Attached files
| file | filename |
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| EX-14 - TIAA REAL ESTATE ACCOUNT | c60029_ex14.htm |
| EX-31 - TIAA REAL ESTATE ACCOUNT | c60029_ex31.htm |
| EX-32 - TIAA REAL ESTATE ACCOUNT | c60029_ex32.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
S ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 33-92990; 333-158136
TIAA REAL ESTATE ACCOUNT
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
NOT APPLICABLE
(I.R.S. Employer Identification No.)
C/O TEACHERS INSURANCE AND
ANNUITY ASSOCIATION OF AMERICA
730 THIRD AVENUE
NEW YORK, NEW YORK 10017-3206
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (212) 490-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES £ NO S
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act:
YES £ NO S
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES S NO £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 or regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: S Not Applicable
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES £ NO £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer £ |
Accelerated filer £ |
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Non-accelerated filer S |
Smaller Reporting Company £ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES £ NO S
Aggregate market value of voting stock held by non-affiliates: Not Applicable
Documents Incorporated by Reference: None
TABLE OF CONTENTS
Item
Page
Business
3
Risk Factors
7
Unresolved Staff Comments
17
Properties
18
Legal Proceedings
25
Reserved
25
Market for Registrant’s Common Stock, Related Stockholder Matters, and Issuer Purchases of Equity Securities
26
Selected Financial Data
27
Management’s Discussion and Analysis of Account’s Financial Condition and Operating Results
29
Quantitative and Qualitative Disclosures about Market Risk
55
Financial Statements and Supplementary Data
58
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
87
Controls and Procedures
87
Directors, Executive Officers, and Corporate Governance of the Registrant; Executive Compensation
88
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
90
Certain Relationships and Related Transactions, and Director Independence
90
Principal Accountant Fees and Services
91
Exhibits and Financial Statement Schedules
92
93 2
General. The TIAA Real Estate Account (the “Real Estate Account”, the “Account” or the “Registrant”) was established on February 22, 1995, as an insurance company separate account of Teachers Insurance and Annuity Association of America (“TIAA”), a New York insurance company, by
resolution of TIAA’s Board of Trustees. The Account, which invests mainly in real estate and real estate-related investments, is a variable annuity investment option offered through individual, group and tax-deferred annuity contracts available to employees in the academic, medical, cultural and research fields.
The Account commenced operations on July 3, 1995, and interests in the Account were first offered to eligible participants on October 2, 1995. The Account offers individual and group accumulating annuity contracts (with contributions made on a pre-tax or after-tax basis), as well as individual lifetime and term-certain variable payout annuity contracts (including the payment of death benefits to beneficiaries). Investors are entitled to transfer funds to
or from the Account under certain circumstances. Funds invested in the Account for each category of contract are expressed in terms of units, and unit values will fluctuate depending on the Account’s performance. The Account is designed as an option for retirement and tax-deferred savings plans for employees of non-profit and governmental institutions. TIAA offers the Account under the following annuity contracts:
•
RA and GRAs (Retirement Annuities and Group Retirement Annuities) • SRAs (Supplemental Retirement Annuities) • GSRAs (Group Supplemental Retirement Annuities) • Retirement Choice and Retirement Choice Plus Annuity • GAs (Group Annuities) and Institutionally-Owned GSRAs • Classic and Roth IRAs (Individual Retirement Annuities) including SEP IRAs (Simplified Employee Pension Plans) • Keoghs • ATRAs (After-Tax Retirement Annuities) Investors should note that state regulatory approval may be pending for certain of these contracts and they may not currently be available in every state. The Account is regulated by the New York State Insurance Department (“NYID”) and the insurance departments of some other jurisdictions in which the annuity contracts are offered. Although TIAA owns the assets of the Real Estate Account, and the Account’s obligations are obligations of TIAA, the
Account’s income, investment gains, and investment losses are credited to or charged against the assets of the Account without regard to TIAA’s other income, gains, or losses. Under New York insurance law, the Account cannot be charged with liabilities incurred by any other TIAA business activities or any other
TIAA separate account. Investment Objective. The Real Estate Account seeks favorable long-term returns primarily through rental income and appreciation of real estate investments owned by the Account. The Account will also invest in publicly-traded securities and short-term higher quality liquid investments that are easily
converted to cash to enable the Account to meet participant redemption requests, purchase or improve properties, or cover expense needs. Investment Strategy. The Account intends to have between 75% and 85% of its assets invested directly in real estate or real estate-related investments with the goal of producing favorable long-term returns primarily through rental income and appreciation. The Account’s principal strategy is to purchase
direct ownership interests in income-producing real estate, primarily office, industrial, retail, and multi-family residential properties. The Account can also invest in real estate or real estate-related investments through joint ventures, real estate partnerships or real estate equity securities. To a limited extent, the
Account can also invest in conventional mortgage loans, participating mortgage loans, common or preferred stock of 3
companies whose operations involve real estate (i.e., that primarily own or manage real estate including real estate investment trusts (“REITs”)), and collateralized mortgage obligations, including commercial mortgage-backed securities and other similar instruments. The Account will invest the remaining portion of its assets (intended to be between 15% and 25% of its assets) in liquid investments; namely, securities issued by U.S. government agencies or U.S. government sponsored entities, corporate debt securities, money market instruments, and, at times, stock of
companies that do not primarily own or manage real estate. There will be periods of time (including since late 2008) during which the Account’s liquid investments will comprise less than 15% (and possibly less than 10%) of its total assets, especially during and immediately following periods of significant net participant outflows. Alternatively, in some circumstances, the
portion of the Account’s assets invested in liquid investments may exceed 25%. This could happen, for example, if the Account receives a large inflow of money in a short period of time, there is a lack of attractive real estate investments available on the market, and/or the Account anticipates more near-term cash
needs. The amount the Account invests in real estate and real estate-related investments at a given time will vary depending on its liquidity position (including the Account’s obligation to meet participant redemption requests) as well as market conditions and real estate prospects, among other factors. The Account from time to time will also make foreign investments in real estate and real estate related assets, which are expected to comprise no more than 25% of the Account’s total assets. As of December 31, 2009, the Account held interests in two foreign property investments (one in the United Kingdom
and one in France) which represent approximately 4.4% of the total assets of the Account. See “Item 2. Properties” for more information, including valuation information, concerning these investments. More detailed information concerning the composition of the Account’s properties, including the Account’s foreign investments and information regarding significant tenants in the Account’s properties, is contained below under the heading “Item 2. Properties.” Net Assets and Portfolio Investments. As of December 31, 2009, the Account’s net assets totaled approximately $7.9 billion. At December 31, 2009, the Account held a total of 101 real estate property investments (including its interests in 12 real estate-related joint ventures), representing 90.27% of the
Account’s Total Investments. As of that date, the Account also held investments in a mortgage loan receivable, representing 0.73% of Total Investments, real estate limited partnerships, representing 2.07% of Total Investments, United States treasury bills, representing 2.13% of Total Investments, and government
agency notes, representing 4.80% of Total Investments. Borrowing. The Account may borrow money and assume or obtain a mortgage on a property—i.e., make leveraged real estate investments. In addition, to meet short-term cash needs, the Account may obtain a line of credit that may be unsecured and/or contain terms that may require the Account secure a
loan with one or more of its properties. Management expects the proceeds from any such short-term borrowing would be used to meet the cash flow needs of the Account’s properties and real estate related investments, but depending on the circumstances, proceeds could be used for Account-level funding needs
(including the need to honor unexpected participant withdrawal activity). Under the Account’s current investment guidelines, which were amended as to borrowing in mid 2009, management intends to maintain the Account’s loan to value ratio (as defined below) at or below 30%. However, through December 31, 2009:
•
the Account will maintain outstanding debt in an aggregate principal amount not to exceed the aggregate principal amount of debt outstanding as of the date of adoption of such guideline (approximately $4.0 billion); and • subject to this $4.0 billion limitation, the Account may incur and/or maintain debt on its properties (including (i) refinancing outstanding debt, (ii) assuming debt on the Account’s properties, (iii) extending the maturity date of outstanding debt and/or (iv) incurring new debt on its properties) based on the
ratio of the outstanding principal amount of the Account’s debt to the Account’s total gross asset value (a “loan to value ratio”). By December 31, 2011, management intends the Account’s ratio loan to value ratio to be 30% or less and thereafter intends to maintain its loan to value ratio at or below 30% (measured at the time of 4
incurrence and after giving effect thereto). In calculating outstanding indebtedness, we will include only the Account’s actual percentage interest in any borrowings on a joint venture investment and not that of any joint venture partner. Also, at the time the Account (or a joint venture in which the Account is a
partner) enters into a revolving line of credit, management deems the maximum amount which may be drawn under that line of credit as fully incurred, regardless of whether the maximum amount available has been drawn from time to time. As of December 31, 2009, the aggregate principal amount of the Account’s outstanding debt (including the Account’s share of debt on its joint venture investments) was approximately $3.9 billion and the Account’s loan to value ratio was approximately 33.1%. The Account may only borrow up to 70% of the then current value of a property, although construction loans may be for 100% of costs incurred in developing the property. Except for construction loans, any mortgage loans on a property will be non-recourse to the Account, meaning that if there is a default on a loan in respect of a specific property, the lender will have recourse to (i.e., be able to foreclose on) only the property encumbered (or the joint venture owning the
property), or to other specific Account properties that may have been pledged as security for the defaulted loan, but not to any other assets of the Account. When possible, the Account will seek to have loans mature at varying times to limit the risks of borrowing. Risk Factors. The Account’s assets and income can be affected by a variety of risk factors. These risks are more fully described under Item 1A of this Report and in the Account’s prospectus (as supplemented from time to time). Personnel and Management. The Account does not directly employ any persons nor does the Account have its own management or board of directors. Rather, TIAA employees, under the direction and control of TIAA’s Board of Trustees and Investment Committee, manage the investment of the
Account’s assets, following investment management procedures TIAA has adopted for the Account. In addition, TIAA performs administration functions for the Account (which includes receiving and allocating premiums, calculating and making annuity payments and providing recordkeeping and other services).
