 773 27,055 76,076 8,784 - ------------ ----------- ------------ ----------- ---------- $ 877,119 $ 473,965 $ 1,996,781 $ 1,009,126 $ - ------------ ----------- ------------ ----------- ---------- COMMERCIAL - ---------- ARROWHEAD SHOPPING CENTER $ - $ 100,359 $ 1,063,925 $ 1,528,268 $ - BARNES & NOBLE, FARGO 2,135,006 540,000 2,752,012 0 - BARNES & NOBLE OMAHA, NE 2,312,924 600,000 3,099,101 - 0 CARMICKE THEATRE, GRAND FORKS 1,989,425 183,515 2,292,653 2,501 67,068 COMPUTER CITY, KENTWOOD MI 1,497,191 225,000 1,888,574 - 0 EDGWOOD VISTA, EAST GRAND FORKS 630,608 25,000 874,821 - - EDGEWOOD VISTA, MINOT ND 3,617,668 260,000 1,835,335 4,180,596 - EDGEWOOD VISTA, MISSOULA MT 629,178 108,900 853,528 0 - HUTCHINSON TECH, S FALLS SD 2,221,843 244,800 4,029,426 154,800 - LINDBERG BLDG, EDEN PRAIRIE 1,195,951 198,000 1,154,404 103,385 - MINOT PLAZA, MINOT ND - 50,000 452,898 5,898 - PET FOOD WAREHOUSE, FARGO 770,318 324,148 900,325 27,216 27,245 PIONEER SEED MOORHEAD, MN 303,622 56,925 548,075 48,876 - RETAIL WAREHOUSE BOISE ID 3,518,783 765,000 4,874,576 6,909 - STONE CONTAINER FARGO 3,024,316 440,251 4,409,079 59,999 89,156 SUPERPUMPER CROOKSTON MN - 13,125 214,153 201,499 - SUPERPUMPER EMERADO ND - 25,000 225,564 46,500 - SUPERPUMPER GRAND FORKS, ND - 80,000 405,007 - - SUPERPUMPER, LANGDON ND - 59,674 151,500 28,038 - SUPERPUMPER, SIDNEY MT - 12,000 108,600 - - WEDGEWOOD, SWEETWATER GA 1,536,479 334,346 3,637,534 - - ------------ ----------- ------------ ----------- ---------- 25,383,312 4,646,043 35,771,090 6,394,485 183,469 ------------ ----------- ------------ ----------- ---------- $134,012,051 $21,558,678 $194,588,014 $13,996,870 $1,272,760 ------------ ----------- ------------ ----------- ---------- ------------ ----------- ------------ ----------- ----------
F-27 Page 115 of 183
LIFE ON WHICH BUILDINGS LATEST INCOME AND ACCUMULATED DATE STATEMENT OFFICE BUILDINGS LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED IS COMPUTED - ---------------- ---- ------------ ----- ------------ -------- ------------- 1ST AVENUE BUILDING, Minot $ 67,710 $ 733,912 $ 801,622 $ 318,171 1981 33-40 years 401 SOUTH MAIN MINOT 70,722 522,953 593,675 125,147 1987 24-40 years 408 1ST STREET SE MINOT 10,016 36,892 46,907 22,030 1986 19-40 years CREEKSIDE OFF BLD, BILLINGS 311,310 1,345,526 1,656,836 196,251 1992 40 years LESTER CHIROPRACTIC CLINIC 25,000 243,917 268,917 58,108 1988 40 years WALTERS 214 SO MAIN, MINOT 27,829 84,086 111,915 76,233 1978 20-40 years ----------- ------------ ------------ ----------- $ 512,587 $ 2,967,285 $ 3,479,872 $ 795,940 ----------- ------------ ------------ ----------- ----------- ------------ ------------ ----------- COMMERCIAL - ---------- ARROWHEAD SHOPPING CENTER $ 100,411 $ 2,592,141 $ 2,692,552 $ 2,118,570 1973 15 1/2-40 yrs BARNES & NOBLE, FARGO 540,000 2,752,012 3,292,012 240,801 1994 40 years BARNES & NOBLE, OMAHA NE 600,000 3,099,101 3,699,101 193,694 1995 40 years CARMICKE THEATRE,GRAND FORKS 183,516 2,362,221 2,545,737 206,632 1994 40 years COMPUTER CITY, KENTWOOD MI 225,000 1,888,574 2,113,574 70,822 1996 40 years EDGWOOD VISTA, EAST GRAND FORKS, MN 630,608 269,213 899,821 17,305 1997 40 years EDGWOOD VISTA, MINOT, ND 260,000 6,015,931 6,275,931 77,509 1997 40 years EDGEWOOD VISTA MISSOULA MT 108,900 853,528 962,428 32,007 1997 40 years HUTCHINSON TECH, S FALLS SD 244,800 4,184,226 4,429,026 567,618 1993 40 years LINDBERG BLDG, EDEN PRAIRIE 198,000 1,257,789 1,455,789 195,003 1992 40 years MINOT PLAZA, MINOT ND 50,000 458,796 508,796 62,494 1993 40 years PET FOOD WAREHOUSE FARGO 324,148 954,786 1,278,934 82,809 1994 40 years PIONEER SEED, MOORHEAD MN 56,925 596,951 653,876 92,183 1992 40 years RETAIL WAREHOUSE, BOISE ID 765,000 4,881,485 5,646,485 548,445 1994 40 years STONE CONTAINER, FARGO 440,251 4,558,235 4,998,485 282,275 1995 40 years SUPERPUMPER, CROOKSTON MN 13,125 415,652 428,777 79,856 1988 40 years SUPERPUMPER, EMERADO ND 25,000 272,064 297,064 147,396 1986 19-40 years SUPERPUMPER GRAND FORKS ND 80,000 405,007 485,007 75,939 1991 40 years SUPERPUMPER, LANGDON ND 59,674 179,538 239,212 56,553 1987 31 1/2-40 yrs SUPERPUMPER, SIDNEY MT 12,000 108,600 120,600 14,933 1993 40 years WEDGEWOOD, SWEETWATER GA 334,346 3,637,533 3,971,878 108,571 1996 40 years ----------- ------------ ------------ ----------- $ 5,251,704 $ 41,743,382 $ 46,995,087 $ 5,270,453 ----------- ------------ ------------ ----------- $23,258,039 $207,868,722 $231,126,761 $21,516,129 ----------- ------------ ------------ ----------- ----------- ------------ ------------ -----------
F-28 Page 116 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES Schedule XI (Continued) Reconciliations of total real estate carrying value for the three years ended April 30, 1998, 1997 and 1996 are as follows:
1998 1997 1996 ------------- -------------- ------------ Balance at beginning of year $ 191,884,509 $ 131,447,734 $ 90,892,662 Additions during year - acquisitions 39,014,223 59,377,674 40,660,975 - improvements 1,788,339 1,463,878 635,791 ------------- -------------- ------------ $ 232,687,071 $ 192,289,286 $132,189,428 Deductions during year - cost of real estate sold (1,270,749) (404,777) (741,694) ------------- -------------- ------------ Balance at close of year $ 231,416,322 $ 191,884,509 $131,447,734 ------------- -------------- ------------ ------------- -------------- ------------
Reconciliations of accumulated depreciation for the three years ended April 30, 1998, 1997 and 1996 are as follows:
1998 1997 1996 --------------- --------------- --------------- Balance at beginning of year $ 16,948,156 $ 13,551,571 $ 11,732,655 Additions during year - provisions for depreciation 4,791,907 3,584,591 2,261,724 Deduction during year - accumulated depreciation on real estate sold (223,934) (188,006) (442,808) --------------- --------------- --------------- Balance at close of year $ 21,516,129 $ 16,948,156 $ 13,551,571 --------------- --------------- --------------- --------------- --------------- ---------------
F-29 Page 117 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 1998 Schedule XII INVESTMENTS IN MORTGAGE LOANS ON REAL ESTATE
Final Face Carrying of Loans Interest Maturity Payment Prior Amounts of Amounts of Delinquent Rate Date Terms Liens Mortgages Mortgages or Interest ---- ---- ----- ----- --------- --------- ----------- Residential Higley Heights, Phoenix, AZ 8% 3-31-04 Quarterly - $ 809,786 $ 678,700 $ 678,700 Great Plains Software, Fargo, ND 9.50% 1-1-99 Balloon Pmt - 15,000,000 1,701,308 - Melanie Bentsinger 8% 6-1-25 Monthly - 217,761 210,298 - Rolland Hausman 9% 2-1-16 Monthly - 315,659 302,147 - Other - over $100,000 7-9% 5-1-03 to 2-1-16 Monthly - 517,325 425,751 - - from $20,000-49,999 8-9% 9-1-98 to 1-1-00 Monthly - 1,610,983 78,474 - - less than $20,000 7-9% 2-1-99 to 1-1-02 Monthly - 1,481,559 41,630 - ----------- ---------- ---------- Total $19,953,073 $3,438,308 $ 678,700 ----------- ---------- ---------- ----------- ---------- ---------- Less - Unearned discounts (4,818) - Deferred gain from property dispositions (2,000) - Allowance for loan losses (120,314) -------- $3,311,176
F-30 Page 118 of 183 Schedule XII (Continued)
1998 1997 ---- ---- MORTGAGE LOANS RECEIVABLE, BEGINNING OF YEAR $ 3,108,933 $ 4,932,138 New participations in and advances on mortgage loans 2,061,179 2,835,212 ----------------- --------------- $ 5,170,112 $ 7,767,350 Collections (1,727,237) (4,516,202) Write-off through allowance (4,567) (142,215) ----------------- --------------- MORTGAGE LOANS RECEIVABLE, END OF YEAR $ 3,438,308 $ 3,108,933 ----------------- --------------- ----------------- ---------------
F-31 Page 119 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES Selected Financial Data
Year Ended April 30 ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ------------ ----------- ----------- Consolidated Income Statement Data Revenue $ 32,407,545 $ 23,833,981 $ 18,659,665 $ 13,801,123 $ 11,583,008 Operating income 4,691,198 3,499,443 3,617,807 3,560,318 3,135,426 Gain on repossession/sale of properties 465,499 398,424 994,163 407,512 64,962 Minority interest of portion of operating partnership income (141,788) (18) - - - Net income 5,014,909 3,897,849 4,611,970 3,967,830 3,200,388 Consolidated Balance Sheet Data Total real estate investments $213,211,369 $177,891,168 $122,377,909 $ 84,005,635 $ 63,972,042 Total assets 224,718,514 186,993,943 131,355,638 94,616,744 72,391,548 Shareholders' equity 68,152,626 59,997,619 50,711,920 37,835,654 29,997,189 Consolidated Per Share Data Operating income $ .29 $ .25 $ .30 $ .34 $ .35 Gain on sale of properties .03 .03 .08 .04 .01 Dividends .42 .39 .37 .34 .33 Tax status of dividend Capital gain 2.9% 21.0% 1.6% 11.0% 7.4% Ordinary income 97.1% 79.0% 98.4% 89.0% 92.6% Return of capital 0.0% 0.0% 0.0% 0.0% 0.0%
F-32 Page 120 of 183 INVESTORS REAL ESTATE TRUST AND AFFILIATED PARTNERSHIPS April 30, 1998, 1997 and 1996 GAIN FROM PROPERTY DISPOSITIONS
Total Original Unrealized Realized Realized Realized Property Gain 4/30/98 4/30/98 4/30/97 4/30/96 -------- --------- ----------- ---------- --------- ---------- Brooklyn Addition * $ 25,000 $ 2,000 $ 1,000 $ 1,000 $ 1,000 1411 South 20th * 34,696 - - - 1,177 1302 South 19 1/2 * 87,669 - 15,713 6,732 6,215 600 Maple * 60,025 - - - 41,253 406 17th Street - Mandan * 233,522 - - 138,629 5,143 Chateau * 684,914 - - - 422,125 108 4th Avenue SE - Minot 173,244 - - - 173,244 Mobridge, SD 293,035 - - - 293,035 Lantern Court 50,971 - - - 50,971 Scottsbluff Estates 326,138 - 326,138 Superpumper - Bottineau 83,579 - 83,579 Superpumper - New Town 25,417 - 25,417 Other gains 13,652 - 13,652 Hutchinson, MN 252,063 - - 252,063 - --------- --------- --------- --------- $ 2,000 $ 465,499 $ 398,424 $ 994,163 --------- --------- --------- --------- --------- --------- --------- ---------
The gain from the sale of these properties is being realized based on the Installment method. The amount of deferred gain realized was $16,713, $146,361, and $476,913 for the years ended April 30, 1998, 1997 and 1996, respectively. F-33 Page 121 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 1998 MORTGAGE LOANS PAYABLE
Final Periodic Carrying Delinquent Interest Maturity Payment Face Amount Amount of Principal or Rate Date Terms of Mortgage Mortgage Interest ----------------------------------------------------------------------------------- 1112 32nd Ave SW Minot 8.50% 7/20/10 Monthly $ 425,000 $ 376,788 $0 177 10th Ave E, Dickinson ND 8.50% 11/1/18 Monthly 250,963 226,229 0 214 South Main 9.00% 5/1/98 Monthly 45,000 773 0 4301 9th Ave Sunchase I 9.04% 9/1/02 Monthly 364,765 153,085 0 4313 9th Ave Sunchase II 9.04% 2/1/14 Monthly 370,000 309,936 0 Barnes & Noble Stores 7.98% 11/1/10 Monthly 4,900,000 4,447,930 0 Candelight Apts 8.50% 12/1/99 Monthly 578,000 498,299 0 Carmike -Grand Forks 7.75% 6/5/14 Monthly 1,750,000 1,989,425 0 Century Apts - Dickinson 8.00625% 3/1/06 Monthly 1,595,000 1,522,794 0 Century Apts - Williston 8.00625% 3/1/06 Monthly 2,700,000 2,577,896 0 Chateau - Minot 8.00625% 3/1/06 Monthly 1,674,350 1,670,895 0 Country Meadows - Billings 7.51000% 1/1/08 Monthly 2,660,000 2,647,777 0 Creekside - Billings 8.35% 5/1/13 Monthly 1,023,750 876,346 0 Crestview Apts. - Bismarck 8.69% 1/1/04 Monthly 3,150,000 2,609,063 0 Computer City 7.75% 2/1/01 Monthly 1,565,361 1,497,191 0 Edgewood Vista - East Grand Forks 8.35% 7/5/12 Monthly 650,000 630,608 0 Edgewood Vista - Minot 8.27% 9/20/12 Monthly 3,710,000 3,617,668 0 Edgewood Vista - Missoula 9.75% 4/15/12 Monthly 647,500 629,178 0 Fairfield - Marshall 9.00% 1/1/98 Monthly 275,000 96,292 0 Forest Park Estates IDS 7.625% 5/1/03 Monthly 4,500,000 3,990,430 0 Hutchinson Technology 8.75% 8/1/08 Monthly 2,800,000 2,221,843 0 Jenner Properties, ND 9.50% 11/1/99 Monthly 1,391,585 1,357,209 0 Kirkwood Manor - Bismarck 7.07% 10/01/98 Bond -semiannual 2,330,000 2,270,000 0 Legacy Apts - Grand Forks 7.070% 1/1/04 Monthly 4,000,000 3,927,506 0 Lindberg Bldg, Eden Prairie 7.63% 12/1/08 Monthly 950,000 1,195,951 0 Magic City Apts, Minot 8.50% 10/10/10 Monthly 2,794,192 2,728,417 0 Mandan Apts - 312 12th 8.75% 8/1/99 Monthly 134,767 16,566 0 Miramont Apts, 8.25% 8/1/36 Monthly 11,582,472 11,525,814 0 Neighborhood Apts - Roch 7.98% 12/20/06 Monthly 7,525,000 7,400,220 0 North Pointe - Bismarck 7.12% 8/1/15 Monthly 1,400,000 1,695,893 0 Oak Manor Apts 27 Plex- Dickinson 8.75% 2/1/99 Monthly 250,000 232,111 0 Oakwood Estates Sioux Falls 8.00625% 3/1/06 Monthly 2,250,000 2,148,247 0 Oxbow Sioux Falls 8.00625% 3/1/06 Monthly 3,565,000 3,403,778 0 Park East, Fargo 6.82000% 4/6/08 Monthly 3,500,000 3,500,000 0 Park Meadows Phase I 8.50% 01/10/07 Monthly 2,600,000 2,529,016 0 Park Meadows Phase II 7.8990% 01/10/07 Monthly 2,214,851 2,170,795 0 Park Meadows Phase III 3.84% 30 yr bond Monthly 3,235,000 3,195,000 0 Pet Food Warehouse 8.50% 12/1/10 Monthly 840,000 770,318 0 Pinecone, Ft Collins 7.125% 12/1/34 Monthly 10,685,215 10,534,209 0 Pioneer Building - Fargo 8.375% 12/1/06 Monthly 425,000 303,622 0 Pointe West Apts 8.97% 1/1/04 Monthly 2,625,000 2,170,254 0 Prairie Winds Apts - Sioux Falls 7.67% 5/1/18 Monthly 1,470,000 1,336,552 0 Retail Warehouse, Boise ID 9.75% 3/29/03 Monthly 3,750,000 3,518,783 0 Rocky Meadows- Billings 7.75% 8/1/16 Monthly 3,000,000 2,876,562 0 RoseWood Ct - Sioux Falls 7.975% 9/1/96 Monthly 1,323,000 1,276,702 0 South Pointe, Minot ND 7.12% 6/5/16 Monthly 6,500,000 6,484,298 0 Southwind Apts 7.12% 4/28/10 Monthly 3,780,000 4,090,096 0 Stone Container 8.25% 12/1/10 Monthly 3,300,000 3,024,316 0 Wedgewood Retirement 7.975% 4/23/17 Monthly 1,566,720 1,536,479 0 West Stonehill 7.93% 2/1/98 Monthly 8,232,569 7,912,344 0 Woodridge- Rochester 7.85% 12/1/16 Monthly 4,410,000 4,282,154 0 Colton Heights 8.75% 6/1/07 Monthly 730,000 338,464 0 F-34 Page 122 of 183 Grafton 24 Plex 9.75% 3/20/03 Monthly 270,000 82,412 0 Grafton 18 Plex 9.75% 3/20/03 Monthly 198,000 112,399 0 Hill Park Properties 8.00625% 3/1/06 Monthly 1,470,000 1,403,790 0 Jamestown 610 10.00% 6/1/99 Monthly 250,000 30,856 0 Jamestown 611 10.00% 1/1/00 Monthly 230,000 40,471 0 Melton/Olson/Thompson 8.50% 12/1/98 Monthly 400,000 22,196 0 1516 N Bismarck 8.00% 8/1/99 Monthly 246,000 25,728 0 ------------ ------------ ------ TOTALS $141,059,060 $134,059,974 0 ------------ ------------ ------ ------------ ------------ ------
F-35 Page 123 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 1998 SIGNIFICANT PROPERTY ACQUISITIONS Acquisition for cash and assumptions of mortgages Commercial: Edgewood Vista, East Grand Forks, MN $ 892,500 Edgewood Vista, Minot, ND 4,900,000 Edgewood Vista Alzheimers, Minot, ND 491,410 Edgewood Vista Phase II, Minot, ND 800,000 -------------- $ 7,083,910 -------------- Apartments: Jenner Properties, ND $ 2,350,000 Kirkwood Manor, Bismarck, ND 3,175,000 Magic City Apartments, Minot, ND 5,270,000 Country Meadows, Billings, MT*** 4,496,134 Park East Apartments, Fargo, ND 4,900,000 Legacy Phase II, Grand Forks, ND* 3,489,937 Cottonwood Phase I, Bismarck, ND*** 4,522,347 Chateau Apartments, Minot, ND 2,364,090 Cottonwood Phase II, Bismarck, ND** 1,362,805 -------------- $ 31,930,313 -------------- TOTAL $ 39,014,223 -------------- --------------
* Property is placed in service at April 30, 1998. Additional costs are still to be incurred. ** Property not placed in service at April 30, 1998. Additional costs are still to be incurred. *** Represents costs to complete a project started in year ending April 30, 1997. F-36 Page 124 of 183 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES Quarterly Results of Consolidated Operations (Unaudited)
Quarter Ended --------------------------------------------------------------------- 7-31-97 10-31-97 1-31-98 4-30-98 ------- -------- ------- ------- Revenues $ 7,183,761 $ 7,996,262 $ 8,440,393 $ 8,787,129 Income before gains on sale of properties 894,045 1,233,451 1,358,752 1,204,950 Net gain on sale of properties 39,069 83,579 326,138 16,713 Minority interest of unit holders in operating partnership (9) (9,423) (64,006) (68,350) Net income 933,105 1,307,607 1,620,884 1,153,313 Per share Income before gains on sale of properties .06 .08 .08 .07 Net gain on sale of properties - .01 .02 - Quarter Ended --------------------------------------------------------------------- 7-31-96 10-31-96 1-31-97 4-30-97 ------- -------- ------- ------- Revenues $ 4,966,475 $ 5,474,027 $ 6,383,030 $ 7,010,450 Income before gains on sale of properties 978,107 1,048,154 1,027,117 446,065 Net gain on sale of properties 252,062 - 138,629 7,733 Minority interest of unit holders in operating partnership - - - (18) Net income 1,230,169 1,048,154 1,165,746 453,780 Per share Income before gains on sale of properties .07 .08 .07 .03 Net gain on sale of properties .02 - .01 - Quarter Ended --------------------------------------------------------------------- 7-31-95 10-31-95 1-31-96 4-30-96 ------- -------- ------- ------- Revenues $ 3,782,061 $ 4,715,186 $ 5,104,409 $ 5,058,009 Income before gains on sale of properties 1,009,468 1,058,136 1,082,506 467,697 Net gain on sale of properties - - 522,001 472,162 Net income 1,009,468 1,058,136 1,604,507 939,859 Per share Income before gains on sale of properties .09 .09 .09 .04 Net gain on sale of properties - - .04 .04