Distribution services for the Account (which include, without limitation, distribution of the annuity contracts, advising existing annuity contract owners in connection with their accumulations and helping employers implement and manage retirement plans) are performed by TIAA-CREF Individual & Institutional
Services, LLC (“Services”), a wholly owned subsidiary of TIAA and registered broker-dealer and member of the Financial Industry Regulatory Authority (“FINRA”). TIAA and Services provide administration and distribution services, as applicable, on an “at-cost” basis. Appraisals and Valuations. With respect to the Account’s real property investments, following the initial purchase of a property or the making of a mortgage loan on a property by the Account (at which time the Account normally receives an independent appraisal on such property), each of the
Account’s real properties are appraised, and mortgage loans are valued, at least once every calendar quarter. Each of the Account’s real estate properties are appraised each quarter by an independent external state-certified (or its foreign equivalent) appraiser (which we refer to in this report as an “independent
appraiser”) who is a member of a professional appraisal organization. In addition, TIAA’s internal appraisal staff performs a review of each quarterly appraisal, in conjunction with the Account’s independent fiduciary, and TIAA’s internal appraisal staff or the independent fiduciary may request an additional
appraisal or valuation outside of this quarterly cycle. Any differences in the conclusions of TIAA’s internal appraisal staff and the independent appraiser will be reviewed by the independent fiduciary, which will make a final determination on the matter (which may include ordering a subsequent independent
appraisal). In general, the Account obtains appraisals of its real estate properties spread out throughout the quarter, which is intended to result in appraisal adjustments and thus adjustments to the valuations of its holdings (to the extent adjustments are made) that happen regularly throughout each quarter and not on one
specific day in each period. In addition, an estimated daily equivalent of net operating income is taken into consideration and is adjusted for actual transactional activity. The remaining assets in the Account are primarily marketable securities that are priced on a daily basis. See “Management’s Discussion and
Analysis of Results of Operations and Financial Condition—Critical Accounting Policies” in this Form 10-K for more information on how each class of the Account’s investments are valued. 5
Liquidity Guarantee. The TIAA general account provides the Account with a liquidity guarantee enabling the Account to have funds available to meet participant redemption, transfer or cash withdrawal requests. If the Account cannot fund participant requests from the Account’s own cash flow and
liquid investments, the TIAA General Account will fund them by purchasing accumulation units issued by the Account (accumulation units that are purchased by TIAA are generally referred to as “liquidity units”). This liquidity guarantee is required by the NYID. TIAA guarantees that participants can redeem
their accumulation units at the accumulation unit value determined after their transfer or cash withdrawal request is received in good order. Liquidity units owned by TIAA are valued in the same manner as accumulation units owned by the Account’s participants. Importantly, however, this liquidity guarantee is not a guarantee of the investment performance of the Account or a guarantee of the value of a participant’s units. The Account pays TIAA for the liquidity guarantee through a daily deduction from the Account’s net assets. As a result of significant net
participant transfers since December 2008 (in particular, in the first half of 2009), pursuant to this liquidity guarantee obligation, the TIAA general account purchased an aggregate of $1.2 billion of liquidity units issued by the Account through June 30, 2009. Since July 1, 2009 and through the date of filing this Form
10-K, no further liquidity units have been purchased. As of the date of filing this Form 10-K, no accumulation units have been redeemed by TIAA. Management cannot predict the extent to which future accumulation unit purchases will be required under this liquidity guarantee, nor can management predict when such liquidity units will be redeemed in part, or in
full. Please refer to the “Liquidity and Capital Resources” section in “Management’s Discussion and Analysis of the Account’s Financial Condition and Results of Operations” for more disclosure surrounding the Liquidity Guarantee. Independent Fiduciary. Because TIAA’s ability to purchase and sell liquidity units raises certain technical issues under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), TIAA applied for and received a prohibited transaction exemption from the U.S. Department of Labor
in 1996 (PTE 96-76). In connection with the exemption, TIAA has appointed an independent fiduciary for the Account, with overall responsibility for reviewing the Account’s transactions to determine whether they are in accordance with the Account’s investment guidelines. Real Estate Research Corporation, a
real estate consulting firm whose principal offices are located in Chicago, Illinois, was appointed as independent fiduciary effective March 1, 2006 and currently serves as the Account’s independent fiduciary. The independent fiduciary’s responsibilities include:
•
reviewing and approving the Account’s investment guidelines and monitoring whether the Account’s investments comply with those guidelines; • reviewing and approving valuation procedures for the Account’s properties; • approving adjustments to any property valuations that change the value of the property or the Account as a whole above or below certain prescribed levels, or that are made within three months of the annual independent appraisal; • reviewing and approving how the Account values accumulation and annuity units; • approving the appointment of all independent appraisers; • reviewing the purchase and sale of units by TIAA to ensure that the Account uses the correct unit values; and • requiring appraisals besides those normally conducted, if the independent fiduciary believes that any of the properties have changed materially, or that an additional appraisal is necessary to ensure the Account has correctly valued a property. In addition, the independent fiduciary has certain responsibilities with respect to the Account that it had historically undertaken or is currently undertaking with respect to TIAA’s purchase and ownership of liquidity units, including among other things, reviewing the purchases and redemption of liquidity units
by TIAA to ensure the Account uses the correct unit values. In addition, as set forth in PTE 96-76, the independent fiduciary’s responsibilities include: 6
•
establishing the percentage of total accumulation units that TIAA’s ownership should not exceed (the “trigger point”) and creating a method for changing the trigger point; • approving any adjustment of TIAA’s ownership interest in the Account and, in its discretion, requiring an adjustment if TIAA’s ownership of liquidity units reaches the trigger point; and • once the trigger point has been reached, participating in any program to reduce TIAA’s ownership in the Account by utilizing cash flow or liquid investments in the Account, or by utilizing the proceeds from asset sales. If the independent fiduciary were to determine that TIAA’s ownership should be reduced
following the trigger point, its role in participating in any asset sales program would include (i) participating in the selection of properties for sale, (ii) providing sales guidelines, and (iii) approving those sales if, in the independent fiduciary’s opinion, such sales are desirable to reduce TIAA’s ownership of
liquidity units. As of the date of this Form 10-K, the independent fiduciary, which has the right to adjust the trigger point, has established the trigger point at 45% of the outstanding accumulation units and it will continue to monitor TIAA’s ownership interest in the Account and provide further recommendations as
necessary. As of December 31, 2009, TIAA owned approximately 12.0% of the outstanding accumulation units of the Account. Available Information. The Account’s annual report on Form 10-K, and quarterly reports on Form 10-Q, and any amendments to those reports, filed by the Account with the Securities and Exchange Commission on or after the date hereof, can be accessed free of charge at www.tiaa-cref.org. Information contained on this website is expressly not incorporated by reference into this Annual Report on Form 10-K. The value of your investment in the Account will fluctuate based on the value of the Account’s assets and the income the assets generate and the Account’s expenses. Participants can lose money by investing in the Account. There is risk associated with an investor attempting to “time” an investment in the
Account’s units, or effecting a redemption of an investor’s units. The Account’s assets and income can be affected by many factors, and you should consider the specific risks presented below before investing in the Account. In particular, for a discussion of how forward-looking statements contained in this Annual
Report on Form 10-K are subject to uncertainties that are difficult to predict, which may be beyond management’s control and which could cause actual results to differ materially from historical experience or management’s present expectations, please refer to the subsection entitled “Forward-Looking
Statements,” which is contained in the section entitled “Management’s Discussion and Analysis of the Account’s Financial Condition and Results of Operations.” RISKS ASSOCIATED WITH REAL ESTATE INVESTING General Risks of Acquiring and Owning Real Property: As referenced elsewhere in this report, the substantial majority of the Account’s net assets are comprised of direct ownership interests in real estate. As such, the Account is particularly subject to the risks inherent in acquiring and owning real property,
including in particular the following:
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Adverse Global and Domestic Economic Conditions. The economic conditions in the markets where the Account’s properties are located may be adversely impacted by factors which include:
adverse domestic or global economic conditions, particularly in the event of a deep recession which results in significant employment losses across many sectors of the economy and reduced levels of consumer spending; • a weak market for real estate generally and/or in specific locations where the Account may own property; • the availability of financing (both for the Account and potential purchasers of the Account’s properties); • an oversupply of, or a reduced demand for, certain types of real estate properties; 7
•
• business closings, industry or sector slowdowns, employment losses and related factors; • natural disasters, flooding and other significant severe weather-related events, including those caused by global climate changes; • terrorist attacks and/or other man-made events; and • decline in population or shifting demographics. The incidence of some or all of these factors could reduce occupancy, rental rates and the market value of the Account’s real properties or interests in investment vehicles (such as limited partnerships) which directly hold real properties.
•
Concentration Risk. The Account may experience periods in which its investments are geographically concentrated, either regionally or in certain markets with similar demographics. Further, while the Account seeks diversification across its four primary property types: office, industrial, retail and multi-family
residential properties, the Account may experience periods where it has concentration in one property type, increasing the potential exposure if there were to be an oversupply of, or a reduced demand for, certain types of real estate properties in the markets in which the Account operates. Also, the Account
may experience periods in which its tenant base is concentrated within a particular industry sector. If any or all of these events occur, the Account’s income and performance may be adversely impacted disproportionately by deteriorating economic conditions in those areas or industry sectors in which the
Account’s investments are concentrated. Also, the Account could experience a more rapid negative change in the value of its real estate investments than would be the case if its real estate investments were more diversified. • Leasing Risk. A number of factors could cause the Account’s rental income, a key source of the Account’s revenue and investment return, to decline, which would adversely impact the Account’s results and investment returns. These factors include:
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A property may be unable to attract new tenants or retain existing tenants. This situation could be exacerbated if a concentration of lease expirations occurred during any one time period or multiple tenants exercise early termination at the same time. • The financial condition of our tenants may be adversely impacted, particularly in a prolonged economic downturn. The Account could lose revenue if tenants do not pay rent when contractually obligated, request some form of rent relief and/or default under a lease at one of the Account’s properties. Such a
default could occur if a tenant declared bankruptcy, suffered from a lack of liquidity, failed to continue to operate its business or for other reasons. In the event of any such default, we may experience a delay in, or an inability to effect, the enforcement of our rights against that tenant, particularly if that
tenant filed for bankruptcy protection. Further, any disputes with tenants could involve costly and time consuming litigation. • In the event a tenant vacates its space at one of the Account’s properties, whether as a result of a default, the expiration of the lease term, rejection of the lease in bankruptcy or otherwise, given current market conditions, we may not be able to re-lease the vacant space either (i) for as much as the rent
payable under the previous lease or (ii) at all. Also, we may not be able to re-lease such space without incurring substantial expenditures for tenant improvements and other lease-up related costs, while still being obligated for any mortgage payments, real estate taxes and other expenditures related to the
property. • In some instances, our properties may be specifically suited to and/or outfitted for the particular needs of a certain tenant based on the type of business the tenant operates. For example, many companies desire space with an open floor plan. We may have difficulty obtaining a new tenant for any vacant space
in our properties, particularly if the floor plan limits the types of businesses that can use the space without major renovation, which may require us to incur substantial expense in re-planning the space. • The Account owns and operates retail properties, which, in addition to the risks listed above, are subject to specific risks, including variations in rental revenues due to customary “percentage rent” clauses which may be in place for retail tenants and the insolvency and/or closing of an anchor tenant. Many
times, anchor tenants will be ‘big box’ stores and other large retailers that can be particularly 8
adversely impacted by a global recession and reduced consumer spending generally. Factors that can impact the level of consumer spending include increases in fuel and energy costs, residential and commercial real estate and mortgage conditions, labor and healthcare costs, access to credit, consumer
confidence and other macroeconomic factors. Under certain circumstances, the leases may allow other tenants in a retail property to terminate their leases, reduce or withhold rental payments. The insolvency and/or closing of an anchor tenant may also cause such tenants to fail to renew their leases at
expiration.
Competition. The Account may face competition for real estate investments from multiple sources, including individuals, corporations, insurance companies or other insurance company separate accounts, as well as real estate limited partnerships, real estate investment funds, commercial developers, pension
plans, other institutional and foreign investors and other entities engaged in real estate investment activities. Some of these competitors may have similar financial and other resources as the Account, and/or they may have investment strategies and policies (including the ability to incur significantly more
leverage than the Account) that allow them to compete more aggressively for real estate investment opportunities, which could result in the Account paying higher prices for investments, experiencing delays in acquiring investments or failing to consummate such purchases. Any resulting delays in the
acquisition of investments, or the failure to consummate acquisitions the Account deems desirable, may increase the Account’s costs or otherwise adversely affect the Account’s investment results. In addition, the Account’s properties may be located close to properties that are owned by other real estate investors and that compete with the Account for tenants. These competing properties may be better located, more suitable for tenants than our properties or have owners who may compete more
aggressively for tenants, resulting in a competitive advantage for these other properties. We may also face similar competition from other properties that may be developed in the future. This competition may limit the Account’s ability to lease space, increase its costs of securing tenants, limit our ability to
maximize our rents and/or require the Account to make capital improvements it otherwise would not, in order to make its properties more attractive to prospective tenants. • Operating Costs. A property’s cash flow could decrease if operating costs, such as property taxes, utilities, litigation expenses associated with a property, maintenance and insurance costs that are not reimbursed by tenants increase in relation to gross rental income, or if the property needs unanticipated repairs
and renovations. • Condemnation. A governmental agency may condemn all or a portion of a property owned by the Account. While the Account would receive compensation in connection with any such condemnation, such compensation may not be in an amount the Account believes represents equivalent value for the
condemned property. Further, a partial condemnation could impair the ability of the Account to maximize the value of the property during its operation, including making it more difficult to find new tenant or retain existing tenants. Finally, a property which has been subject to a partial condemnation may be
more difficult to sell at a price the Account believes is appropriate. • Terrorism and Acts of War and Violence. Terrorist attacks may harm our property investments. The Account cannot assure you that there will not be further terrorist attacks against the United States, U.S. businesses or elsewhere in the world. These attacks or armed conflicts may directly or indirectly impact
the value of the property we own or that secure our loans. Losses resulting from these types of events may be uninsurable or not insurable to the full extent of the loss suffered. Moreover, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United
States and worldwide financial markets and economy. Such events could also result in economic uncertainty in the United States or abroad. Adverse economic conditions resulting from terrorist activities could reduce demand for space in the Account’s properties and thereby reduce the value of the Account’s
properties and therefore your investment return. General Risks of Selling Real Estate Investments: Among the risks of selling real estate investments are:
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The sale price of an Account property might differ, perhaps significantly, from its estimated or appraised value, leading to losses or reduced profits to the Account. • The Account might not be able to sell a property at a particular time for a price which management believes represents its fair or full value. This illiquidity may result from the cyclical nature of real 9
•
estate, general economic conditions impacting the location of the property, disruption in the credit markets or the availability of financing on favorable terms or at all, and the supply of and demand for available tenant space, among other reasons. This might make it difficult to raise cash quickly which could
impair the Account’s liquidity position (particularly during any period of sustained significant net participant outflows) and also could lead to Account losses. Further, the liquidity guarantee does not serve as a working capital facility or credit line to enhance the Account’s liquidity levels generally, as its