The above financial information is unaudited. In the opinion of management, all adjustments (which are of a normal recurring nature) have been included for a fair presentation. F-37 Page 125 of 183 INVESTORS REAL ESTATE TRUST UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX-MONTH PERIOD ENDED JANUARY 31, 1999 The following financial statements have been prepared from the records of Investors Real Estate Trust and its six affiliated limited partnerships and have not been audited or reviewed by the Trust's independent certified public accountants. Accordingly, these statements are subject to adjustments upon audit, which audit will be conducted for the Fiscal Year ending April 30, 1999. Reference is made to the footnotes to the Statements prepared by the Trust's auditors for the Fiscal Year ended April 30, 1998, contained in the Annual Report for Fiscal 1998. In the opinion of the Trust, there have been no developments requiring footnote disclosure for the periods covered by the Financial Statements set forth below that are not adequately disclosed in the footnotes to the April 30, 1998, statements. The accompanying condensed consolidated financial statements of Investors Real Estate Trust, and its subsidiaries (collectively, the "Company"), included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments necessary (of a normal recurring nature only) to present fairly the financial position of the Company as of January 31, 1999 and results of operations and cash flows for the stated periods have been included. The Condensed Consolidated Balance Sheet at April 30, 1998, contained herein, was derived from audited financial statements, but does not include all disclosures included in the 1998 Annual Report and applicable under generally accepted accounting principles. Certain information and footnote disclosures normally included in interim financial statements prepared in accordance with generally accepted accounting principles have been omitted. The results of operations for the three and nine months ended January 31, 1999, are not necessarily indicative of operating results for the entire year. BALANCE SHEETS (unaudited)
ASSETS: 01-31-99 04-30-98 -------- -------- Cash $ 6,585,779 $ 2,132,220 Marketable Securities - GNMA's 3,169,508 3,536,538 - Other REIT's 722,461 720,688 Accounts Receivable 30,452 55,326 Tax & Insurance Escrow 2,573,915 1,254,068 Deferred Charges 1,315,927 1,088,016 Prepaid Insurance 348,819 219,871 Real Estate Deposits 694,963 2,493,713 General Partnerships 0 6,705 ------------------------------------------------------------------------------------------ $ 15,441,824 $ 11,507,145 ------------------------------------------------------------------------------------------ F-38 Page 126 of 183 Real Estate Investments Real Estate Owned $ 272,827,784 $ 231,416,322 Less Accumulated Depreciation (24,639,537) (21,516,129) --------------------------------------------------------------------------------- Net Real Estate Owned 248,188,248 209,900,193 --------------------------------------------------------------------------------- Real Estate Mortgages 1,474,587 3,438,308 Less Unearned Discounts & Allowances (124,879) (127,132) --------------------------------------------------------------------------------- Net Mortgages & Contracts 1,349,708 3,311,176 --------------------------------------------------------------------------------- Total Real Estate Investments $ 249,537,955 $ 213,211,369 ------------------------------------------------------------------------------------------ TOTAL ASSETS $ 264,979,779 $ 224,718,514 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ LIABILITIES: 01-31-99 04-30-98 -------- -------- Accounts Payable & Other Liabilities $ 4,254,406 $ 2,847,080 Mortgages Payable 155,942,643 134,059,974 Investment Certificates Payable 12,358,251 10,369,561 Due on Credit Line 0 1,000,000 ------------------------------------------------------------------------------------------ TOTAL LIABILITIES $ 172,555,300 $ 148,276,615 ------------------------------------------------------------------------------------------ MINORITY INTERESTS IN OPERATING PARTNERSHIP: $ 12,619,372 $ 8,289,273 ------------------------------------------------------------------------------------------ SHAREHOLDERS' EQUITY Shares of Beneficial Interest Outstanding Shares of: 01-31-99 04-30-98 -------- -------- 18,134,700 on 01/31/99 16,391,412 on 04/30/98 $ 86,426,032 $ 74,708,559 Accumulated Distributions in Excess of Net Income (6,552,068) (6,666,555) Unrealized Gain(Loss) on Securities Held for Sale (68,857) $ 110,622 --------------------------------------------------------------------------------------- Total Shareholders' Equity $ 79,805,107 $ 68,152,626 --------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 264,979,779 $ 224,718,514 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------
(The balance of this page is left blank intentionally.) F-39 Page 127 of 183 STATEMENT OF OPERATIONS For the Three- and Nine-Month Periods Ended January 31, 1999 & 1998 (unaudited)
3 Months Ended 9 Months Ended January 31, 1999 January 31, 1999 ---------------- ----------------- OPERATING INCOME: 1999 1998 1999 1998 ---- ---- ---- ---- Real Estate Rentals $ 9,930,345 $ 8,286,064 $ 28,359,059 $ 23,121,047 Interest Income 305,785 136,893 754,133 447,214 Mortgage Discount & Fees 667 17,435 62,253 52,156 - --------------------------------------------------------------------------------------------------------------------------- $ 10,236,797 $ 8,440,634 $ 29,175,445 $ 23,620,417 - --------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSE: Interest $ 3,095,853 $ 2,681,092 $ 8,847,570 $ 7,653,429 Utilities & Maintenance 1,528,599 1,307,348 4,494,113 3,668,313 Property Management 828,598 667,387 2,382,422 1,962,352 Taxes & Insurance 1,154,956 917,211 3,271,700 2,586,960 Advisory & Trustees Fees 170,980 172,552 613,245 485,929 Operating Expenses 166,722 52,755 296,492 167,925 - --------------------------------------------------------------------------------------------------------------------------- $ 6,945,708 $ 5,798,345 $ 19,905,542 $ 16,524,908 - --------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME: (before reserves) $ 3,291,089 $ 2,642,289 $ 9,269,903 $ 7,095,509 - --------------------------------------------------------------------------------------------------------------------------- DEPRECIATION/AMORTIZATION (1,558,161) (1,283,345) (4,449,057) (3,609,434) - --------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (after reserves) $ 1,732,928 $ 1,358,944 $ 4,820,846 $ 3,486,075 GAIN ON SALE OF INVESTMENTS 80,121 326,138 1,788,038 448,786 MINORITY INTEREST PORTION OF OPERATING PARTNERSHIP NET INCOME (158,821) (48,438) (580,263) (61,585) NET INCOME $ 1,654,228 $ 1,636,644 $ 6,028,621 $ 3,873,276 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- NET INCOME PER SHARE: Operating Income (after depreciation) .09 .08 .25 .22 Gain on Sale of Investments .00 .02 .10 .03 - --------------------------------------------------------------------------------------------------------------------------- Total Net Income/Share .09 .10 .35 .25 - --------------------------------------------------------------------------------------------------------------------------- DIVIDENDS PAID PER SHARE .12 .105 .345 .30925 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Average Number of Shares Outstanding 17,772,327 15,878,436 17,263,056 15,552,844 FUNDS FROM OPERATIONS: * Operating Income $ 1,732,928 $ 1,358,944 $ 4,820,846 $ 3,486,075 Plus Depreciation and Amortization 1,558,161 1,283,345 4,449,057 3,609,434 Minus Minority Interest - Operating Partnership (158,821) (48,438) (580,263) (61,585) FUNDS FROM OPERATIONS * $ 3,132,268 $ 2,593,851 $ 8,689,640 $ 7,033,924 per share .18 .16 .50 .45 - ---------------------------------------------------------------------------------------------------------------------------
* Funds from Operations is defined as income before gains (losses) on sales of investments, minority interests of unitholders in operating partnership and extraordinary items, plus depreciation and amortization. F-40 Page 128 of 183 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIODS ENDED JANUARY 31, 1999 AND 1998 (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998 ---- ---- Net Income $ 6,028,621 $ 3,873,276 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,336,034 3,364,663 Minority interest portion of operating partnership income 580,263 61,585 Accretion of discount on contracts (2,253) (4,280) Gain on Sale of Properties (1,788,038) (448,786) Interest reinvested in investment certificates 291,804 244,124 Changes in other assets and liabilities: (Increase) decrease in real estate deposits 1,494,087 (73,000) (Increase) decrease in other assets (104,074) (178,038) (Increase) decrease in tax and insurance escrow (1,319,847) (342,948) (Increase) decrease in deferred charges (227,911) (109,348) Increase (decrease) in accounts payable and accrued expenses 1,686,559 689,215 - -------------------------------------------------------------------------------------------------------- NET CASH PROVIDED FROM OPERATING ACTIVITIES $ 10,975,245 $ 7,076,463 - -------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity of marketable securities held to maturity $ 367,030 $ 360,758 Principle payments on mortgage loans receivable 321,484 1,696,188 Proceeds from sale of property 3,045,454 1,345,058 Payments for acquisition and improvements of properties (36,099,964) (34,552,590) Purchase of marketable securities available for sale (181,250) 0 Investment in mortgage loans receivable (46,500) (294,669) - -------------------------------------------------------------------------------------------------------- NET CASH USED FOR INVESTING ACTIVITIES $(32,593,746) $(31,445,255) - -------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of shares $ 10,866,530 $ 9,236,005 Proceeds from investment certificates issued 3,064,421 2,430,709 Proceeds from mortgages payable 18,670,909 18,444,138 Proceeds from short-term lines of credit 8,250,000 8,650,000 Proceeds from sale of minority interest 4,245,197 585,334 Repurchase of shares (3,053,729) (1,971,506) Dividends Paid (2,730,164) (1,738,751) F-41 Page 129 of 183 Redemption of investment certificates (1,403,881) (940,883) Principal payments on mortgage loans (2,587,223) (2,032,557) Payments on short-term lines of credit (9,250,000) (8,150,000) - -------------------------------------------------------------------------------------------------------- NET CASH PROVIDED FROM FINANCING ACTIVITIES $ 26,072,060 $ 24,512,489 - -------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH $ 4,453,559 $ 143,697 CASH AT APRIL 30 $ 2,132,220 $ 1,718,257 - -------------------------------------------------------------------------------------------------------- CASH AT JANUARY 31 $ 6,585,779 $ 1,861,954 - -------------------------------------------------------------------------------------------------------- SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES 1999 1998 ---- ---- Dividends reinvested $ 3,925,118 $ 3,149,841 Real estate investment and mortgage loans receivable acquired through assumption of mortgage loans payable and accrual of costs 5,366,292 10,609,107 Mortgage loan receivable transferred to property owned 1,701,308 1,161,878 Proceeds from sale of properties deposited directly with escrow agent 2,569,292 0 Properties acquired through the issuance of minority Interest units in the operating partnership 1,055,525 5,455,265 Mortgages paid directly by owner of contract 0 0 Interest reinvested directly in investment certificates 291,804 244,124 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest paid on mortgages $ 7,952,416 $ 6,739,919 Interest paid on margin account and other 41,452 39,045 Interest paid on investment certificates 285,562 224,529 - -------------------------------------------------------------------------------------------------------- $ 8,279,430 $ 7,003,493 - --------------------------------------------------------------------------------------------------------
(The balance of this page is left blank intentionally.) F-42 Page 130 of 183 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is an itemization of the anticipated cost to the Trust in connection with the issuance and distribution of the securities to be registered. Commission $487,500 Legal: $15,000 Advertising, Printing & Promotion Expenses: 15,000 to 136,500 Accounting: 1,000 Registration Fees: 10,000 -------- $41,000 to 650,000 ITEM 31. SALES TO SPECIAL PARTIES There is no person or class of persons to whom any securities have been sold within the past six months, or are to be sold, by the registrant or any security holder for whose account any of the securities being registered are to be offered, at a price varying from that at which securities of the same class are to be offered to the general public pursuant to this registration, except as follows: The Trust has a policy allowing its Trustees and employees of its Advisor - Odell-Wentz & Associates, L.L.C. - and their spouses to purchase its shares of beneficial interest at a price equal to the net price then received by IRET for its shares, after payment of the brokerage commission, when sold to the public. During the three-year period ended July 31, 1998, 485,072 shares were purchased by eligible individuals. No commissions or other discounts were paid or given in connection with such sales. The Trust claims exemption from the registration of said shares under Section 4(2) of the Securities Act of 1933. ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES Until July 9, 1996, the shares of Beneficial Interest of IRET were sold in the over-the-counter market only within the State of North Dakota by Inland National Securities, Inc., 21 South Main, Minot, ND 58701, and Financial Advantage Brokerage Services, Inc., 17 South Main, Minot, ND 58701. Set forth below, by quarter-year, are the total number of IRET shares sold and repurchased and the high and low reported sales prices for the period beginning July 1, 1995:
Shares Repurchased New Shares Sold Calendar No. of From Shareholders by IRET Year Months Shares Sold Low High Low High ---- ------ ----------- --- ---- --- ---- 1995 July -September 452,665 5.89 6.03 6.40 6.55 1995 October-December 466,447 5.89 6.16 6.40 6.70 1996 January-March 516,179 5.89 6.30 6.40 6.85 1996 April-July 9 394,234 6.30 6.30 6.85 6.85
II-1 Page 131 of 183 During said period, IRET shares were sold on the primary market only for cash to bona-fide residents of the State of North Dakota by Inland National Securities, Inc., and Financial Advantage Brokerage Services, Inc., which were securities dealers registered with the State of North Dakota. IRET claims exemption from the registration of its shares of Beneficial Interest under the Securities Act of 1933 under Section 3(a)(11) of said Act. All of said securities were offered and sold only to persons resident within the State of North Dakota. ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS The governing provisions of the Trust provide nonliability of and indemnification to the Board of Trustees and officers except for willful misfeasance, bad faith, gross negligence, or any liability imposed by the Securities Act of 1933. The Trust currently provides no insurance coverage for the errors or omissions of Board members, officers or the Advisor. The Advisor currently maintains no insurance coverage for its errors or omissions as Advisor to the Trust. ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED No portion of the consideration to be received by the registrant for such shares is to be credited to an account other than the appropriate capital share account. ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS a) List of all financial statements filed as part of this registration statement