purpose is tied to participants having the ability to redeem their accumulation units upon demand (thus, alleviating the Account’s need to dispose of properties solely to increase liquidity levels in what management deems a suboptimal sales environment). • The Account may need to provide financing to a purchaser if no cash buyers are available, or if buyers are unable to receive financing on terms enabling them to consummate the purchase. • For any particular property, the Account may be required to make expenditures for improvements to, or to correct defects in, the property before the Account is able to market and/or sell the property. Valuation and Appraisal Risks: Investments in the Account’s assets are stated at fair value which is defined as the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date. Determination of fair value, particularly for real estate assets, involves
significant judgment. Valuation of the Account’s real estate properties (which comprise a substantial majority of the Account’s net assets) are based on real estate appraisals, which are estimates of property values based on a professional’s opinion and may not be accurate predictors of the amount the Account
would actually receive if it sold a property. Appraisals can be subjective in certain respects and rely on a variety of assumptions and conditions at that property or in the market in which the property is located, which may change materially after the appraisal is conducted. Among other things, market prices for
comparable real estate may be volatile, in particular if there has been a lack of recent transaction activity in such market. Recent disruptions in the macroeconomy, real estate markets and the credit markets have led to a significant decline in transaction activity in most markets and sectors and the lack of
observable transaction data may have made it more difficult for an appraisal to determine the fair value of the Account’s real estate. Further, as the Account generally obtains appraisals on a quarterly basis, there may be circumstances in the period between appraisals or interim valuation adjustments in which the true realizable value of a property is not reflected in the Account’s daily net asset value calculation or in the Account’s periodic
financial statements. This disparity may be more apparent when the commercial and/or residential real estate markets experience an overall and possibly dramatic decline (or increase) in property values in a relatively short period of time between appraisals. If the appraised values of the Account’s properties as a whole are too high, those participants who purchased accumulation units prior to (i) a downward valuation adjustment of a property or multiple properties or (ii) a property or properties being sold for a lower price than the appraised value will be credited
with less of an interest than if the value had previously been adjusted downward. Also, those participants who redeem during any such period will have received more than their pro rata share of the value of the Account’s assets, to the detriment of other non-redeeming participants. In particular, appraised property
values may prove to be too high (as a whole) in a rapidly declining commercial real estate market. Further, implicit in the Account’s definition of fair value is a principal assumption that there will be a reasonable time to market a given property and that the property will be exchanged between a willing buyer and
willing seller in a non-distressed scenario. However, an appraised value may not reflect the actual realizable value that would be obtained in a rush sale where time was of the essence. Also, appraised values may lag actual realizable values to the extent there is significant and rapid economic deterioration in a
particular geographic market or a particular sector within a geographic market. If the appraised values of the Account’s properties as a whole are too low, those participants who redeem prior to (i) an upward valuation adjustment of a property or multiple properties or (ii) a property or properties being sold for a higher price than the appraised value will have received less than their pro
rata share of the value of the Account’s assets, and those participants who purchase units during any such period will be credited with more than their pro rata share of the value of the Account’s assets. Finally, the Account recognizes items of income (such as net operating income from real estate investments, distributions from real estate limited partnerships or joint ventures, or dividends from REIT stocks) and expense in many cases on an intermittent basis, where the Account cannot predict with certainty 10
the magnitude or the timing of such item. As such, even as the Account estimates items of net operating income on a daily basis, the Accumulation Unit Value (“AUV”) for the Account may fluctuate, perhaps significantly, from day to day, as a result of adjusting these estimates for the actual recognized item of
income or expense. Investment Risk Associated with Participant Transactions: The amount we have available to invest in new properties and other real estate related assets will depend, in large part, on the level of net participant transfers into or out of the Account, as well as participant premiums into the Account. As noted
elsewhere in this report, the Account intends to hold between 15% and 25% of its assets in investments other than real estate and real estate related investments, primarily comprised of highly liquid investments. These liquid assets are intended to be available to purchase real estate related investments in
accordance with the Account’s investment objective and strategy and are also available to meet the participant redemption requests and the Account’s expense needs (including, from time to time, obligations on maturing debt). During 2008 (and in particular, the second half of 2008), the Account experienced
significant net participant transfers out of the Account. Due in large part to this activity, the TIAA liquidity guarantee was initially executed in December 2008. While the rate of net participant transfers out of the Account declined throughout each quarter of 2009, the Account experienced net participant outflows
in each quarter of 2009. The Account’s liquid assets represented less than 10% of the Account’s total assets throughout all of 2009 and, as of December 31, 2009, representing approximately 7.0% of the Account’s total assets. See “Establishing and Managing the Account—The Role of TIAA—Liquidity Guarantee.” If the amount of net participant transfers out of the Account were to continue, particularly at an increase rate similar to that experienced in late 2008, we may not have enough available liquid assets to pursue, or consummate, new investment opportunities presented to us that are otherwise attractive to the
Account. This, in turn, could harm the Account’s returns. Management cannot predict with precision whether net participant transfers will cease in the near term (i.e., during 2010). Additionally, even if net transfers out of the Account ceased for a period of time, there is no guarantee that redemption activity would
not increase again, perhaps in a significant and rapid manner. Risks of Borrowing: The Account acquires some of its properties subject to existing financing and from time to time borrows new funds at the time of purchase. Also, the Account may from time to time place new leverage on, increase the leverage already placed on, or refinance maturing debt on, existing
properties the Account owns. Under the Account’s current investment guidelines, the Account may maintain indebtedness, in the aggregate, either directly or through its joint venture investments, in an amount up to approximately $4.0 billion, and following December 31, 2011, the Account intends to maintain a
loan to value ratio at or below 30% (measured at the time of incurrence and after giving effect thereto). Also, the Account may borrow up to 70% of the then-current value of a particular property. Non-construction mortgage loans on a property will be non-recourse to the Account. Among the risks of borrowing money or otherwise investing in a property subject to a mortgage are:
•
General Economic Conditions. General economic conditions, dislocations in the capital or credit markets generally or the market conditions then in effect in the real estate finance industry, may hinder the Account’s ability to obtain financing or refinancing for its property investments on favorable terms or at
all, regardless of the quality of the Account’s property for which financing or refinancing is sought. Such unfavorable terms might include high interest rates, increased fees and costs and restrictive covenants applicable to the Account’s operation of the property. Longer term disruptions in the capital and
credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to financing necessary to make profitable real estate investments. Our failure to obtain financing or refinancing on favorable terms due
to the current state of the credit markets or otherwise could have an adverse impact on the returns of the Account. • Default Risk. The property may not generate sufficient cash flow to support the debt service on the loan, the property may fail to meet certain financial or operating covenants contained in the loan documents, and/or the property may have negative equity (i.e. the loan balance exceeds the value of the
property). In any of these circumstances, we may default on the loan, including due to the failure to make required debt service payments when due. If a loan is in default, the Account may determine that it is not economically desirable and/or in the best interests of the Account to continue to make 11
payments on the loan (including accessing other sources of funds to support debt service on the loan), and/or the Account may not be able to otherwise remedy such default on commercially reasonable terms or at all. In either case, the lender then could accelerate the outstanding amount due on the loan and/
or foreclose on the underlying property, in which case and the Account could lose the value of its investment in the foreclosed property. Further, any such default or acceleration could trigger a default under loan agreements in respect of other Account properties pledged as security for the defaulted loan.
Finally, any such default could increase the Account’s borrowing costs, or result in less favorable terms, with respect to financing future properties. • Balloon Maturities. If the Account obtains a mortgage loan that involves a balloon payment, there is a risk that the Account may not be able to make the lump sum principal payment due under the loan at the end of the loan term, or otherwise obtain adequate refinancing on terms commercially acceptable to
the Account or at all. The Account then may be forced to sell the property or other properties under unfavorable market conditions or default on its mortgage, resulting in the lender exercising its remedies, which may include repossession of the property and the Account could lose the value of its investment
in that property. • Variable Interest Rate Risk. If the Account obtains variable-rate loans, the Account’s returns may be volatile when interest rates are volatile. Further, to the extent that the Account takes out fixed-rate loans and interest rates subsequently decline, this may cause the Account to pay interest at above-market
rates for a significant period of time. Any hedging activities the Account engages in to mitigate this risk may not fully protect the Account from the impact of interest rate volatility. • Valuation Risk. The market valuation of mortgage loans payable could have an adverse impact on the Account’s performance. Valuations of mortgage loans payable are generally based on the amount at which the liability could be transferred in a current transaction, exclusive of transaction costs, and such
valuations are subject to a number of assumptions and factors with respect to the loan and the underlying property, a change in any of which could cause the value of a mortgage loan to fluctuate. A general disruption in the credit markets, such as the credit markets have been recently experiencing, may aggravate some or all of these risks. For a discussion of the recent credit market disruptions, please see “Management’s Discussion and Analysis of the Account’s Financial Condition and Results of
Operations.” Regulatory Risks: Government regulation at the federal, state and local levels, including, without limitation, zoning laws, rent control or rent stabilization laws, laws regulating housing on the Account’s multifamily residential properties, the Americans with Disabilities Act, property taxes and fiscal, accounting,
environmental or other government policies, could operate or change in a way that adversely affects the Account and its properties. For example, these regulations could raise the cost of owning, improving or maintaining properties, present barriers to otherwise desirable investment opportunities or make it harder
to sell, rent, finance, or refinance properties either on economically desirable terms, or at all, due to the increased costs associated with regulatory compliance. Environmental Risks: The Account may be liable for damage to the environment or injury to individuals caused by hazardous substances used or found on its properties. Under various environmental regulations, the Account may also be liable, as a current or previous property owner or mortgagee, for the cost
of removing or cleaning up hazardous substances found on a property, even if it did not know of and was not responsible for the hazardous substances. If any hazardous substances are present or the Account does not properly clean up any hazardous substances, or if the Account fails to comply with regulations
requiring it to actively monitor the business activities on its premises, the Account may have difficulty selling or renting a property or be liable for monetary penalties. Further, environmental laws may impose restrictions on the manner in which a property may be used, the tenants which may be allowed, or the
manner in which businesses may be operated, which may require the Account to expend funds. These laws may also cause the most ideal use of the property to differ from that originally contemplated and as a result could impair the Account’s returns. The cost of any required cleanup relating to a single real estate
investment (including remediating contaminated property) and the Account’s potential liability for environmental damage, including paying personal injury claims and performing under indemnification obligations to third parties, could exceed the value of the Account’s investment in a property, the property’s
value, or in an extreme case, a significant portion of the Account’s assets. 12
Uninsurable Losses: Certain catastrophic losses (e.g., from earthquakes, wars, terrorist acts, nuclear accidents, wind, floods or environmental or industrial hazards or accidents) may be uninsurable or so expensive to insure against that it is economically disadvantageous to buy insurance for them. Further, the
terms and conditions of the insurance coverage the Account has on its properties, in conjunction with the type of loss actually suffered at a property, may subject the property, or the Account as a whole, to a cap on insurance proceeds that is less than the loss or losses suffered. If a disaster that we have not insured
against occurs, if the insurance contains a high deductible, and/or if the aggregate insurance proceeds for a particular type of casualty are capped, the Account could lose some of its original investment and any future profits from the property. Further, the Account may not have sufficient access to external sources
of funding to repair or reconstruct a damaged property to the extent insurance proceeds do not cover the full loss. In addition, some leases may permit a tenant to terminate its obligations in certain situations, regardless of whether those events are fully covered by insurance. In that case, the Account would not
receive rental income from the property while that tenant’s space is vacant. Risks of Developing Real Estate or Buying Recently Constructed Properties: If the Account chooses to develop a property or buys a recently constructed property, it may face the following risks:
•
In developing real estate, there may be delays or unexpected increases in the cost of property development and construction due to strikes, bad weather, material shortages, increases in material and labor costs or other events. • Because external factors may have changed from when the project was originally conceived (e.g., slower growth in the local economy, higher interest rates, or overbuilding in the area), the property may not operate at the income and expense levels first projected or may not be developed in the way originally
planned or at all. Risks of Joint Ownership: Investing in joint venture partnerships or other forms of joint property ownership may involve special risks, many of which are exacerbated when the consent of parties other than the Account are required to take action.
•
The co-venturer may have interests or goals inconsistent with those of the Account, including during times when a co-venturer may be experiencing financial difficulty. For example:
a co-venturer may desire a higher current income return on a particular investment than does the Account (which may be motivated by a longer-term investment horizon or exit strategy), or vise versa, which could cause difficulty in managing a particular asset; • a co-venturer may desire to maximize or minimize leverage in the venture, which may be at odds with the Account’s strategy; • a co-venturer may be more or less likely than the Account to agree to modify the terms of significant agreements (including loan agreements) binding the venture, or may significantly delay in reaching a determination whether to do so, each of which may frustrate the business objectives of the Account;
and • For reasons related to its own business strategy, a co-venturer may have different concentration standards as to its investments (geographically, by sector, or by tenant), which might frustrate the execution of the business plan for the joint venture.
•
The co-venturer may be unable to fulfill its obligations (such as to fund its pro rata share of committed capital, expenditures or guarantee obligations of the venture) during the term of such agreement or may become insolvent or bankrupt, any of which could expose the Account to greater liabilities than
expected and frustrate the investment objective of the venture. • If a co-venturer does not follow the Account’s instructions or adhere to the Account’s policies, the jointly owned properties, and consequently the Account, might be exposed to greater liabilities than expected. • The Account may have limited rights with respect to the underlying property pursuant to the terms of the joint venture, including the right to operate, manage or dispose of a property, and a co-venturer could have approval rights over the sale of the underlying property. 13
•
• A co-venturer can make it harder for the Account to transfer its equity interest in the venture to a third party, which could adversely impact the valuation of the Account’s interest in the venture. Risks with Purchase-Leaseback Transactions: To the extent the Account invested in a purchase leaseback transaction, the major risk is that the third party lessee will be unable to make required payments to the Account. If the leaseback interest is subordinate to other interests in the real property, such as a
first mortgage or other lien, the risk to the Account increases because the lessee may have to pay the senior lienholder to prevent foreclosure before it pays the Account. If the lessee defaults or the leaseback is terminated prematurely, the Account might not recover its investment unless the property is sold or
leased on favorable terms. RISKS OF INVESTING IN MORTGAGE LOANS The Account’s investment strategy includes, to a limited extent, investments in mortgage loans (i.e., the Account serving as lender).
•
General Risks of Mortgage Loans: The Account will be subject to the risks inherent in making mortgage loans, including:
The borrower may default on the loan, requiring that the Account foreclose on the underlying property to protect the value of its mortgage loan. Since its mortgage loans are usually non-recourse, the Account must rely solely on the value of a property for its security. • The larger the mortgage loan compared to the value of the property securing it, the greater the loan’s risk. Upon default, the Account may not be able to sell the property for its estimated or appraised value. Also, certain liens on the property, such as mechanics or tax liens, may have priority over the
Account’s security interest. • A deterioration in the financial condition of tenants, which could be caused by general or local economic conditions or other factors beyond the control of the Account, or the bankruptcy or insolvency of a major tenant, may adversely affect the income of a property, which could increase the likelihood that
the borrower will default under its obligations. • The borrower may be unable to make a lump sum principal payment due under a mortgage loan at the end of the loan term, unless it can refinance the mortgage loan with another lender. • If interest rates are volatile during the loan period, the Account’s variable-rate mortgage loans could have volatile yields. Further, to the extent the Account makes mortgage loans with fixed interest rates, it may receive lower yields than that which is then available in the market if interest rates rise
generally.