Financial Statement Filed Included in Prospectus ------------------------- ---------------------- Financial Statement by Investors Real See F-1 through F-37 Estate Trust for the period ended April 30, 1998, prepared by Brady Martz & Associates, P.C., Certified Public Accountants Interim Financial Statement by Investors Real Estate Trust for the three-month period ended July 31, 1998 (unaudited) See F-38 through F-42
b) Exhibit Index
Description of Exhibit Location in Form S-11 Filing ---------------------- ---------------------------- (1) Security Sales Agreement Ex-1(i), Pages 138 - 139 (2) Plan of acquisition, Not Applicable reorganization, arrangement, liquidation or succession II-2 Page 132 of 183 (3) (i) Second Restated Ex-3(i), Pages 140 - 175 Declaration of Trust Dated February 10, 1999 (ii) IRET Properties IRET Properties Partnership Partnership Agreement Agreement dated January 31, 1997, filed as Ex-3(ii) to Form S-11 filed by the Registrant on November 28, 1997, (File No. 0-14851) and Incorporated herein by reference (4) Instruments defining the See #3 rights of security holders, including indentures (5) Opinion re legality Ex-5, Pages 176 - 177 (6) Opinion re discount on Not Applicable capital shares (7) Opinion re liquidation Not Applicable preference (8) Opinion re tax matters Ex-8, Page 178 (9) Voting trust agreement Not Applicable (10) Material Contracts Advisory Agreement with the Registrant and Odell-Wentz & Associates, filed as Exhibit 10 to said Form S-11 and incorporated herein by reference (File No. 0-14851) (11) Statement re computation Not Applicable of per share earnings (12) Statement re computation Not Applicable of ratios (15) Letter re unaudited Not Applicable interim financial information (16) Letter re change in Not Applicable certifying accountant (21) Subsidiaries of the List of affiliated Registrant partnerships filed as Item 7 of Form S-11 filed for the Registrant (File No. 0-14851) and II-3 Page 133 of 183 incorporated herein by reference (23) Consent of experts and counsel (i) Pringle & Herigstad, P.C. Ex-23(i), Page 179 (ii) Brady Martz & Associates, Ex-23(ii), Page 180 P.C. (24) Power of Attorney Not Applicable (25) Statement of eligibility Not Applicable of trustee (27) Financial Data Schedule Ex-27, Page 181 (99) Additional Exhibits (i) Ex-99, Page 182 (ii) Marketing Agreement dated October 1, 1997, between IRET and Roger Domres filed as Exhibit 99 to Form S-11 for the Registrant on November 28, 1997 (File No. 0-14851) and incorporated herein by reference
UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 Page 134 of 183 (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. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant 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 the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) of (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certified that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this registration to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minot, State of North Dakota. INVESTORS REAL ESTATE TRUST May 7, 1999 BY /s/ Roger R. Odell ------------------------------ Roger R. Odell Its President II-5 Page 135 of 183 Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dated indicated. Signature Title Date --------- ----- ---- /s/ Ralph A. Christensen - ------------------------------ Trustee and Chairman May 7, 1999 Ralph A. Christensen /s/ Mike F. Dolan - ------------------------------ Trustee and Vice Chairman May 7, 1999 Mike F. Dolan /s/ Jeffrey L. Miller - ------------------------------ Trustee and Vice-Chairman May 7, 1999 Jeffrey L. Miller /s/ John F. Decker - ------------------------------ Trustee May 7, 1999 John F. Decker /s/ Patrick G. Jones - ------------------------------ Trustee May 7, 1999 Patrick G. Jones /s/ J. Norman Ellison - ------------------------------ Trustee May 7, 1999 J. Norman Ellison /s/ Daniel L. Feist - ------------------------------ Trustee May 7, 1999 Daniel L. Feist /s/ Thomas A. Wentz, Jr. - ------------------------------ Trustee May 7, 1999 Thomas A. Wentz, Jr. /s/ C. Morris Anderson - ------------------------------ Trustee May 7, 1999 C. Morris Anderson /s/ Roger R. Odell - ------------------------------ President and Trustee May 7, 1999 Roger R. Odell /s/ Thomas A. Wentz - ------------------------------ Vice-President May 7, 1999 Thomas A. Wentz /s/ Timothy P. Mihalick - ------------------------------ Vice-President May 7, 1999 Timothy P. Mihalick /s/ Diane K. Bryantt - ------------------------------ Secretary May 7, 1999 Diane K. Bryantt II-6 Page 136 of 183 INDEX OF EXHIBITS
Description of Exhibit Location in Form S-11 Filing - ---------------------- ---------------------------- (1) Security Sales Agreements Ex-1(i), Pages 139 - 140 (2) Plan of acquisition, Not Applicable reorganization, arrangement, liquidation or succession (3) (i) Second Restated Declaration Ex-3(i), Pages 141 - 176 of Trust dated February 10, 1999 (ii) IRET Properties Partnership IRET Properties Partnership Agreement Agreement dated January 31, 1997, filed as Ex-3 (ii) to Form S-11 filed by the Registrant on November 28, 1997, (File No. 0-14851) and Incorporated herein by reference (4) Instruments defining the See #3 rights of security holders, including indentures (5) Opinion re legality Ex-5, Pages 177 - 178 (6) Opinion re discount on Not Applicable capital shares (7) Opinion re liquidation Not Applicable preference (8) Opinion re tax matters Ex-8, Page 179 (9) Voting trust agreement Not Applicable (10) Material Contracts Advisory Agreement with the Registrant and Odell- Wentz & Associates, filed as Exhibit 10 to said Form S-11 and incorporated herein by reference (File No. 0-14851) (11) Statement re computation Not Applicable of per share earnings (12) Statement re computation Not Applicable (15) Letter re unaudited Not Applicable interim financial information II-7 Page 137 of 183 (16) Letter re change in Not Applicable certifying accountant (21) Subsidiaries of the List of affiliated partnerships Registrant filed as Item 7 of Form S-11 filed for the Registrant (File No. 0-14851) and incorporated herein by reference (23) Consent of experts and counsel (i) Pringle & Herigstad, P.C. Ex-23 (i), Page 180 (ii) Brady Martz & Associates, Ex-23 (ii), Page 181 P.C. (24) Power of Attorney Not Applicable (25) Statement of eligibility Not Applicable of trustee (27) Financial Data Schedule Ex-27, Page 182 (99) Additional Exhibits (i) Ex-99, Page 183 (iii) Marketing Agreement dated October 1, 1997, between IRET and Roger Domres filed as Exhibit 99 to Form S-11 for the Registrant on November 28, 1997 (File No. 0-14851) and incorporated herein by reference
THE BALANCE OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK. II-8 Page 138 of 183 EX-1.I 2 EXHIBIT 1(I) EX-1(i) FORM S-11 INVESTORS REAL ESTATE TRUST SECURITY SALES AGREEMENT THIS AGREEMENT, made this _____ day of May, 1999, between INVESTORS REAL ESTATE TRUST, A North Dakota Business Trust, 12 South Main, Minot, North Dakota 58701 (hereinafter ("IRET"), and NAME AND ADDRESS OF BROKER,(hereinafter "BROKER"). WHEREAS, IRET intends to file a Form S-11 with the Securities and Exchange Commission to register for sale to the public 750,000 shares of its shares of Beneficial Interest; and, WHEREAS, BROKER is a broker registered with the National Association of Securities Dealers and is also registered in states in which said shares of Beneficial Interest will also be registered for sale by IRET; NOW, THEREFORE, in consideration of the mutual covenants herein contained, it is agreed as follows: 1. IRET hereby employs BROKER as a Broker to offer said shares of Beneficial Interest for sale for $8.10 per share with a minimum purchase of 100 shares. BROKER agrees to use its best efforts to conduct the sales effort necessary to market said securities subject to the terms and conditions of this agreement. This agreement shall become effective only upon the effectiveness of the registration of said securities by the Securities and Exchange Commission and the applicable state Securities Commissioners and shall terminate contemporaneously with the termination or completion of said registration. 2. IRET shall be responsible for paying all costs and expenses relating to the registration of said securities, including the preparation, printing and filing of the Prospectus and Registration Statements and all amendments and exhibits, all filing and registration fees and costs, and all legal, accounting, printing and filing fee expenses in connection therewith. 3. All solicitation expenses including travel, telephone and other expenses incurred by BROKER and its salesmen shall be the responsibility of BROKER and its salesmen. In the event the offering is terminated, BROKER will NOT be reimbursed for any out-of-pocket expenses. 4. As compensation for its services hereunder, BROKER shall receive 8% of the proceeds of all of the securities sold by it and paid for. 5. IRET represents and warrants to BROKER as follows: - IRET is a North Dakota Business Trust duly organized and in good standing under the laws of the State of North Dakota II-9 Page 139 of 183 and duly authorized to conduct its business in the states in which it operates. - The shares of Beneficial Interest described in the Prospectus filed in connection with the above described Offering have the characteristics set forth in said Prospectus and IRET is authorized to issue an unlimited number of its shares of Beneficial Interest under its trust powers. - The Financial Statements contained in the Prospectus and by reference incorporated herein are true, correct and complete, and no material, adverse changes have occurred since the issuance of such statement. IRET hereby indemnifies and will hold BROKER harmless from all claims, demands, liabilities and expenses (including legal expenses) arising out of or based on any of the representations or warranties made by IRET herein. This agreement shall be binding upon and shall inure to the benefit of the parties, their successors and assigns. INVESTORS REAL ESTATE TRUST BY /s/ Thomas A. Wentz, Sr. ---------------------------- Thomas A. Wentz, Sr., Vice President BROKER BY (NAME OF BROKER) ---------------------------- Its ------------------------- II-10 Page 140 of 183 EX-3.I 3 EXHIBIT 3(I) EX-3(i) FORM S-11 INVESTORS REAL ESTATE TRUST SECOND RESTATED DECLARATION OF TRUST INVESTORS REAL ESTATE TRUST WHEREAS, Under the DECLARATION OF TRUST made on the 31st day of July, 1970, and the Restated DECLARATION OF TRUST made on October 22, 1996 by the undersigned as trustees of Investors Real Estate Trust (hereinafter referred to as IRET), there was granted to the undersigned under Article 1, Section 5 of said Declaration of Trust, the power to amend said Declaration without prior approval of the Shareholders in order to conform said Trust Agreement to the requirements of the regulatory authority with jurisdiction over the issuance of the Trust securities, and WHEREAS, Said governmental authority has requested certain amendments to said DECLARATION OF TRUST, NOW, THEREFORE, Pursuant to said reserved power to them granted under said DECLARATION OF TRUST, the undersigned do hereby amend and restate said DECLARATION OF TRUST as follows: SECOND RESTATED DECLARATION OF TRUST made as of this 10th day of February, 1999, by the trustees of Investors Real Estate Trust, creating a trust to invest directly or through an operating partnership in real estate, interests in real estate, leasehold interests, mortgages, and interests in mortgages secured by real estate using funds invested in the trust by individuals in exchange for a beneficial interest in the trust (hereinafter called Shareholders). The trustees agree to hold and manage the assets of this Trust; and The Trustees for the purpose of defining the respective interests of the Shareholders in the Trust, have agreed to issue to each Shareholder negotiable certificates of beneficial interest or shares (hereinafter called Shares) in the respective amounts and with the designations and form as hereinafter provided: Now, therefore, the trustees hereby declare that they assume the duties of trustees hereunder and will hold all assets of the Trust, including those to be received as hereinafter provided, and all rents, income, profits, and gains therefrom, from whatever source derived, in trust for the Shareholders in accordance with the terms and conditions hereinafter in this instrument provided and all amendments thereto called the Second Restated DECLARATION OF TRUST to wit: II-11 Page 141 of 183 TABLE OF CONTENTS ARTICLE 1 - THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Name. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Location. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Nature of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Purposes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Particular Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Conflicts of Interest and Investment Restrictions . . . . . . . . . . . . 21 Sales and Leases to IRET . . . . . . . . . . . . . . . . . . . . . . 21 Sales and Leases to SPONSOR, ADVISOR, TRUSTEES or any AFFILIATE. . . 21 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Investment Policies. . . . . . . . . . . . . . . . . . . . . . . . . 22 Multiple PROGRAMS. . . . . . . . . . . . . . . . . . . . . . . . . . 22 Other Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 22 Appraisal of Real Property . . . . . . . . . . . . . . . . . . . . . 22 Roll-Up Transaction. . . . . . . . . . . . . . . . . . . . . . . . . 23 Borrowing Limitations. . . . . . . . . . . . . . . . . . . . . . . . 24 Other Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . 24 Fees, Compensation and Expenses. . . . . . . . . . . . . . . . . . . 26 TRUSTEE'S Review . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ACQUISITION FEES and ACQUISITION EXPENSES. . . . . . . . . . . . . . 26 TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . 26 Real Estate Commissions on Resale of Property. . . . . . . . . . . . 27 Incentive Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ADVISOR Compensation . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE 2 - SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SHARES: Certificates of Beneficial Interest . . . . . . . . . . . . . . . 29 Sale of SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Offering of SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SHARES Purchased by IRET. . . . . . . . . . . . . . . . . . . . . . . . . 29 Transferability of SHARES . . . . . . . . . . . . . . . . . . . . . . . . 30 Effect of Transfer of SHARES or Death, Insolvency, or Incapacity of SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Redemption and Prohibition on Transfer. . . . . . . . . . . . . . . . . . 30 ARTICLE 3 - SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Rights and Obligations of SHAREHOLDERS. . . . . . . . . . . . . . . . . . 30 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Voting Rights of SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . 31 Liability of SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . 32 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Access to Records. . . . . . . . . . . . . . . . . . . . . . . . . . 33 Distribution Reinvestment Plans. . . . . . . . . . . . . . . . . . . 34 Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Election of TRUSTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . 35 II-12 Page 142 of 183 ARTICLE 4 - THE TRUSTEES . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Number, Term of Office, Qualification, and Compensation of TRUSTEES . . 35 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Successor TRUSTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Actions by TRUSTEES . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Title and Authority of TRUSTEES . . . . . . . . . . . . . . . . . . . . 37 The ADVISOR and Independent Contractor. . . . . . . . . . . . . . . . . 37 Written Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Fiduciary Duty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Powers of TRUSTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . 38 TRUSTEES' Right to Own SHARES in Trust. . . . . . . . . . . . . . . . . 41 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Indemnification of TRUSTEES. . . . . . . . . . . . . . . . . . . . 41 PERSONS Dealing with TRUSTEES . . . . . . . . . . . . . . . . . . . . . 43 Administrative Powers of TRUSTEES . . . . . . . . . . . . . . . . . . . 43 ARTICLE 5 - DURATION AND TERMINATION OF IRET . . . . . . . . . . . . . . . . 43 Termination of IRET . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Organization as a Corporation . . . . . . . . . . . . . . . . . . . . . 44 ARTICLE 6 - AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 When No SHARES are outstanding. . . . . . . . . . . . . . . . . . . . . 44 When SHARES are Outstanding . . . . . . . . . . . . . . . . . . . . . . 45 ARTICLE 7 - MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . 45 Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Headings for Reference Only . . . . . . . . . . . . . . . . . . . . . . 45