•
Prepayment Risks: The Account’s mortgage loan investments will usually be subject to the risk that the borrower repays a loan early. Also, we may be unable to reinvest the proceeds at as high an interest rate as the original mortgage loan rate. • Interest Limitations: The interest rate we charge on mortgage loans may inadvertently violate state usury laws that limit rates, if, for example, state law changes during the loan term. If this happens, we could incur penalties or may be unable to enforce payment of the loan. • Risks of Participations: To the extent the Account invested in a participating mortgage, the following additional risks would apply:
•
The participation feature, in tying the Account’s returns to the performance of the underlying asset, might generate insufficient returns to make up for the higher interest rate the loan would have obtained without the participation feature. • In very limited circumstances, a court may characterize the Account’s participation interest as a partnership or joint venture with the borrower and the Account could lose the priority of its security interest or become liable for the borrower’s debts. 14
•
RISKS OF INVESTING IN REAL ESTATE INVESTMENT TRUST (“REIT”) SECURITIES The Account from time to time has invested in REIT securities and may in the future invest in such securities. Investments in REIT securities are subject to many of the same general risks associated with direct real property ownership. In particular, equity REITs may be affected by changes in the value of the
underlying properties owned by the entity, while mortgage REITs may be affected by the quality of any credit extended. In addition to these risks, because REIT investments are securities, they may be exposed to market risk and potentially significant price volatility due to changing conditions in the financial
markets and, in particular, changes in overall interest rates, regardless of the value of the underlying real estate such REIT may own. In addition, REITs are tax regulated entities established to invest in real estate-related assets. REITs do not pay federal income taxes if they distribute most of their earnings to their shareholders and meet other tax requirements. As a result, REITs are subject to tax risk in continuing to qualify as a REIT. RISKS OF INVESTING IN MORTGAGE-BACKED SECURITIES The Account from time to time has invested in mortgage-backed securities and may in the future invest in such securities. Mortgage-backed securities are subject to many of the same general risks inherent in real estate investing, making mortgage loans and investing in debt securities. The underlying mortgage
loans may experience defaults with greater frequency than projected when such mortgages were underwritten, which would impact the values of these securities, and could hamper our ability to sell such securities. In particular, these types of investments may be subject to prepayment risk or extension risk (i.e., the
risk that borrowers will repay the loans earlier or later than anticipated). If the underlying mortgage assets experience faster than anticipated prepayments of principal, the Account could fail to recoup some or all of its initial investment in these securities, since the original price paid by the Account was based in
part on assumptions regarding the receipt of interest payments. If the underlying mortgage assets are repaid later than anticipated, the Account could lose the opportunity to reinvest the anticipated cash flows at a time when interest rates might be rising. The rate of prepayments depends on a variety of geographic,
social and other functions, including prevailing market interest rates and general economic factors. Importantly, the market value of these securities is also highly sensitive to changes in interest rates, liquidity of the secondary market and economic conditions impacting financial institutions and the credit markets generally. Note that the potential for appreciation, which could otherwise be expected to result
from a decline in interest rates, may be limited by any increased prepayments. Further, volatility and disruption in the mortgage market and credit markets generally (such as has recently been the case) may cause there to be a very limited or even no secondary market for these securities and they therefore may be
harder to sell than other securities. RISKS OF U.S. GOVERNMENT AGENCY SECURITIES AND CORPORATE OBLIGATIONS The Account invests in securities issued by U.S. government agencies and U.S. government sponsored entities. Some of these issuers may not have their securities backed by the full faith and credit of the U.S. government, which could adversely affect the pricing and value of such securities. Also, the Account
invests in corporate obligations (such as commercial paper) and while the Account seeks out such holdings in short-term, higher-quality liquid instruments, the ability of the Account to sell these securities may be uncertain, particularly when there are general dislocations in the finance or credit markets, such as has
recently been the case. Any such volatility could have a negative impact on the value of these securities. Further, transaction activity generally may fluctuate significantly from time to time, which could impair the Account’s ability to dispose of a security at a favorable time, regardless of the credit quality of the
underlying issuer. Further, inherent with investing in any corporate obligation is the risk that the credit quality of the issuer will deteriorate, which could cause the obligations to be downgraded, and hamper the value or the liquidity of these securities. RISKS OF LIQUID INVESTMENTS The Account’s investments in cash equivalents, marketable securities (whether debt or equity) and mortgage loans receivable are subject to the following general risks: 15
•
Financial / Credit Risk—The risk, for debt securities, that the issuer will not be able to pay principal and interest when due (and/or declare bankruptcy or be subject to receivership) and, for equity securities such as common or preferred stock, that the issuer’s current earnings will fall or that its overall financial
soundness will decline, reducing the security’s value. • Market Volatility Risk—The risk that the Account’s investments will experience price volatility due to changing conditions in the financial markets even regardless of the credit quality or financial condition of the underlying issuer. This risk is particularly acute to the extent the Account holds equity securities,
which have experienced significant short-term price volatility over the past year. Also, to the extent the Account holds debt securities, changes in overall interest rates can cause price fluctuations. • Interest Rate Volatility—The risk that interest rate volatility may affect the Account’s current income from an investment. • Deposit / Money Market Risk—The risk that, to the extent the Account’s cash held in bank deposit accounts exceeds federally insured limits as to that bank, the Account could experience losses if banks fail. In addition, there is some risk that investments held in money market accounts or funds can suffer
losses. Further, to the extent that a significant portion of the Account’s net assets at any particular time are comprised of cash, cash equivalents and marketable securities, the Account’s returns may suffer as compared to the return that could have been generated by more profitable real estate related investments. RISKS OF FOREIGN INVESTMENTS In addition to other investment risks noted above, foreign investments present the following special risks:
•
The value of foreign investments or rental income can increase or decrease due to changes in currency rates, currency exchange control regulations, possible expropriation or confiscatory taxation, political, social, and economic developments and foreign regulations. The Account translates into U.S. dollars
purchases and sales of securities, income receipts and expense payments made in foreign currencies at the exchange rates prevailing on the respective dates of the transactions. The effect of any changes in currency exchange rates on investments and mortgage loans payable is included in the Account’s net
realized and unrealized gains and losses. As such, fluctuations in currency exchange rates may impair the Account’s returns. • The Account may, but is not required to, seek to hedge its exposure to changes in currency rates, which could involve extra costs. Further, any hedging activities might not be successful. • Foreign real estate markets may have different liquidity and volatility attributes than U.S. markets. • It may be more difficult to obtain and collect a judgment on foreign investments than on domestic investments, and the costs associated with contesting claims relating to foreign investments may exceed those costs associated with a similar claim on domestic investments. • We may invest from time to time in securities issued by (1) entities domiciled in foreign countries, (2) domestic affiliates of such entities and/or (3) foreign domiciled affiliates of domestic entities. Such investments could be subject to the risks associated with investments subject to foreign regulation, including
political unrest or the repatriation or nationalization of the issuer’s assets. These events could depress the value of such securities and/or make such securities harder to sell on favorable terms, if at all. CONFLICTS OF INTEREST WITHIN TIAA TIAA and its affiliates (including Teachers Advisors, Inc., its wholly owned subsidiary and a registered investment adviser) have interests in other real estate programs and accounts and also engage in other business activities and as such, they will have conflicts of interest in allocating their time between the
Account’s business and these other activities. Also, the Account may be buying properties at the same time as TIAA affiliates that may have similar investment objectives to those of the Account. There is also a risk that TIAA will choose a property that provides lower returns to the Account than a property
purchased by 16
TIAA and its affiliates. Further, the Account will likely acquire properties in geographic areas where TIAA and its affiliates own properties. In addition, the Account may desire to sell a property at the same time another TIAA affiliate is selling a property in an overlapping market. Conflicts could also arise
because some properties owned by TIAA and its affiliates may compete with the Account’s properties for tenants. Among other things, if one of the TIAA entities attracts a tenant that the Account is competing for, the Account could suffer a loss of revenue due to delays in locating another suitable tenant. TIAA
has adopted allocation policies and procedures applicable to the purchasing conflicts scenario, but the resolution of such conflicts may be economically disadvantageous to the Account. As a result of TIAA’s and its affiliates’ obligations to other current and potential TIAA sponsored investment vehicles with similar
objectives to those of the Account, there is no assurance that the Account will be able to take advantage of every attractive investment opportunity that otherwise is in accordance with the Account’s investment objectives. In addition, as discussed elsewhere in this report, the TIAA General Account provides a liquidity guarantee to the Account. While an independent fiduciary is responsible for establishing a “trigger point” (a percentage of TIAA’s ownership of liquidity units beyond which TIAA’s ownership may be reduced at
the fiduciary’s direction), there is no express cap on the amount TIAA may be obligated to fund under this guarantee. TIAA’s ownership of liquidity units (including the potential of higher levels of ownership in the future) could result in the perception that TIAA is taking into account its own economic interests
while serving as investment manager for the Account. Any perception of a conflict of interest could cause participants to transfer accumulations out of the Account to another investment option, which could have an adverse impact on the Account’s ability to act most optimally upon its investment strategy. NO OPPORTUNITY FOR PRIOR REVIEW OF PURCHASE Investors do not have the opportunity to evaluate the economic or financial merit of the purchase of a property or other investment before the Account completes the purchase, so investors will need to rely solely on TIAA’s judgment and ability to select investments consistent with the Account’s investment
objective and policies. Further, the Account may change its investment objective and pursue specific investments in accordance with any such amended investment objective without the consent of the Account’s investors. RISKS OF REGISTRATION UNDER THE INVESTMENT COMPANY ACT OF 1940 The Account has not registered, and management intends to continue to operate the Account so that it will not have to register, as an “investment company” under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Generally, a company is an “investment company” and
required to register under the Investment Company Act if, among other things, it holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities, or it is engaged or proposes to engage in the business of investing, reinvesting, owning,
holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of such company’s total assets (exclusive of government securities and cash items) on an unconsolidated basis. If the Account were obligated to register as an investment company, the Account would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things, limitations on capital structure, restrictions on certain investments, compliance with
reporting, record keeping, voting and proxy disclosure requirements and other rules and regulations that could significantly increase its operating expenses and reduce its operating flexibility. To maintain compliance with the exemptions from the Investment Company Act, the Account may be unable to sell assets it
would otherwise want to sell and may be unable to purchase securities it would otherwise want to purchase, which might materially adversely impact the Account’s performance. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. 17
THE PROPERTIES—IN GENERAL In the table below, participants will find general information about each of the Account’s property investments as of December 31, 2009. The Account’s property investments include both properties that are wholly-owned by the Account and properties owned by the Account’s joint venture investments. Certain
investments are comprised of a portfolio of properties. Fair value amounts are in thousands.