II-13 Page 143 of 183 ARTICLE 1 - THE TRUST SECTION 1. DEFINITIONS. Unless a term contained in this document is defined immediately following its use, the following definition shall apply: 1. ADMINISTRATOR: The official or agency administering the Securities laws of a jurisdiction. 2. ACQUISITION EXPENSES: Expenses including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on property not acquired, accounting fees and expenses, title insurance, and miscellaneous expenses related to selection and acquisition of properties, whether or not acquired. 3. ACQUISITION FEE: The total of all fees and commissions paid by any party to any party in connection with making or investing in mortgage loans or the purchase, development or construction of property by IRET. Included in the computation of such fees or commissions shall be any real estate commission, selection fee, DEVELOPMENT FEE, CONSTRUCTION FEE, nonrecurring management fee, loan fees or points or any fee of a similar nature, however designated. Excluded shall be DEVELOPMENT FEES and CONSTRUCTION FEES paid to PERSONS not affiliated with the SPONSOR in connection with the actual development and construction of a project. 4. ADVISOR: The PERSON responsible for directing or performing the day-to-day business affairs of IRET, including a PERSON to which an ADVISOR subcontracts substantially all such functions. 5. AFFILIATE: An AFFILIATE of another PERSON includes any of the following: A. any PERSON directly or indirectly owning, controlling, or holding, with power to vote ten percent or more of the outstanding voting, securities of such other PERSON. B. any PERSON ten percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other PERSON. C. any PERSON directly or indirectly controlling, controlled by, or under common control with such other PERSON. D. any executive officer, director, TRUSTEE or general partner of such other PERSON. II-14 Page 144 of 183 E. any legal entity for which such PERSON acts as an executive officer, director, TRUSTEE or general partner. 6. AVERAGE INVESTED ASSETS: For any period the average of the aggregate book value of the assets of the Trust invested, directly or indirectly, in equity interests in and loans secured by real estate, before reserves for depreciation or bad debts or other similar non-cash reserves computed by taking the average of such values at the end of each month during such period. 7. COMPETITIVE REAL ESTATE COMMISSION: Real estate or brokerage commission paid for the purchase or sale of a property which is reasonable, customary and competitive in light of the size, type and location of such property. 8. CONTRACT PRICE FOR THE PROPERTY: The amount actually paid or allocated to the purchase, development, construction or improvement of a property exclusive of ACQUISITION FEES and ACQUISITION EXPENSES. 9. CONSTRUCTION FEE: A fee or other remuneration for acting as general contractor and/or construction manager to construct improvements, supervise and coordinate projects or to provide Major Repairs or Rehabilitation on IRET's property. 10. DECLARATION OF TRUST: The DECLARATION OF TRUST, by-laws, certificate, articles of incorporation or other governing instrument pursuant to which IRET is organized. 11. DEVELOPMENT FEE: A fee for the packaging of IRET'S property, including negotiating and approving plans, and assisting in obtaining necessary zoning, variances, and financing for the specific property, either initially or at a later date. 12. INDEPENDENT EXPERT: A PERSON with no material current or prior business or personal relationship with the ADVISOR or TRUSTEES who is engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by IRET. 13. INDEPENDENT TRUSTEE(S): The TRUSTEE(S) of IRET who are not associated and have not been associated within the last two years, directly or indirectly, with the SPONSOR or ADVISOR of IRET. A. A TRUSTEE shall be deemed to be associated with the SPONSOR or ADVISOR if he or she i. owns an interest in the SPONSOR, ADVISOR, or any of their AFFILIATES; or II-15 Page 145 of 183 ii. is employed by the SPONSOR, ADVISOR or any of their AFFILIATES; or iii. is an officer or director of the SPONSOR, ADVISOR, or any of their AFFILIATES; or iv. performs services, other than as a TRUSTEE, for IRET; or v. is a TRUSTEE for more than three REITS organized by the SPONSOR or advised the ADVISOR; or vi. has any material business or professional relationship with the SPONSOR, ADVISOR, or any of their AFFILIATES. B. For purposes of determining whether or not the business or professional relationship is material, the gross revenue derived by the prospective INDEPENDENT TRUSTEE from the SPONSOR and ADVISOR and AFFILIATES shall be deemed material per se if it exceeds 5% of the prospective INDEPENDENT TRUSTEE'S: i. annual gross revenue, derived from all sources, during either of the last two years; or ii. net worth, on a fair market value basis. C. An indirect relationship shall include circumstances in which a TRUSTEE'S spouse, parents, children, siblings, mothers-or fathers-in-laws, sons-or daughters-in-laws, or brothers - or sisters-in-law is or has been associated with the SPONSOR, ADVISOR, any of their AFFILIATES, or IRET. 14. INITIAL INVESTMENT: That portion of the initial capitalization of IRET contributed by the SPONSOR, or its AFFILIATES. 15. IRET: Investors Real Estate Trust. 16. LEVERAGE: The aggregate amount of indebtedness of IRET for money borrowed (including purchase money mortgage loans) outstanding at any time, both secured and unsecured. 17. NET ASSETS: The total assets (other than intangibles) at cost before deducting depreciation or other non-cash reserves less total liabilities, calculated at least quarterly on a basis consistently applied. 18. NET INCOME: For any period total revenues applicable to such period, less the expenses applicable to such period other than additions to reserves for depreciation or bad debts or other similar non-cash reserves. If the ADVISOR receives an incentive fee, NET INCOME, for purposes of II-16 Page 146 of 183 calculating TOTAL OPERATING EXPENSES shall exclude the gain from the sale of IRET'S assets. 19. ORGANIZATION AND OFFERING EXPENSES: All expenses incurred by and to be paid from the assets of IRET in connection with and in preparing IRET for registration and subsequently offering and distributing it to the public, including, but not limited to, total underwriting and brokerage discounts and commissions (including fees of the underwriters' attorneys), expenses for printing, engraving, mailing, salaries of employees while engaged in sales activity, charges of transfer agents, registrars, TRUSTEES, escrow holders, depositories, experts, expenses of qualification of the sale of the securities under Federal and State laws, including taxes and fees, accountants' and attorneys' fees. 20. PERSON: Any natural person, partnership, corporation, association, trust, limited liability company or other legal entity. 21. PROSPECTUS: Shall have the meaning given to that term by Section 2(10) of the Securities Act of 1933, including a preliminary PROSPECTUS; provided, however, that such term as used herein shall also include an offering circular as described in Rule 256 of the General Rules and Regulations under the Securities Act of 1933 or, in the case of an intrastate offering, any document by whatever name known, utilized for the purpose of offering and selling securities to the public. 22. REAL ESTATE INVESTMENT TRUST ("REIT"): A corporation, trust, association or other legal entity (other than a real estate syndication) which is engaged primarily in investing in equity interests in real estate (including fee ownership and leasehold interests) or in loans secured by real estate or both. 23. ROLL-UP: A transaction involving the acquisition, merger, conversion, or consolidation either directly or indirectly of the REIT and the issuance of securities of a ROLL-UP ENTITY. Such term does not include: A. a transaction involving securities of REIT that have been for at least 12 months listed on a national securities exchange or traded through the National Association of Securities Dealers Automated Quotation National Market System; or B. a transaction involving the conversion to corporate, trust, or association form of only the REIT if, as a consequence of the transaction, there will be no significant adverse change in any of the following: II-17 Page 147 of 183 i. SHAREHOLDERS' voting rights; ii. the term of existence of the REIT; iii. SPONSOR or ADVISOR compensation; iv. the REIT'S investment objectives. 24. ROLL-UP ENTITY: A partnership, REIT, corporation, trust, or other entity that would be created or would survive after the successful completion of a proposed ROLL-UP transaction. 25. SHARES: SHARES of beneficial interest or of common stock of a REIT of the class that has the right to elect the TRUSTEES of such REIT. 26. SHAREHOLDERS: The registered holders of IRET'S SHARES. 27. SPECIFIED ASSET REIT: A Program where, at the time a securities registration is ordered effective, at least 75% of the net proceeds from the sale of SHARES are allocable to the purchase, construction, renovation, or improvement of individually identified assets. Reserves shall not be included in the 75%. 28. SPONSOR: Any PERSON directly or indirectly instrumental in organizing, wholly or in part, a REIT, or any PERSON who will control, manage or participate in the management of a REIT, and any AFFILIATE of such PERSON. Not included is any PERSON whose only relationship with the REIT is as that of an independent property manager of REIT assets, and whose only compensation is as such. SPONSOR does not include wholly independent third parties such as attorneys, accountants and underwriters whose only compensation is for professional services. A PERSON may also be deemed a SPONSOR of the REIT by: A. taking the initiative, directly or indirectly, in founding or organizing the business or enterprise of the REIT, either alone or in conjunction with one or more other PERSONS; B. receiving a material participation in the REIT in connection with the founding or organizing of the business of the REIT, in consideration of services or property, or both services and property; C. having a substantial number of relationships and contacts with the REIT; D. possessing significant rights to control REIT properties; II-18 Page 148 of 183 E. receiving fees for providing services to the REIT which are paid on a basis that is not customary in the industry; F. providing goods or services to the REIT on a basis which was not negotiated at arms length with the REIT. 29. TOTAL OPERATING EXPENSES: Aggregate expenses of every character paid or incurred by IRET as determined under Generally Accepted Accounting Principles, including ADVISORS' fees, but excluding: A. the expenses of raising capital such as ORGANIZATION AND OFFERING EXPENSES, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and such other expenses, and tax incurred in connection with the issuance, distribution, transfer, registration, and stock exchange listing of IRET'S SHARES; B. interest payments; C. taxes; D. non-cash expenditures such as depreciation, amortization and bad debt reserves; E. incentive fees; F. ACQUISITION FEES, ACQUISITION EXPENSES, real estate commissions on resale of property and other expenses connected with the acquisition, disposition, and ownership of real estate interests, mortgage loans, or other property (such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair, and improvement of property. 30. TRUSTEE(S): The members of the board of trustees or directors or other body which manages IRET. 31. UNIMPROVED REAL PROPERTY: The real property of a REIT which has the following three characteristics: A. an equity interest in real property which was not acquired for the purpose of producing rental or other operating income; B. has no development or construction in process on such land; and C. no development or construction on such land is planned in good faith to commence on such land within one year. SECTION 2. NAME. The Trust shall be known as "Investors Real Estate Trust," in which name the TRUSTEES may conduct business, sue and be sued and otherwise do all things and take all action deemed by them II-19 Page 149 of 183 appropriate to carry out the business and preserve the assets of the Trust. SECTION 3. LOCATION. The principal office of the Trust shall be at 12 South Main Street, Minot, North Dakota 58701, or at such other address, city, or locality as the TRUSTEES shall from time to time determine. The Trust may have such other offices or places of business as the TRUSTEES may from time to time determine. SECTION 4. NATURE OF TRUST. The Trust shall be of the type commonly termed a business trust and shall not be a general partnership, limited partnership, partnership association or corporation. The SHAREHOLDERS are beneficial owners hereunder. Neither the TRUSTEES nor the SHAREHOLDERS nor any of them shall ever be deemed or treated in any way whatsoever to be liable or responsible hereunder as partners. This Trust is intended to have the status of a "REAL ESTATE INVESTMENT TRUST" as that term is defined in Section 856-858 of the Internal Revenue Code of 1986, as now enacted and as it may be hereafter amended, and the DECLARATION OF TRUST and all actions of the TRUSTEES shall be construed in accordance with such intent. SECTION 5. PURPOSES. IRET will be primarily engaged in the investment and reinvestment of its funds and other assets in real property, interests in real property, mortgages secured by real property, leasehold interests in real property, and interests in mortgages on real property, except that if the TRUSTEES are of the opinion that investment in real estate assets at any particular time is not prudent because of market or economic conditions, IRET's assets may be maintained in cash or government securities, or both. IRET shall not be primarily engaged in investing, reinvesting, or trading in securities. It is the express purpose and objective of IRET to have invested from time to time such percentages of the value of its total assets in real property, leaseholds thereof, mortgages on real property, or interests therein, cash, cash items, government securities and securities of other REITs, and to follow such investment policies, as may be required in order that IRET qualify (so long as such qualification, in the opinion of the TRUSTEES, is advantageous to its SHAREHOLDERS) as said "REAL ESTATE INVESTMENT TRUST." SECTION 6. PARTICULAR POLICIES. IRET will follow such policies as are required to maintain its qualification as a REIT. In the event that IRET shall desire to issue or sell SHARES or other securities in any state or jurisdiction in which there shall be in force and effect a law, rule, or regulation of the ADMINISTRATOR requiring that this DECLARATION OF TRUST contain one or more particular limitations or restrictions on the policies or operations of IRET, then anything else in this DECLARATION OF TRUST contained to the contrary notwithstanding, the TRUSTEES may, without the prior approval of the SHAREHOLDERS, amend this DECLARATION OF TRUST to incorporate herein any such limitations or restrictions, including, without affecting the generality of the foregoing, limitations or restrictions on the issuance of senior securities, borrowing money, requiring appraisals in particular circumstances, making loans, underwriting securities of others, investing in unimproved real estate, investing in mortgages, investing II-20 Page 150 of 183 in securities of other real estate companies, investing in real estate contracts of sale and commodities, issuing different classes of SHARES or options or redeemable securities, and on the amount of operating expenses that may be incurred. The TRUSTEES shall also have the power to provide that no further amendments of this DECLARATION OF TRUST may be made without the consent of SHAREHOLDERS. SECTION 7. CONFLICTS OF INTEREST AND INVESTMENT RESTRICTIONS. A. SALES AND LEASES TO IRET. IRET shall not purchase property from the SPONSOR, ADVISOR, TRUSTEE, or any AFFILIATE thereof, unless a majority of TRUSTEES (including a majority of INDEPENDENT TRUSTEES) not otherwise interested in such transaction approve the transaction as being fair and reasonable to IRET and at a price to IRET no greater than the cost of the asset to such SPONSOR, ADVISOR, TRUSTEE or any AFFILIATE thereof, or if the price to IRET is in excess of such cost, that substantial justification for such excess exists and such excess is reasonable. In no event shall the cost of such asset to IRET exceed its current appraised value. B. SALES AND LEASES TO SPONSOR, ADVISOR, TRUSTEES OR ANY AFFILIATE. 1. A SPONSOR, ADVISOR, TRUSTEE, or an AFFILIATE thereof, shall not acquire assets from IRET unless approved by a majority of TRUSTEES (including a majority of INDEPENDENT TRUSTEES), not otherwise interested in such transaction, as being fair and reasonable to IRET. 2. IRET may lease assets to a SPONSOR, ADVISOR, TRUSTEE, or any AFFILIATE thereof, only if approved by a majority of TRUSTEES (including a majority of INDEPENDENT TRUSTEES), not otherwise interested in such transaction, as being fair and reasonable to IRET. C. LOANS. 1. No loans may be made by IRET to the SPONSOR, ADVISOR, TRUSTEE, or any AFFILIATE thereof, except as provided under Article I, Section 7(K)(3). 2. IRET may not borrow money from the SPONSOR, ADVISOR, TRUSTEE, or any AFFILIATE thereof, unless a majority of TRUSTEES (including a majority of INDEPENDENT TRUSTEES) not otherwise interested in such transaction approve the transaction as being fair, competitive, and commercially reasonable and no less favorable to IRET than loans between unaffiliated parties under the same circumstances. II-21 Page 151 of 183 D. INVESTMENTS. 1. IRET shall not invest in joint ventures with the SPONSOR, ADVISOR, TRUSTEE, or any AFFILIATE thereof, unless a majority of TRUSTEES (including a majority of INDEPENDENT TRUSTEES) not otherwise interested in such transactions, approve the transaction as being fair and reasonable to IRET and on substantially the same terms and conditions as those received by the other joint venturers. 2. IRET shall not invest in equity securities unless a majority of TRUSTEES (including a majority of INDEPENDENT TRUSTEES) not otherwise interested in such transaction approve the transaction as being fair, competitive, and commercially reasonable. E. INVESTMENT POLICIES. 1 . The primary investment objectives of IRET are to obtain current income and capital appreciation for its SHARE HOLDERS. 2. The INDEPENDENT TRUSTEES shall review the investment policies of IRET with sufficient frequency and at least annually to determine that the policies being followed by IRET at any time are in the best interests of its SHAREHOLDERS. Each such determination and the basis therefore shall be set forth in the minutes of the TRUSTEES. F. MULTIPLE PROGRAMS. The method for the allocation of the acquisition of properties by two or more Programs of the same SPONSOR or ADVISOR seeking to acquire similar types of assets shall be reasonable. It shall be the duty of the TRUSTEES (including the INDEPENDENT TRUSTEES) to ensure such method is applied fairly to IRET. G. OTHER TRANSACTIONS. All other transactions between IRET and the SPONSOR, ADVISOR, TRUSTEE, or any AFFILIATE thereof, shall require approval by a majority of the TRUSTEES (including a majority of INDEPENDENT TRUSTEES) not otherwise interested in such transactions as being fair and reasonable to IRET and on terms and conditions not less favorable to IRET than those available from unaffiliated third parties. H. APPRAISAL OF REAL PROPERTY. The consideration paid for real property acquired by IRET shall ordinarily be based on the fair market value of the property as determined by a majority of the TRUSTEES. In cases in which a II-22 Page 152 of 183 majority of the INDEPENDENT TRUSTEES so determine, and in all cases in which assets are acquired from the ADVISORS, TRUSTEES, SPONSORS, or AFFILIATES thereof, such fair market value shall be as determined by an INDEPENDENT EXPERT selected by the INDEPENDENT TRUSTEES. I. ROLL-UP TRANSACTION. 1. In connection with a proposed ROLL-UP, an appraisal of all IRET's assets shall be obtained from a competent, INDEPENDENT EXPERT. IRET assets shall be appraised on a consistent basis. The appraisal shall be based on an evaluation of all relevant information, and shall indicate the value of IRET'S assets as of a date immediately prior to the announcement of the proposed ROLL-UP transaction. The appraisal shall assume an orderly liquidation of IRET assets over a 12 month period. The terms of the engagement of the INDEPENDENT EXPERT shall clearly state that the engagement is for the benefit of IRET and its investors. A summary of the independent appraisal, indicating all material assumptions underlying the appraisal, shall be included in a report to the investors in connection with a proposed ROLL-UP. 2. In connection with a proposed ROLL-UP, the PERSON sponsoring the ROLL-UP shall offer to SHAREHOLDERS who vote "no" on the proposal the choice of: a. accepting the securities of the ROLL-UP ENTITY offered in the proposed ROLL-UP; or b. one of the following: i. remaining as SHAREHOLDERS of IRET and preserving their interests therein on the same terms and conditions as existed previously; or ii. receiving cash in an amount equal to the SHAREHOLDERS' pro-rata share of the appraised value of the NET ASSETS of IRET. 3. IRET shall not participate in any proposed ROLL-UP which would result in SHAREHOLDERS having democracy rights in the ROLL-UP ENTITY that are less than those provided for in this document unless approved by a majority of the SHAREHOLDERS. 4. IRET shall not participate in any proposed ROLL-UP which includes provisions which would operate to materially impede or frustrate the accumulation of SHARES by any purchaser of the securities of the ROLL-UP ENTITY (except to the minimum extent II-23 Page 153 of 183 necessary to preserve the tax status of the ROLL-UP ENTITY). IRET shall not participate in any proposed ROLL-UP which would limit the ability of an investor to exercise the voting rights of its securities of the ROLL-UP ENTITY on the basis of the number of IRET SHARES held by that investor. 5. IRET shall not participate in any proposed ROLL-UP in which investors' rights of access to the records of the ROLL-UP ENTITY will be less than those provided for by this document. 6. IRET shall not participate in any proposed ROLL-UP in which any of the costs of the transaction would be borne by IRET if the ROLL-UP is not approved by the SHAREHOLDERS. J. BORROWING LIMITATIONS. The aggregate borrowings of IRET, secured and unsecured, shall be reasonable in relation to the NET ASSETS of IRET, and shall be reviewed by the TRUSTEES at least quarterly. The maximum amount of such borrowings in relation to the NET ASSETS shall, in the absence of a satisfactory showing that a higher level of borrowing is appropriate, not exceed 300%. Any excess in borrowing over such 300% level shall be approved by a majority of the INDEPENDENT TRUSTEES and disclosed to SHAREHOLDERS in the next quarterly report of IRET, along with justification for such excess. K. OTHER LIMITATIONS. IRET may not: 1. Invest more than 10% of its total assets in UNIMPROVED REAL PROPERTY or mortgage loans on UNIMPROVED REAL PROPERTY. 2. Invest in commodities or commodity future contracts. Such limitation is not intended to apply to future contracts, when used solely for hedging purposed in connection with IRET's ordinary business of investing in real estate assets and mortgages. 3. Invest in or make mortgage loans unless an appraisal is obtained concerning the underlying property, except for those loans insured or guaranteed by a government or government agency. In cases in which a majority of the INDEPENDENT TRUSTEES so determine, and in all cases in which the transaction is with the ADVISOR, TRUSTEES, SPONSOR, or AFFILIATES thereof, such an appraisal must be obtained from an INDEPENDENT EXPERT concerning the underlying property. This appraisal shall be maintained in IRET's records for at least five years, and shall be II-24 Page 154 of 183 available for inspection and duplication by any SHAREHOLDER. In addition to the appraisal, a mortgagee's or owner's title insurance policy or commitment as to the priority of the mortgage or the condition of the title must be obtained. Further, the ADVISOR and TRUSTEES shall observe the following policies in connection with investing in or making mortgage loans: a. IRET shall not invest in real estate contracts of sale, otherwise known as land sale contracts, unless such contracts of sale are in recordable form and appropriately recorded in the chain of title. b. IRET shall not make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans outstanding on the property, including the loans of IRET, would exceed an amount equal to 85% of the appraised value of the property as determined by appraisal unless substantial justification exists because of the presence of other underwriting criteria. For purposes of this subsection, the "aggregate amount of all mortgage loans outstanding on the property, including the loans of IRET," shall include all interest (excluding contingent participation in income and/or appreciation in value of the mortgaged property), the current payment of which may be deferred pursuant to the terms of such loans, to the extent that deferred interest on each loan exceeds 5% per annum of the principal balance of the loan. c. IRET shall not make or invest in any mortgage loans that are subordinate to any mortgage or equity interest of the ADVISOR, TRUSTEES, SPONSORS or any AFFILIATE of IRET. d. The policies outlined in a-c above may be exceeded or avoided for a particular transaction provided a commercially reasonable justification exists and is approved by a majority of the TRUSTEES (including a majority of the INDEPENDENT TRUSTEES) not otherwise interested in the transaction. 4. Issue redeemable equity securities. 5. Issue debt securities unless the historical debt service coverage (in the most recently completed fiscal year) as adjusted for known changes is sufficient to properly service that higher level of debt. II-25 Page 155 of 183 6. Issue options or warrants to purchase its SHARES to the ADVISOR, TRUSTEES, SPONSORS, or any AFFILIATE thereof, except on the same terms as such options or warrants are sold to the general public. IRET may issue options or warrants to PERSONS not so connected with IRET but not at exercise prices less than the fair market value of such securities on the date of grant and for consideration (which may include services) that in the judgment of the INDEPENDENT TRUSTEES has a market value less than the value of such option on the date of grant. Options or warrants issuable to the ADVISOR, TRUSTEES, SPONSORS, or any AFFILIATE thereof, shall not exceed an amount equal to 10% of the outstanding SHARES of IRET on the date of grant of any options or warrants. 7. Issue its SHARES on a deferred payment basis or other similar arrangement. SECTION 8. FEES, COMPENSATION AND EXPENSES. A. TRUSTEE'S REVIEW. 1. The INDEPENDENT TRUSTEES will determine, from time to time but at least annually, that the total fees and expenses of IRET are reasonable in light of the investment performance of IRET, its NET ASSETS, its NET INCOME, and the fees and expenses of other comparable unaffiliated REITS. Each such determination shall be reflected in the minutes of the meeting of the TRUSTEES. B. ACQUISITION FEES AND ACQUISITION EXPENSES. 1. The total of ACQUISITION FEES and ACQUISITION EXPENSES shall be reasonable, and shall not exceed an amount equal to 6% of the contract price of the property, or in the case of a mortgage loan, 6% of the funds advanced. 2. Notwithstanding the above, a majority of the TRUSTEES (including a majority of the INDEPENDENT TRUSTEES) not otherwise interested in the transaction may approve fees in excess of these limits if they determine the transaction to be commercially competitive, fair and reasonable to IRET. C. TOTAL OPERATING EXPENSES. 1. The TOTAL OPERATING EXPENSES of IRET shall (in the absence of a satisfactory showing to the contrary) be deemed to be excessive if they exceed in any fiscal year the greater of 2% of its AVERAGE INVESTED ASSETS or 25% of its NET INCOME for such year. The II-26 Page 156 of 183 INDEPENDENT TRUSTEES shall have the fiduciary responsibility of limiting such expenses to amounts that do not exceed such limitations unless such INDEPENDENT TRUSTEES shall have made a finding that, based on such unusual and non-recurring factors which they deem sufficient, a higher level of expenses is justified for such year. Any such finding and the reasons in support thereof shall be reflected in the minutes of the meeting the TRUSTEES. 2. Within 60 days after the end of any fiscal quarter of IRET for which TOTAL OPERATING EXPENSES (for the twelve (12) months then ended) exceeded 2% of AVERAGE INVESTED ASSETS or 25% of NET INCOME, whichever is greater, there shall be sent to the SHAREHOLDERS of IRET a written disclosure of such fact, together with an explanation of the factors the INDEPENDENT TRUSTEES considered in arriving at the conclusion that such higher operating expenses were justified. 3. In the event the INDEPENDENT TRUSTEES do not determine such excess expenses are justified, the ADVISOR shall reimburse IRET at the end of the twelve month period the amount by which the aggregate annual expenses paid or incurred by IRET exceed the limitations herein provided. D. REAL ESTATE COMMISSIONS ON RESALE OF PROPERTY. If an ADVISOR, TRUSTEE, SPONSOR, or any AFFILIATE, provides a substantial amount of the services in the effort to sell the property of IRET, then that PERSON may receive up to one-half of the brokerage commission paid but in no event to exceed an amount equal to 3% of the contracted for sales price. In addition, the amount paid when added to the sums paid to unaffiliated parties in such a capacity shall not exceed the lesser of the COMPETITIVE REAL ESTATE COMMISSION or an amount equal to 6% of the contracted for sales price, unless a majority of the TRUSTEES, including a majority of the INDEPENDENT TRUSTEES, not otherwise interested in the transaction, approve fees in excess of these limits upon a determination that such deviation is commercially competitive, fair and reasonable to IRET. E. INCENTIVE FEES. 1. An interest in the gain from the sale of assets of IRET, for which full consideration is not paid in cash or property of equivalent value, shall be allowed provided the amount or percentage of such interest is reasonable. Such an interest in gain from the sale of IRET assets shall be considered presumptively reasonable if it does not exceed 15% of the balance of such net proceeds remaining after payment to SHAREHOLDERS, in the aggregate, of an II-27 Page 157 of 183 amount equal to 100% of the original issue price of IRET SHARES, plus an amount equal to 6% of the original issue price of the REIT SHARES per annum cumulative. For purposes of this Section, the original issue price of IRET SHARES may be reduce by prior cash distributions to SHAREHOLDERS of net proceeds from the sale of IRET assets. 2. In the case of multiple ADVISORS, ADVISORS and any AFFILIATE shall be allowed incentive fees provided such fees are distributed by a proportional method reasonably designed to reflect the value added to IRET assets by each respective ADVISOR or any AFFILIATE. Distribution of incentive fees to ADVISORS or AFFILIATES, in proportion to the length of time served as ADVISOR while such property was held by IRET or in ratio to the fair market value of the asset at the time of the ADVISOR's termination, and the fair market value of the asset upon its disposition by IRET shall be considered reasonable methods by which to apportion incentive fees. F. ADVISOR COMPENSATION. INDEPENDENT TRUSTEES shall determine from time to time and at least annually that the compensation which IRET contracts to pay to the ADVISOR is reasonable in relation to the nature and quality of services performed. The INDEPENDENT TRUSTEES shall also supervise the performance of the ADVISOR and the compensation paid to it by IRET to determine that the provisions of such contract are being carried out. Each such determination shall be based on the factors set forth below and all other factors such INDEPENDENT TRUSTEES may deem relevant and the findings of such TRUSTEES on each of such factors shall be recorded in the minutes of the TRUSTEES: 1. The size of the advisory fee in relation to the size, composition and profitability of the portfolio of IRET. 2. The success of the ADVISOR in generating opportunities that meet the investment objectives of IRET. 3. The rates charged to other REIT's and to investors other than REIT'S by ADVISORS performing similar services. 