Property
Location
Year
Year
Rentable
Percent
Annual Avg.
Fair OFFICE PROPERTIES 1001 Pennsylvania Ave
Washington, DC
1987
2004
756,603
100
%
$
39.74
$
480,622
(4) Four Oaks Place
Houston, TX
1983
2004
1,754,334
94
%
17.47
409,027
(4) Fourth & Madison
Seattle, WA
2002
2004
845,533
96
%
29.78
295,000
(4) 50 Fremont Street
San Francisco,
CA
1983
2004
817,412
98
%
33.46
284,283
(4) 99 High Street
Boston, MA
1971
2005
731,204
94
%
35.83
253,557
(4) 780 Third Avenue
New York, NY
1984
1999
487,566
87
%
49.88
240,077 1 & 7 Westferry Circus
London, UK
1992, 1993
2005
391,442
100
%
49.51
239,036
(4)(5) The Newbry
Boston, MA
1940-
1961(6)
2006
607,424
90
%
39.31
230,375 1900 K Street
Washington, DC
1996
2004
339,060
100
%
45.34
204,000 Lincoln Centre
Dallas, TX
1984
2005
1,638,132
84
%
17.09
202,029
(4) 701 Brickell
Miami, FL
1986(8)
2002
675,424
93
%
28.20
198,630
(4) 275 Battery
San Francisco,
CA
1988
2005
472,261
91
%
29.57
164,390 Wilshire Rodeo Plaza
Beverly Hills, CA
1935, 1984
2006
264,287
97
%
45.71
151,209
(4) 1401 H Street NW
Washington, D.C.
1992
2006
350,635
64
%
30.20
143,555
(4) Yahoo! Center(7)
Santa Monica,
CA
1984
2004
1,185,119
90
%
25.31
133,227 Mellon Financial Center at
One Boston Place(10)
Boston, MA
1970(8)
2002
804,444
90
%
44.41
129,922 Ten & Twenty Westport Road
Wilton, CT
1974(8);
2001
2001
538,840
94
%
21.56
126,860 Millennium Corporate Park
Redmond, VA
1999, 2000
2006
536,884
97
%
12.56
116,548 Inverness Center
Birmingham, AL
1980-1985
2005
903,857
96
%
12.33
90,315 Urban Centre
Tampa, FL
1984, 1987
2005
547,979
89
%
19.21
80,282 Morris Corporate Center III
Parsippany, NJ
1990
2000
526,052
77
%
20.32
66,478 Treat Towers(11)
Walnut Creek,
CA
1999
2003
367,313
69
%
19.17
66,435 The Ellipse at Ballston
Arlington, VA
1989
2006
194,914
96
%
30.79
65,505 Oak Brook Regency Towers
Oakbrook, IL
1977(8)
2002
402,318
80
%
13.83
64,265 88 Kearny Street
San Francisco,
CA
1986
1999
228,358
84
%
38.50
61,600 Pacific Plaza
San Diego, CA
2000, 2002
2007
215,758
65
%
23.68
60,075
(4) Parkview Plaza
Oakbrook, IL
1990
1997
264,461
92
%
15.95
44,360 One Virginia Square
Arlington, VA
1999
2004
116,077
100
%
40.70
40,503 Camelback Center
Phoenix, AZ
2001
2007
231,345
93
%
20.89
37,774 Wellpoint
Westlake Village,
CA
1986 1998
2006
216,571
100
%
13.47
37,400 The Pointe on Tampa Bay
Tampa, FL
1982(8)
2002
250,357
71
%
18.05
35,060 8270 Greensboro Drive
McLean, VA
2000
2005
158,110
100
%
26.19
34,200 18
Built
Purchased
Area
(Sq. ft.)(1)
Leased
Base Rent
Per Leased
Sq. Ft.(2)
Value(3)
Property
Location
Year
Year
Rentable
Percent
Annual Avg.
Fair The North 40 Office
Complex
Boca Raton, FL
1983, 1984
2006
350,000
88
%
$
11.16
$
33,969 West Lake North Business
Park
Westlake Village,
CA
2000
2004
198,558
92
%
17.11
32,407 Prominence in Buckhead(11)
Atlanta, GA
1999
2003
423,916
84
%
11.14
30,952 3 Hutton Centre
Santa Ana, CA
1985(8)
2003
197,819
80
%
15.85
28,752 Centerside I
San Diego, CA
1982
2004
202,913
67
%
19.13
27,012 Tysons Executive Plaza II(12)
McLean, VA
1988
2000
257,740
94
%
27.04
26,275 Creeksides at Centerpoint
Kent, WA
1985
2006
218,712
52
%
8.02
18,724 Needham Corporate Center
Needham, MA
1987
2001
138,259
83
%
19.23
16,196 Subtotal—Office Properties
91
%
$
5,000,886 Percent leased weighted by
property market value—
92
% INDUSTRIAL
PROPERTIES Ontario Industrial Portfolio
Various, CA
1997-1998
1998, 2000,
2004
3,981,894
78
%
$
3.23
$
167,998
(4) Dallas Industrial Portfolio(13)
Dallas and
Coppell, TX
1997-2001
2000-2002
3,684,941
92
%
2.60
125,275 Southern California RA
Industrial Portfolio
Los Angeles, CA
1982
2004
920,078
85
%
5.31
75,817 Rainier Corporate Park
Fife, WA
1991-1997
2003
1,104,646
94
%
4.22
65,277 Great West Industrial
Portfolio
Rancho
Cucamonga and
Fontana, CA
2004-2005
2008
1,358,925
100
%
4.21
65,000 Seneca Industrial Park
Pembroke Park,
FL
1999-2001
2007
882,182
93
%
3.50
62,341 Chicago Industrial
Portfolio(13)
Chicago and
Joliet, IL
1997-2000
1998; 2000
1,427,699
100
%
3.11
60,908 Rancho Cucamonga
Industrial Portfolio
Rancho
Cucamonga, CA
2000-2002
2000; 2001;
2002; 2004
1,490,235
62
%
2.05
57,327 Shawnee Ridge Industrial
Portfolio
Atlanta, GA
2000-2005
2005
1,422,922
96
%
3.29
52,219 Chicago CALEast Industrial
Portfolio(15)
Chicago, IL
1974-2005
2003
1,145,152
98
%
3.43
48,304 Regal Logistics Campus
Seattle, WA
1999-2004
2005
968,535
100
%
4.15
47,955 Northern California RA
Industrial
Oakland, CA
1981
2004
657,602
83
%
4.20
42,437 IDI National Portfolio(14)
Various, U.S.