4. Additional revenues realized by the ADVISOR and any AFFILIATE through their relationship with the IRET, including loan administration, underwriting or broker commissions, servicing, engineering, inspection and other fees, whether paid by IRET or by others with whom IRET does business. II-28 Page 158 of 183 5. The quality and extent of service and advice furnished by the ADVISOR. 6. The performance of the investment portfolio of IRET, including income, conservation or appreciation of capital, frequency of problem investments and competence in dealing with distress situations. 7. The quality of the portfolio of IRET in relationship to the investments generated by the ADVISOR for its own accounts. ARTICLE 2 - SHARES SECTION 1. SHARES: CERTIFICATES OF BENEFICIAL INTEREST. The units into which the beneficial interest in IRET will be divided shall be designated as SHARES. The certificates evidencing ownership of SHARES in IRET will be designated as Certificates of Beneficial Interest or SHARES and shall be in such form as the TRUSTEES may from time to time prescribe. The registered holders thereof shall be designated as SHAREHOLDERS. The number of SHARES authorized or issued hereunder shall be unlimited. All SHARES shall be without par value, shall be of the same class, shall have equal voting, distribution, liquidation, and other rights, and shall be fully paid and non assessable. The SHAREHOLDERS shall have no legal title or interest in the property of IRET and no right to a partition thereof or to an accounting during the continuance of IRET but only the rights expressly provided in this DECLARATION OF TRUST. SECTION 2. SALE OF SHARES. The TRUSTEES may from time to time issue and sell by private or public offering, or exchange SHARES in IRET in such number or for such sums of money, real estate assets, or other considerations, and on such terms as they deem proper. The SHAREHOLDERS shall have no preemptive rights. SECTION 3. OFFERING OF SHARES. The TRUSTEES are authorized to cause to be made from time to time offerings of the SHARES of IRET to the public at public offering prices deemed appropriate. For this purpose, the TRUSTEES are authorized to enter into a contract with an underwriter upon such terms and with such commissions for its services as may be agreed upon by the parties, provided that the total expenses associated with the offering of any particular issue of SHARES does not exceed 15% of the gross offering amount. SECTION 4. SHARES PURCHASED BY IRET. IRET may repurchase or otherwise acquire its own SHARES on such terms and conditions as the TRUSTEES deem appropriate, and for II-29 Page 159 of 183 this purpose IRET may create and maintain such reserves as are deemed necessary and proper. SHARES issued hereunder and purchased or otherwise acquired for the account of IRET shall not, so long as they belong to IRET, either receive distributions (except that they shall be entitled to receive distributions payable in SHARES of IRET) or be voted at any meeting of the SHAREHOLDERS. Such SHARES may, in the discretion of the TRUSTEES, be canceled and the number of SHARES authorized thereby reduced or such SHARES may, in the discretion of the TRUSTEES, be held in the treasury and be disposed of by the TRUSTEES at such time or times, to such party or parties, and for such consideration, as the TRUSTEES may deem appropriate. The SPONSOR, ADVISOR, TRUSTEES, or AFFILIATES thereof, are prohibited from receiving a fee on the repurchase of the SHARES by IRET. SECTION 5. TRANSFERABILITY OF SHARES. SHARES in IRET shall be transferable in accordance with the procedure prescribed from time to time in the TRUSTEES' Regulations. The PERSONS in whose names the SHARES are registered on the books of IRET shall be deemed the absolute owners thereof and, until a transfer is effected on the books of IRET, the TRUSTEES shall not be affected by any notice, actual or constructive, of any transfer. SECTION 6. EFFECT OF TRANSFER OF SHARES OR DEATH, INSOLVENCY, OR INCAPACITY OF SHAREHOLDERS. Neither the transfer of SHARES nor the death, insolvency or incapacity of any SHAREHOLDERS shall operate to dissolve or terminate IRET, nor shall it entitle any transferee, legal representative or other PERSON to a partition of the property of IRET or to an accounting. SECTION 7. REDEMPTION AND PROHIBITION ON TRANSFER. To insure compliance with the Internal Revenue Code provision that no more than 50% of the outstanding SHARES may be owned by five or fewer individuals, the TRUSTEES may at any time redeem SHARES from any SHAREHOLDER at the fair market value thereof (as determined in good faith by the TRUSTEES based on an independent appraisal of Trust assets made within six months of the redemption date). Also, the TRUSTEE may refuse to transfer SHARES to any PERSON whose acquisition of additional SHARES might, in the opinion of the TRUSTEES, violate the above requirement. ARTICLE 3 - SHAREHOLDERS SECTION 1. RIGHTS AND OBLIGATIONS OF SHAREHOLDERS. A. MEETINGS. 1. There shall be an annual meeting of the SHAREHOLDERS of IRET upon reasonable notice and within a II-30 Page 160 of 183 reasonable period (not less than 30 days) following delivery of the annual report. The TRUSTEES, including the INDEPENDENT TRUSTEES, shall be required to take reasonable steps to ensure that this requirement is met. The holders of a majority of SHARES in IRET, present in PERSON or by proxy, shall constitute a quorum at any meeting. 2. Special meetings of the SHAREHOLDERS may be called by the chief executive officer, by a majority of the TRUSTEES or by a majority of the INDEPENDENT TRUSTEES, and shall be called by an officer of IRET upon written request of the SHAREHOLDERS holding in the aggregate not less than 10% of the outstanding SHARES of the IRET entitled to vote at such meeting. Upon receipt of a written request, either in PERSON or by mail, stating the purpose or purposes of the meeting, IRET shall provide all SHAREHOLDERS within ten days after receipt of said request, written notice, either in PERSON or by mail, of a meeting and the purpose of such meeting to be held on a date not less than fifteen nor more than sixty days after the distribution of such notice, at a time and place specified in the request, or if none if specified, at a time and place convenient to SHAREHOLDERS. The holders of a majority of SHARES in IRET, present in PERSON or by proxy, shall constitute a quorum at any meeting. B. VOTING RIGHTS OF SHAREHOLDERS. 1. The voting rights per share of equity securities of IRET (other than the publicly held equity securities of IRET) sold in a private offering shall not exceed voting rights which bear the same relationship to the voting rights of the publicly held SHARES of IRET as the consideration paid to IRET for each privately offered IRET share bears to the book value of each outstanding publicly held share. 2. The majority of the outstanding SHARES may, without the necessity of concurrence by the TRUSTEES, vote to: a. amend the DECLARATION OF TRUST; b. terminate IRET; c. remove the TRUSTEES. 3. The majority of SHAREHOLDERS present in PERSON or by proxy at an Annual Meeting at which a quorum is present, may, without the necessity of concurrence by II-31 Page 161 of 183 the TRUSTEES, vote to elect the TRUSTEES. A quorum shall be 50% of the then outstanding SHARES. 5. Without concurrence of a majority of the outstanding SHARES, the TRUSTEES may not: a. amend the DECLARATION OF TRUST, except for amendments which do not adversely affect the rights, preferences and privileges of SHAREHOLDERS including amendments to provisions relating to, TRUSTEE qualifications, fiduciary duty, liability and indemnification, conflicts of interest, investment policies or investment restrictions; b. sell all or substantially all of the IRET's assets other than in the ordinary course of the IRET's business or in connection with liquidation and dissolution; c. cause the merger or other reorganization of IRET; or d. dissolve or liquidate IRET, other than before the INITIAL INVESTMENT in property. A sale of all or substantially all of IRET's assets shall mean the sale of two-thirds or more of IRET's assets based on the total number of properties and mortgages, or the current fair market value of these assets. 6. With respect to SHARES owned by the ADVISOR, the TRUSTEES, or any AFFILIATE, neither the ADVISOR, nor the TRUSTEES, nor any AFFILIATE may vote or consent on matters submitted to the SHAREHOLDERS regarding the removal of the ADVISOR, TRUSTEES, or any transaction between IRET and any of them. In determining the requisite percentage in interest of SHARES necessary to approve a matter on which the ADVISOR, TRUSTEES, and any AFFILIATE may not vote or consent, any SHARES owned by any of them shall not be included. C. LIABILITY OF SHAREHOLDERS. 1. The SHARES of IRET shall be non-assessable by IRET whether a trust, corporation or other entity. The SHAREHOLDERS of IRET shall not be personally liable on account of any of the contractual obligations undertaken by IRET. All written contracts to which IRET is a party shall include a provision that the SHAREHOLDER shall not be personally liable thereon. II-32 Page 162 of 183 D. REPORTS. IRET shall cause to be prepared and mailed or delivered to each SHAREHOLDER as of a record date after the end of the fiscal year and each holder of other publicly held securities of IRET within 120 days after the end of the fiscal year to which it relates an annual report for each fiscal year which shall include: a. financial statements prepared in accordance with generally accepted accounting principles which are audited and reported on by independent certified public accountants; b. the ratio of the costs of raising capital during the period to the capital raised; c. the aggregate amount of advisory fees and the aggregate amount of other fees paid to the ADVISOR and any AFFILIATE of the ADVISOR by IRET and including fees or charges paid to the ADVISOR and any AFFILIATE of the ADVISOR by third parties doing business with IRET; d. the TOTAL OPERATING EXPENSES of IRET, stated as a percentage of AVERAGE INVESTED ASSETS and as a percentage of its NET INCOME; e. a report from the INDEPENDENT TRUSTEES that the policies being followed by IRET are in the best interests of its SHAREHOLDERS and the basis for such determination; and f. separately stated, full disclosure of all material terms, factors, and circumstances surrounding any and all transactions involving IRET, TRUSTEES, ADVISORS, SPONSORS, and any AFFILIATE thereof, occurring in the year for which the annual report is made. INDEPENDENT TRUSTEES shall be specifically charged with a duty to examine and comment in the report on the fairness of such transactions; E. ACCESS TO RECORDS. Any SHAREHOLDER and any designated representative thereof shall be permitted access to all records of IRET at all reasonable times, and may inspect and copy any of them. Inspection of IRET's books and records by the ADMINISTRATOR shall be provided upon reasonable notice and during normal business hours. Access shall include the following as it pertains to SHAREHOLDERS: 1. An alphabetical list of the names, addresses, and telephone numbers of the SHAREHOLDERS of IRET along with the number of SHARES held by each of them (the "SHAREHOLDER List") shall be maintained as part of the books and records of IRET and shall be available for inspection by any SHAREHOLDERS or the II-33 Page 163 of 183 SHAREHOLDERS' designated agent at the home of IRET upon the request of the SHAREHOLDER; 2. The SHAREHOLDER List shall be updated at least quarterly to reflect changes in the information contained therein. 3. A copy of the SHAREHOLDER List shall be mailed to any SHAREHOLDER requesting the SHAREHOLDER List within ten days of the request. The copy of the SHAREHOLDER List shall be printed in alphabetical order, on white paper, and in a readily readable type size (in no event smaller than 10-point type). A reasonable charge for copy work may be charged by IRET. 4. The purposes for which a SHAREHOLDER may request a copy of the SHAREHOLDER List include, without limitation, matters relating to SHAREHOLDERS' voting rights under the IRET DECLARATION OF TRUST, and the exercise of SHAREHOLDERS' rights under federal proxy laws; and 5. If the ADVISOR or TRUSTEES of IRET neglects or refuses to exhibit, produce, or mail a copy of the SHAREHOLDERS' List as requested, the ADVISOR, and the TRUSTEES shall be liable to any SHAREHOLDER requesting the list for the costs, including attorneys' fees, incurred by that SHAREHOLDER for compelling the production of the SHAREHOLDER List, and for actual damages suffered by any SHAREHOLDER by reason of such refusal or neglect. It shall be a defense that the actual purpose and reason for the requests for inspection or for a copy of the SHAREHOLDER List is to secure such list of SHAREHOLDERS or other information for the purpose of selling such list or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as a SHAREHOLDER relative to the affairs of IRET. IRET may require the SHAREHOLDER requesting the SHAREHOLDER List to represent that the list is not requested for a commercial purpose unrelated to the SHAREHOLDER'S interest in IRET. The remedies provided hereunder to SHAREHOLDERS requesting copies of the SHAREHOLDER List are in addition to, and shall not in any way limit, other remedies available to SHAREHOLDERS under federal law, or the laws of any state. F. DISTRIBUTION REINVESTMENT PLANS. The IRET Distribution Reinvestment Plan shall provide for the following: II-34 Page 164 of 183 1. All material information regarding the distribution to the SHAREHOLDER and the effect of reinvesting such distribution, including the tax consequences thereof, shall be provided to the SHAREHOLDER at least annually. 2. Each SHAREHOLDER participating in the plan shall have a reasonable opportunity to withdraw from the plan at least annually after receipt of the information required in subparagraph (1) above. G. DISTRIBUTIONS. Distribution shall be determined as follows: 1. DISTRIBUTIONS IN KIND. Distributions in kind shall not be permitted, except for: a. distributions of readily marketable securities; b. distributions of beneficial interests in a liquidating trust established for the dissolution of IRET and the liquidation of its assets in accordance with the terms of the DECLARATION OF TRUST; or 2. distributions of in-kind property which meet all of the following conditions: a. The TRUSTEES advise each SHAREHOLDER of the risks associated with direct ownership of the property. b. The TRUSTEES offer each SHAREHOLDER the election of receiving like-kind property distributions. c. The TRUSTEES distribute in-kind property only to those SHAREHOLDERS who accept the TRUSTEE'S offer. SECTION 3. ELECTION OF TRUSTEES. All TRUSTEES shall be elected annually by the vote of the SHAREHOLDERS. Each Shareholder shall be entitled to one vote in PERSON or by proxy for each Share registered in his name for as many PERSONS as there are TRUSTEES to be elected. The candidates receiving the highest respective numbers of votes up to the number of trusteeships to be filled in the election shall be elected. ARTICLE 4 - THE TRUSTEES SECTION 1. NUMBER, TERM OF OFFICE, QUALIFICATION, AND COMPENSATION OF TRUSTEES. There shall be not less than five nor more than eleven TRUSTEES, as fixed in the TRUSTEES' Regulations, a majority of whom shall be independent and not affiliated with the manager or ADVISOR (or any II-35 Page 165 of 183 AFFILIATE of the manager or ADVISOR) of IRET. The term of office of each TRUSTEE shall be for one year and shall extend from the date of his election or appointment until the election and qualification of his successor by the SHAREHOLDERS. The TRUSTEES shall be individuals of at least 18 years of age with no less than three years of relevant real estate experience, and no PERSON shall qualify as a TRUSTEE until he shall have either signed the DECLARATION OF TRUST or agreed in writing to be bound in all respects by the DECLARATION OF TRUST. The TRUSTEES shall be entitled to receive reasonable compensation for their services as TRUSTEES. SECTION 2. RESIGNATION. A TRUSTEE may resign at any time by giving notice in writing to the TRUSTEES at the principal office of IRET. Such resignation shall take effect on the date it is received or any later time specified therein. Unless otherwise specified therein, the acceptance of a resignation shall not be necessary to make it effective. SECTION 3. VACANCIES. The resignation, incompetency, or death of any or all of the TRUSTEES shall not terminate IRET or affect its continuity. During a vacancy, the remaining TRUSTEE or TRUSTEES may exercise the powers of the TRUSTEES hereunder. Vacancies among the TRUSTEES may be filled by a written designation signed by a majority of the remaining TRUSTEES, provided a vacancy among the INDEPENDENT TRUSTEES shall be filled by action of a majority of only the INDEPENDENT TRUSTEES, and lodged among the records of IRET. The determination of a vacancy among the TRUSTEES by reason of resignation, incompetency, or death, or for any other reason, when made by a majority of the remaining TRUSTEES and stated in the instrument filling such vacancy, shall be final and conclusive for all purposes. If at any time, by reason of resignations, incompetency, or deaths, there shall be no remaining TRUSTEES, a meeting of the SHAREHOLDERS shall be forthwith called for the election of successor TRUSTEES. Any SHAREHOLDER or SHAREHOLDERS owning of record an aggregate of 10% of the issued and outstanding SHARES of IRET shall be entitled to call such meeting and to nominate candidates for election as successor TRUSTEES at any such election. SECTION 4. SUCCESSOR TRUSTEES. Title to the property of IRET shall vest in successor TRUSTEES, upon written acceptance of their election or appointment without any further act. They shall thereupon have the same powers, duties and exemptions as though originally named as TRUSTEES in this DECLARATION OF TRUST. Such written acceptance shall be filed with the records of IRET, and a certificate signed by a majority of the TRUSTEES as to who are or were TRUSTEES at any time shall be conclusive and binding for all purposes. II-36 Page 166 of 183 SECTION 5. ACTIONS BY TRUSTEES. The TRUSTEES may act with or without a meeting. Any action of a majority of TRUSTEES in office shall be conclusive and binding as an action of the TRUSTEES. All agreements, deeds, and other instruments executed by a majority of the TRUSTEES or executed by one TRUSTEE pursuant to authorization of a majority of the TRUSTEES given either at a meeting or in writing shall be effective and binding as if executed by all the TRUSTEES. The TRUSTEES may establish such committees they deem appropriate (provided the majority of the members of each committee are INDEPENDENT TRUSTEES). SECTION 6. TITLE AND AUTHORITY OF TRUSTEES. The TRUSTEES, as joint tenants, shall hold the legal title to all property belonging to IRET in the name of IRET, or in the name of one or more of the TRUSTEES, as TRUSTEES for IRET, or in the name of one or more nominees for IRET provided that each such nominee shall execute an instrument in recordable form recognizing the interest of IRET in the property so held. The TRUSTEES shall have absolute and exclusive control, management, and disposition thereof, and absolute and exclusive control over the management and conduct of the business affairs of IRET. SECTION 7. THE ADVISOR AND INDEPENDENT CONTRACTOR. In their exercise of the absolute control and management of all the assets of IRET, the TRUSTEES may contract for the services of an advisory firm or corporation (hereinafter referred to as the ADVISOR) to advise them in respect of investing and reinvesting the funds of IRET in real property assets, interests in real property, mortgages secured by real property, leasehold interests in real property, interests in mortgages, or other assets. Such contract may provide that the ADVISOR shall act as agent of IRET in the purchase and sale of real estate, leaseholds, or real estate mortgages, or any interest therein. Such contract may also provide that the ADVISOR shall act as agent of IRET in the management of real estate, leaseholds or real estate mortgages, or any interest therein, and receive commissions or other compensation for such management services at rates not in excess of those prescribed by real estate boards or similar organizations in the area in which the real estate is located, or the TRUSTEES may employ a different firm or corporation to perform these functions for all or some of IRET's properties and to receive such commissions and compensations. Such contracts shall provide that they shall not be assignable without the written consent of IRET and shall be for a term of one year or less. Each advisory contact shall be terminable by a majority of the INDEPENDENT TRUSTEES, or the ADVISOR or the holders of a majority of the outstanding SHARES on sixty (60) days written notice without cause or penalty. It shall be the duty of the TRUSTEES to evaluate the performance of the ADVISOR before entering into or renewing an advisory II-37 Page 167 of 183 contract. The criteria used in such evaluation shall be reflected in the minutes of such meeting. SECTION 8. WRITTEN POLICIES. The TRUSTEES shall establish written policies on investments and borrowing and shall monitor the administrative procedures, investment operations and performance of the IRET and the ADVISOR to assure that such policies are carried out. SECTION 9. FIDUCIARY DUTY. The TRUSTEES and ADVISOR of IRET shall be deemed to be in a fiduciary relationship to IRET and the SHAREHOLDERS. The TRUSTEES of IRET shall also have a fiduciary duty to the SHAREHOLDERS to supervise the relationship of IRET with the ADVISOR. SECTION 10. POWERS OF TRUSTEES. The TRUSTEES shall have all the powers necessary, convenient, or appropriate to effectuate the purposes of IRET and may take any action which they deem necessary or desirable and proper to carry out such purposes. Any determination of the purposes of IRET made by the TRUSTEES in good faith shall be conclusive. In construing the provisions of the DECLARATION OF TRUST, the presumption shall be in favor of the grant of powers to the TRUSTEES. Subject to the limitations contained in Article 1 hereof, the TRUSTEES' powers shall include the following: 1. To purchase, acquire through the issuance of SHARES in IRET, obligations of IRET, or otherwise, and to mortgage, sell, acquire on lease, hold, manage, improve, lease to others (without limitation as to the term of such lease, which may extend beyond the termination of IRET), option, exchange for real or personal property, release, and partition interests in personal property and real estate interests of every nature, including freehold, leasehold, mortgage, ground rent, and other interests therein, and to erect, construct, alter, repair, demolish, or otherwise change buildings and structures of every nature. 2. To purchase, acquire through the issuance of SHARES in IRET, obligations of IRET, or otherwise, option, sell, and exchange stocks, bonds, notes, certificates of indebtedness, and securities of every nature. 3. To purchase, acquire through the issuance of SHARES in IRET, obligations of IRET, or otherwise, grant security interests in, sell, acquire on lease, hold, manage, improve, lease to others, option, and exchange personal property of every nature. II-38 Page 168 of 183 4. To hold title to the property of IRET as is provided in this DECLARATION OF TRUST. 5. To borrow money for the purposes of IRET and to give notes, debentures, including debentures convertible into SHARES, bonds, and other negotiable or nonnegotiable instruments of IRET therefore; to enter into other obligations on behalf of and for the purposes of IRET; and to mortgage, grant security interests in, or pledge or cause to be mortgaged, granted security interests in, or pledged real and personal property of IRET to secure such notes, debentures, bonds, instruments, or other obligations; and to subordinate the interests of IRET in real and personal property, or interests therein to such other PERSONS and on such conditions as is deemed desirable. 6. To lend money on behalf of IRET and to invest the funds of IRET. 7. To create reserve funds for such purposes as they deem advisable. 8. To deposit funds of IRET in banks and other depositories without regard to whether such accounts will draw interest. 9. To pay taxes and assessments imposed upon or chargeable against IRET or the TRUSTEES by virtue of or arising out of the existence, property, business, or activities of IRET. 10. To purchase, issue, sell, or exchange SHARES of IRET as provided by this DECLARATION OF TRUST. The good faith determination of the value of the consideration received by IRET shall be within the absolute discretion of the TRUSTEES. 11. To adopt and, from time to time, amend TRUSTEES' Regulations which may include but shall not be limited to provisions relating to the time, place, and notice of meetings of the TRUSTEES and of the SHAREHOLDERS; record dates and other matters relating to voting and the use of proxies designation, appointment and compensation of representatives and agents and their number, duties, powers, authorities, and qualifications; the conditions for replacing lost, mutilated, or stolen SHARES; and the procedure for amendment of the TRUSTEES' Regulations. 12. To exercise with respect to property of IRET all options, privileges and rights, whether to vote, assent, subscribe, or convert, or of any other II-39 Page 169 of 183 nature; to grant proxies; and to participate in and accept securities issued under any voting trust agreement. 13. To participate in any reorganization, readjustment, consolidation, merger, dissolution, sale or purchase of assets, lease, or similar proceedings of any corporation, partnership or other organization in which IRET shall have an interest and in connection therewith to delegate discretionary powers to any reorganization, protective, or similar committee and to pay assessments and other expenses in connection therewith. 14. To engage or employ agents, representatives, and employees of any nature, or independent contractors, including, without limiting the generality of the foregoing, transfer agents for the transfer of SHARES in IRET, registrars, underwriters for the sale of SHARES in IRET, independent certified public accountants, attorneys at law, appraisers, and real estate agents and brokers; and to delegate to one or more TRUSTEES, agents, representatives, employees, independent contractors, or other PERSONS such powers and duties as the TRUSTEES deem appropriate. The same PERSONS may he employed in multiple capacities and may receive compensation from IRET in as many capacities as they may be engaged or employed by IRET, and if TRUSTEES serve in such capacities they may receive compensation in addition to that provided in Article 4, Section 1 hereof. 15. To determine conclusively the allocation between capital and income of the receipts, holdings, expenses, and disbursements of IRET, regardless of the allocation which might be considered appropriate in the absence of this provision. 16. To determine conclusively the value from time to time and to revalue the real estate, securities, and other property of IRET, in accordance with such appraisals or other information as they deem satisfactory. 17. To compromise or settle claims, questions, disputes, and controversies by, against, or affecting IRET. 18. To solicit proxies of the SHAREHOLDERS. 19. To adopt a fiscal year for IRET and change such fiscal year. 20. To adopt and use a seal. II-40 Page 170 of 183 21. To merge or consolidate or otherwise amalgamate IRET or any successor thereto with or into any other trust or corporation engaged or to be engaged in business activities substantially similar to those engaged in by IRET, subject to the provisions in this DECLARATION OF TRUST. 22. To deal with IRET property in every way, including the entering into joint ventures, partnerships, and any other combinations or associations, that it would be lawful for an individual to deal with the same, whether similar to or different from the way herein and hereinabove specified. SECTION 11. TRUSTEES' RIGHT TO OWN SHARES IN TRUST. A TRUSTEE may acquire, hold, and dispose of SHARES in IRET for his individual account and may exercise all rights of a Shareholder to the same extent and in the same manner as if he were not a TRUSTEE. After the commencement of any public offering of the SHARES of IRET, TRUSTEES may purchase SHARES only at the current offer price then prevailing in connection with such public offering, less all or any part of the selling or other commission as may be agreed with the distributor. SECTION 12. INDEMNIFICATION. A. INDEMNIFICATION OF TRUSTEES. 1. IRET shall indemnify and hold harmless each TRUSTEE, ADVISOR or AFFILIATE from and against all claims and liabilities, whether they proceed to judgment or are settled, to which such TRUSTEE, ADVISOR or AFFILIATE may become subject by reason of his being or having been a TRUSTEE, ADVISOR or AFFILIATE, or by reason of any action alleged to have been taken or omitted by him as TRUSTEE, ADVISOR or AFFILIATE, and shall reimburse him for all legal and other expenses reasonably incurred by him in connection with any such claim or liability. IRET shall not provide for indemnification of the TRUSTEES, ADVISORS or AFFILIATES for any liability or loss suffered by the TRUSTEES, ADVISORS or AFFILIATES, nor shall it provide that the TRUSTEES, ADVISORS or AFFILIATES be held harmless for any loss or liability suffered by IRET, unless all of the following condition are met: a. The TRUSTEES, ADVISORS or AFFILIATES have determined, in good faith, that the course of conduct which caused the loss or liability was in the best interests of IRET. b. The TRUSTEES, ADVISORS or AFFILIATES were acting on behalf of or performing services for IRET. II-41 Page 171 of 183 c. Such liability or loss was not the result of: i. negligence or misconduct by the TRUSTEES, excluding the INDEPENDENT TRUSTEES, ADVISORS or AFFILIATES; or ii. gross negligence or willful misconduct by the INDEPENDENT TRUSTEES. d. Such indemnification or agreement to hold harmless is recoverable only out of IRET NET ASSETS and not from SHAREHOLDERS. 2. Notwithstanding anything to the contrary contained in this document or elsewhere, the TRUSTEES, ADVISORS or AFFILIATES and any PERSONS acting as a broker-dealer shall not be indemnified by IRET for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws by such party unless one or more of the following conditions are met: a. There has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee. b. Such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee. c. A court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the published position of any state securities regulatory authority in which securities of IRET were offered or sold as to indemnification for violations of securities laws. 3. The advancement of IRET funds to the TRUSTEES, ADVISORS or AFFILIATES for legal expenses and other costs incurred for which indemnification is being sought is permissible only if all of the following conditions are satisfied: a. The legal action relates to acts or omissions with respect to the performance of duties or services on behalf of IRET. b. The legal action is initiated by a third party who is not a SHAREHOLDER or the legal action is initiated by a SHAREHOLDER acting in his or her capacity as such and a court of competent jurisdiction specifically approves such advancement. II-42 Page 172 of 183 c. The TRUSTEES, ADVISORS or AFFILIATES undertake to repay the advanced funds to IRET, together with the applicable legal rate of interest thereon, in cases in which such TRUSTEES, ADVISORS or AFFILIATES are found not to be entitled to indemnification. SECTION 13. PERSONS DEALING WITH TRUSTEES. Any act of the TRUSTEES purporting to be done in their capacity as such, or by agents or representatives of the TRUSTEES under authority from the TRUSTEES shall, as to other PERSONS dealing with such TRUSTEES, agents, or representatives, be conclusively deemed to be within the purposes of IRET and within the powers of the TRUSTEES. No PERSON dealing with the TRUSTEES or any of them, or with their authorized agents or representatives, shall be bound to see to the application of any funds or property passing into their hands or control. The receipt of the TRUSTEES or any of them, or of their authorized agents or representatives, for monies or other consideration paid or delivered to any of them shall be effectual discharges to PERSONS paying or delivering the same. SECTION 14. ADMINISTRATIVE POWERS OF TRUSTEES. The TRUSTEES shall have power to pay the expenses of organization and administration of IRET, including all legal and other expenses in connection with the preparation and carrying out of the plan for the formation of IRET, the acquisition of properties thereunder and the issuance of SHARES thereunder; and to employ such officers, experts, counsel, managers, salesmen, agents, workmen, clerks and other PERSONS as they think best, and fix their compensation and define their duties. Any TRUSTEE so employed may receive special or additional compensation therefore. ARTICLE 5 - DURATION AND TERMINATION OF IRET SECTION 1. TERMINATION OF IRET. IRET shall, unless sooner terminated as provided hereinafter, continue in existence until such time as all of its assets have been liquidated and distributed to the SHAREHOLDERS. IRET may be terminated at any time by the TRUSTEES or, if the TRUSTEES have not so terminated IRET, by the affirmative vote of the holders of a majority of the issued and outstanding SHARES. In any event, unless this Trust shall be earlier terminated as provided in this DECLARATION OF TRUST, it shall continue only until the expiration of 20 years after the death of the last survivor of the following named PERSONS: C. Morris Anderson, Ralph A. Christensen, John D. Decker, J. Norman Ellison, Jr., Magner J. Muus, Roger R. Odell and Thomas A. Wentz. II-43 Page 173 of 183 In connection with any termination of IRET, the TRUSTEES, upon receipt of such releases or indemnity as they deem necessary for their protection, may 1. sell and convert into cash the property of IRET and distribute the net proceeds among the SHAREHOLDERS ratably; or 2. convey the property of IRET to one or more PERSONS, entities, trusts, or corporations for consideration consisting in whole or in part of cash, SHARES of stock, or other property of any kind, and distribute the net proceeds among the SHAREHOLDERS ratably, at valuations fixed by the TRUSTEES, in cash or in kind, or partly in cash and partly in kind; provided that the proposal to proceed as described in this clause (2) shall have been set forth in the written approval of the SHAREHOLDERS holding a majority of the SHARES issued and outstanding. Upon termination of IRET and distribution to the SHAREHOLDERS as herein provided, a majority of the TRUSTEES shall execute and lodge among the records of IRET an instrument in writing setting forth the fact of such termination, and the TRUSTEES shall thereupon be discharged from all further liabilities and duties hereunder, and the right, title, and interest of all SHAREHOLDERS shall cease and be canceled and discharged. SECTION 2. ORGANIZATION AS A CORPORATION. Whenever the TRUSTEES deem it for the best interests of the SHAREHOLDERS that IRET be organized as a corporation, the TRUSTEES shall have full power to organize such corporation, under the laws of such state as they may consider appropriate, in the place and stead of IRET without procuring the further consent of any of the SHAREHOLDERS, in which event the capital stock of such corporation shall be and remain the same as fixed under this Agreement and DECLARATION OF TRUST and the SHAREHOLDERS shall receive and accept stock in such corporation on the same basis as they hold SHARES in IRET. ARTICLE 6 - AMENDMENTS SECTION 1. WHEN NO SHARES ARE OUTSTANDING. At any time when no SHARES in IRET are outstanding, the TRUSTEES may amend any provision of the DECLARATION OF TRUST. A certificate signed by a majority of the TRUSTEES, setting forth such amendment and reciting that it was duly adopted by the TRUSTEES, shall be lodged among the records of IRET and shall be conclusive evidence of such amendment. II-44 Page 174 of 183 SECTION 2. WHEN SHARES ARE OUTSTANDING. At any time when SHARES in IRET are outstanding, except as provided in Article 1, Section 6, the DECLARATION OF TRUST may be amended by the TRUSTEES then in office only with the consent of SHAREHOLDERS owning a majority of the issued and outstanding SHARES. A certificate signed by a majority of the TRUSTEES setting forth an amendment and reciting that it was duly adopted shall be lodged among the records of IRET and recorded or filed in each public office or registry in which the DECLARATION OF TRUST shall be recorded or filed and shall be conclusive evidence of such amendment, and any restatement of any provision of the DECLARATION OF TRUST purported to be contained therein. ARTICLE 7 - MISCELLANEOUS SECTION 1. APPLICABLE LAW. The DECLARATION OF TRUST is executed and delivered in Minot, North Dakota, and the laws of the State of North Dakota shall govern the construction, validity, and effect of the DECLARATION OF TRUST and the administration of the entity hereby created, provided, however, that causes of action for violations of federal or state securities laws shall not be governed by this Section 1. SECTION 2. HEADINGS FOR REFERENCE ONLY. Headings preceding the text, articles, and sections hereof have been inserted solely for convenience and reference, and shall not be construed to affect the meaning, construction, or effect of the DECLARATION OF TRUST. In approval of the foregoing RESTATED DECLARATION OF TRUST for Investors Real Estate Trust, the undersigned TRUSTEES constituting a majority hereby approve this document. Signature Title Date --------- ----- ---- /s/ Ralph A. Christensen - --------------------- Trustee and Chairman February 10, 1999 Ralph A. Christensen /s/ Mike F. Dolan - --------------------- Trustee and Vice Chairman February 10, 1999 Mike F. Dolan /s/ Jeffrey Miller - --------------------- Trustee and Vice Chairman February 10, 1999 Jeffrey Miller /s/ Patrick G. Jones - --------------------- Trustee February 10, 1999 Patrick G. Jones /s/ J. Norman Ellison - --------------------- Trustee February 10, 1999 J. Norman Ellison II-45 Page 175 of 183 /s/ Daniel L. Feist - --------------------- Trustee February 10, 1999 Daniel L. Feist /s/ C. Morris Anderson - --------------------- Trustee February 10, 1999 C. Morris Anderson /s/ Thomas A. Wentz, Jr. - --------------------- Trustee February 10, 1999 Thomas A. Wentz, Jr. /s/ John F. Decker - --------------------- Trustee February 10, 1999 John F. Decker II-46 Page 176 of 183 EX-5 4 EXHIBIT 5 November 12, 1998 EXHIBIT EX-5 OPINION RE LEGALITY Securities and Exchange Commission Washington, D.C. 20549 INVESTORS REAL ESTATE TRUST - FORM S-11 DATED MAY 7th, 1999 In connection with the filing of Form S-11 by Investors Real Estate Trust, we advise you that we have examined and are familiar with the originals of all documents, trust records and other instruments relating to the organization of Investors Real Estate Trust, the authorization and issuance of the shares of Beneficial Interest described in said application, including the following: 1. Second Restated Declaration of Trust of Investors Real Estate Trust dated February 10, 1999. 2. Registration Statement (Form S-11). From our examination of said documents and records, it is our opinion: 1. Investors Real Estate Trust has been duly organized and is a validly existing business trust under the laws of the State of North Dakota. 2. Investors Real Estate Trust has the power under North Dakota law to conduct the business activities described in the Trust Agreement and said Prospectus. 3. Investors Real Estate Trust is authorized to issue an unlimited number of its shares of Beneficial Interest as set forth in its Trust Agreement and such shares conform to the statements made about them in said Form S-11 and Prospectus. 4. Said shares of Beneficial Interest have been duly and validly authorized and issued. II-47 Page 177 of 183 5. We are not aware, and Investors Real Estate Trust has advised us that it is not aware of any legal or governmental proceedings pending or threatened to which Investors Real Estate Trust is a party or which the property thereof is the subject; and it and we do not know of any contracts of a character to be disclosed on said application or prospectus which are not disclosed, filed and properly summarized therein. 6. Said Form S-11 and the Prospectus and other exhibits attached thereto are in the form required and have been examined by us; we have no reason to believe that any of said documents contain any untrue statement of material fact or omits to state any material fact the statements therein not misleading. We have reviewed said documents and to the best of our knowledge, information and belief, the statements contained therein are correct. PRINGLE & HERIGSTAD, P.C. By /s/ Thomas A. Wentz, Jr. -------------------------------- Thomas A. Wentz, Jr. kak II-48 Page 178 of 183 EX-8 5 EXHIBIT 8 EXHIBIT EX-8 OPINION RE TAX MATTERS Securities and Exchange Commission Washington, D.C. 20549 INVESTORS REAL ESTATE TRUST - FORM S-11 DATED MAY 7th, 1999 - TAX MATTERS In connection with the filing of the above described Form S-11 by Investors Real Estate Trust, we advise you that we have prepared the section of the Prospectus entitled "Tax Treatments of the Trust and Its Security Holders", including the following subcategories: Federal Income Tax, North Dakota Income Tax, Taxation of the Trust's Shareholders, Taxation of Tex-Exempt Shareholders, Tax Considerations for Foreign Investors, Backup Withholding, State and Local Taxes, Other Tax Considerations, Tax Aspects of the Operating Partnership, Classification as a Partnership and Income Taxation of the operating Partnership and Its Partners. In connection with the preparation of said portion of the filing, we have examined and are familiar with the originals of all documents, trust records and other instruments relating to the organization and operation of Investors Real Estate Trust, IRET Properties, a North Dakota Limited Partnership, and all other related entities described in the filing. In addition, we have reviewed all applicable provisions of the Internal Revenue Code, the regulations issued thereunder and, where appropriate, revenue rulings, federal and state court decisions and such other materials as we deemed necessary and relevant to the matters being opined upon. The conclusions and statements made in the above described portions of the S-11 filing represent our opinions on such matters and have been set forth with our knowledge and consent. The above portions of the Prospectus are hereby incorporated by reference. PRINGLE & HERIGSTAD, P.C. By /s/ Thomas A. Wentz, Jr. ------------------------------- Thomas A. Wentz, Jr. kak II-49 Page 179 of 183 EX-23.I 6 EXHIBIT 23(I) EX-23(i) ______________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSIONER WASHINGTON DC 20549 FORM S-11 REGISTRATION STATEMENT INVESTORS REAL ESTATE TRUST CIK0000798359 May 7, 1999 TO WHOM IT MAY CONCERN: We consent to the incorporation directly or by reference in this Registration Statement of Investors Real Estate Trust, on Form S-11 of our opinion letter dated May 7th, 1999, concerning the opinion of legality. We also consent to the reference to us under the heading "Experts" in the Prospectus, which is also part of this Registration Statement. PRINGLE & HERIGSTAD, P.C. /s/ Thomas A. Wentz, Jr. Thomas A. Wentz, Jr. kak II-50 Page 180 of 183 EX-23.II 7 EXHIBIT 23(II) EX-23(ii) BRADY MARTZ - ---------------------------- CERTIFIED PUBLIC ACCOUNTANTS UNITED STATES SECURITIES AND EXCHANGE COMMISSIONER WASHINGTON DC 20549 RE: FORM S-11 REGISTRATION STATEMENT INVESTORS REAL ESTATE TRUST CIK0000798359 May 5, 1999 TO WHOM IT MAY CONCERN: We hereby consent to the incorporation directly or by reference in the Registration Statement of Investors Real Estate Trust on Form S-11, of the consolidated financial statements and additional information of Investors Real Estate Trust and Affiliated Partnerships as of April 30, 1998, as well as our Independent Auditor's Report dated May 27, 1998. We also consent to the reference to us under the heading "Experts" in the Prospectus, which is part of the Registration Statement. We also acknowledge that we are aware that said Form S-11 Filing includes the unaudited consolidated financial report of the Registrant for the nine-month period ended January 31, 1999. BRADY MARTZ & ASSOCIATES, P.C. /s/ BRADY MARTZ & ASSOCIATES, P.C. - ------------------------------------ BRADY, MARTZ & ASSOCIATES, P.C. 24 West Central P.O. Box 848 Minot, ND 58702-0848 (701) 852-0196 Fax (701) 839-5452 II-51 Page 181 of 183 EX-27 8 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM FINANCIAL STATEMENT ATTACHED HERETO AS EXHIBIT F FOR THE 9-MONTH PERIOD ENDED JANUARY 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH EXHIBIT F. 9-MOS JAN-31-1998 MAY-01-1998 JAN-31-1999 3,086,972 4,100,590 1,709,669 126,212 0 12,932,502 240,046,889 22,575,451 217,471,438 2,822,462 137,324,811 10,869,391 0 74,708,559 6,555,933 224,718,514 0 9,102,278 0 6,152,307 133,863 0 2,816,108 1,193,988 0 1,193,988 0 366,017 0 1,560,005 .10 .10
EX-99 9 EXHIBIT 99 EX-99 Investors Real Estate Trust SUBSCRIPTION AGREEMENT AMOUNT $__________________ NUMBER OF COMMON SHARES ________________ OWNERSHIP Name(s)_________________________________________________________ REGISTRATION: Address ________________________________________________________ City ____________________________ State _______ Zip ____________ Social Security Number ____-____-____ or Tax I.D.# ___-_______ Date of Birth ____/____/____ Social Security Number ____-____-____ or Tax I.D.# ___-_______ Date of Birth ____/____/____ Under penalties of perjury, the undersigned certified (1) that the number shown as his taxpayer identification number is his correct taxpayer identification number and (2) that he is not subject to back up withholding either because he has not been notified that he is subject to backup withholding as a result of a failure to report all interest and dividends or because the Internal Revenue Service has notified him that he is no longer subject to backup withholding. - ------------------------------------------------------------------------------- MAILING ADDRESS FOR CORRESPONDENCE AND CASH DISTRIBUTIONS Name(s)_______________________________________________________________________ Address_______________________________________________________________________ City ____________________________________ State __________ Zip ____ (If different from above) ______________________________________________________________________________ TITLE TO _____Individual _____Tenants in Common _____IRA ___Partnership BE HELD: _____Joint Tenants/ _____Corporation _____Trust ___Pension Plan Rights of Survivorship _____Marital Property _____Custodian ____Profit Sharing - ------------------------------------------------------------------------------- SIGNATURES: I hereby certify as follows: That a copy of the Prospectus, including the Subscription Agreement attached thereto, as amended and/or supplemented to date, has been delivered to me, and I acknowledge that such Prospectus was received. Executed this ___ day of _______, 199__, at ___________(city) ___ (state). Signature (investor's, otherwise Trustee of IRA, Pension Plan, etc.) ______ Additional Signature (if joint tenant) - ------------------------------------------------------------------------------- The undersigned hereby represents that it has reasonable grounds to believe on the basis of information obtained from the above-named investor concerning his-her investment objectives, other investments, financial situation and needs, and any other information known by it that: A. The above-named investor is or will be in a financial position appropriate to enable him-her to realize, to a significant extent, the benefits discussed in the Prospectus; B. The above-named investor has a fair market net worth sufficient to sustain the risks inherent in the Shares, including loss of investment and lack of liquidity; and C. The Shares are otherwise suitable for the above-named investor. I further represent that prior to executing this purchase transaction, I informed the above-named investor of all pertinent facts relating to the liquidity of the Shares. - ------------------------------------------------------------------------------- SOLICITING DEALER ENDORSEMENT: Firm _________________________________________________________ Registered Representative _______________________ Phone ______ Address ______________________________________________________ Dealer Authorized Signature __________________________________ NOTE: Checks to be made payable to: INVESTORS REAL ESTATE TRUST, 12 SOUTH MAIN ST., MINOT, ND 58701 - ------------------------------------------------------------------------------- Accepted by: INVESTORS REAL ESTATE TRUST ________________________________ By: ODELL-WENTZ & ASSOCIATES Date _________________ (Advisor) ii-53 Page 183 of 183 -----END PRIVACY-ENHANCED MESSAGE-----