1999-2004
2004
3,655,671
85
%
2.62
40,587 Atlanta Industrial
Portfolio(13)
Lawrenceville,
GA
1996-1999
2000
1,295,440
98
%
2.76
39,519 Pinnacle Industrial/DFW
Trade Center
Grapevine. TX
2003, 2004,
2006
2006
899,200
100
%
3.59
34,148 GE Appliance East Coast
Distribution Facility
Perryville, MD
2003
2005
1,004,000
100
%
2.82
28,900 South River Road Industrial
Cranbury, NJ
1999
2001
858,957
72
%
2.38
28,656 Northeast RA Industrial
Portfolio
Boston, MA
2000
2004
384,000
75
%
3.41
24,845 Broadlands Business Park
Elkton, MD
2006
2006
756,600
100
%
2.88
23,600 Centre Pointe and Valley
View
Los Angeles
County, CA
1965-1989
2004
307,685
99
%
5.61
18,929 19
Built
Purchased
Area
(Sq. ft.)(1)
Leased
Base Rent
Per Leased
Sq. Ft.(2)
Value(3)
Office(9)
Portfolio(13)
Property
Location
Year
Year
Rentable
Percent
Annual Avg.
Fair Northwest RA Industrial
Portfolio
Seattle, WA
1996
2004
312,321
100
%
$
5.06
$
17,800 Konica Photo Imaging
Headquarters
Mahwah, NJ
1999
1999
168,000
—
%
0.00
15,100 Airways Distribution Center
Memphis, TN
2005
2006
556,600
70
%
0.94
12,600 Summit Distribution Center
Memphis, TN
2002
2003
708,532
5
%
0.00
12,300 UPS Distribution Facility
Fernley, NV
1998
1998
256,000
100
%
2.37
7,600 Subtotal—Industrial Properties
88
%
$
1,175,442 Percent leased weighted by
property market
value—Industrial(9)
87
% RETAIL PROPERTIES DDR Joint Venture(16)
Various
Various
2007
16,183,158
83
%
$
10.14
$
312,182 The Florida Mall(17)
Orlando, FL
1986(8)
2002
988,011
97
%
38.41
252,432 Printemps de l’Homme
Paris, FR
1930
2007
130,372
100
%
73.84
200,995
(5) Florida Retail Portfolio(18)
Various, FL
1974-2005
2006
1,289,825
84
%
12.83
162,204 Westwood Marketplace
Los Angeles, CA
1950(8)
2002
202,201
100
%
29.93
77,077 Miami International Mall(17)
Miami, FL
1982(8)
2002
295,400
97
%
36.05
76,856 Marketfair
West Windsor, NJ
1987
2006
240,297
97
%
17.59
65,594 Mazza Gallerie
Washington, DC
1975
2004
293,935
100
%
12.16
65,500 Publix at Weston Commons
Weston, FL
2005
2006
126,922
99
%
23.43
38,100
(4) West Town Mall(17)
Knoxville, TN
1972(8)
2002
764,219
97
%
21.56
37,262 Plainsboro Plaza
Plainsboro, NJ
1987
2005
218,653
77
%
9.39
26,962 South Frisco Village
Frisco, TX
2002
2006
227,175
79
%
9.89
26,900
(4) Champlin Marketplace
Champlin, MN
1998-99,
2005
2007
103,577
97
%
10.59
13,801 Suncrest Village
Orlando, FL
1987
2005
93,358
85
%
10.03
12,329 Plantation Grove
Ocoee, FL
1995
1995
73,655
92
%
10.41
9,600 Subtotal—Retail Properties
86
%
$
1,377,794 Percent leased weighted by
property market
value—Retail(9)
92
% RESIDENTIAL
PROPERTIES Houston Apartment
Portfolio(19)
Houston, TX
1984-2004
2006
N/A
92
%
N/A
$
179,717 Palomino Park Apartments
Denver, CO
1996-2001
2005
N/A
96
%
N/A
143,907 The Colorado
New York, NY
1987
1999
N/A
99
%
N/A
110,144
(4) Kierland Apartment
Portfolio(19)
Scottsdale, AZ
1996-2000
2006
N/A
96
%
N/A
78,060 The Legacy at Westwood
Apartments
Los Angeles, CA
2001
2002
N/A
95
%
N/A
77,836
(4) Ashford Meadows
Apartments
Herndon, VA
1998
2000
N/A
94
%
N/A
71,105 Regents Court Apartments
San Diego, CA
2001
2002
N/A
99
%
N/A
50,505
(4) Larkspur Courts
Larkspur, CA
1991
1999
N/A
95
%
N/A
50,111 The Caruth
Dallas, TX
1999
2005
N/A
99
%
N/A
49,641
(4) 20
Built
Purchased
Area
(Sq. ft.)(1)
Leased
Base Rent
Per Leased
Sq. Ft.(2)
Value(3)
Property
Location
Year
Year
Rentable
Percent
Annual Avg.
Fair South Florida Apartment
Portfolio
Boca Raton and
Plantation, FL
1986
2001
N/A
98
%
N/A
$
48,366 1050 Lenox Park
Atlanta, GA
2001
2005
N/A
96
%
N/A
48,223 The Reserve at Sugarloaf
Duluth, GA
2000
2005
N/A
98
%
N/A
37,710
(4) The Maroneal
Houston, TX
1998
2005
N/A
96
%
N/A
32,179 The Lodge at Willow Creek
Denver, CO
1997
1997
N/A
97
%
N/A
31,624 Glenridge Walk
Atlanta, GA
1996, 2001
2005
N/A
98
%
N/A
30,326 Lincoln Woods Apartments
Lafayette Hill,
PA
1991
1997
N/A
88
%
N/A
28,728 Westcreek Apartments
Westlake Village,
CA
1988
1997
N/A
99
%
N/A
23,061 Phoenix Apartment
Portfolio(19)
Greater Phoenix
Area, AZ
1995-1998
2006
N/A
93
%
N/A
21,767 Quiet Water at Coquina
Lakes
Deerfield Beach,
FL
1995
2001
N/A
97
%
N/A
19,918 The Fairways of Carolina
Margate, FL
1993
2001
N/A
99
%
N/A
18,628 Subtotal—Residential
Properties
96
%
$
1,151,556 Percent leased weighted by
property market
value—Residential(9)
96
% OTHER COMMERCIAL
PROPERTIES Storage Portfolio I(20)
Various, U.S.
1972-1990
2003
2,295,410
83
%
$
12.78
$
46,269 Subtotal—Commercial
Properties
$
7,600,391 Total—All Properties—Percent
Leased weighted by
property market value
92
%
$
8,751,947
(1)
The square footage is an approximate measure and is subject to periodic remeasurement. (2) Based on total contractual rent for leases existing as of December 31, 2009. The contractual rent can be either on a gross or net basis, depending on the terms of the leases. (3) Market value reflects the value determined in accordance with the procedures described in the Account’s prospectus and as stated in the Statement of Investments. (4) Property is subject to a mortgage. The market value shown represents the Account’s interest gross of debt. (5) 1 & 7 Westferry Circus is located in the United Kingdom, and the market value reflects the Account’s interest gross of debt. Printemps de l’Homme is located in France. The market value of each property is converted from local currency to U.S. Dollars at the exchange rate as of December 31, 2009. (6) This property was renovated in 2004 and 2006. (7) This property is held in 50%/50% joint venture with Equity Office Properties Trust. Market value shown reflects the value of the Account’s interest in the joint venture, net of debt. (8) Undergone extensive renovations since original construction. (9) Values shown are based on the property market value weighted as a percent of the total market value and based upon the percent leased for each property. (10) The Account purchased a 50.25% interest in a private REIT, which owns this property. A 49.70% interest is owned by Societe Immobiler Trans-Quebec, and .05% is owned by 100 individuals. Market value shown reflects the value of the Account’s interest in the joint venture. 21
Built
Purchased
Area
(Sq. ft.)(1)
Leased
Base Rent
Per Leased
Sq. Ft.(2)
Value(3)
(11) This investment property is held in a 75%/25% joint venture with Equity Office Properties Trust. Market value shown reflects the value of the Account’s interest in the joint venture. (12) This investment property is held in a 50%/50% joint venture with Tennessee Consolidated Retirement System. Market value shown reflects the value of the Account’s interest in the joint venture. (13) A portion of this portfolio was sold in 2007. (14) This investment property held in 60%/40% joint venture with Industrial Development International. Market value shown reflects the value of the Account’s interest in the joint venture, net of debt. (15) A portion of this portfolio was sold in 2007 and 2008. (16) This investment property consists of 65 properties located in 13 states and is held in a 85% / 15% joint venture with Developers Diversified Realty Corporation. Market Value shown reflects the value of the Account’s interest in the joint venture, net of debt. (17) This investment property is held in a 50%/50% joint venture with the Simon Property Group. Market value shown reflects the value of the Account’s interest in the joint venture, net of debt. (18) This investment property is held in a 80%/20% joint venture with Weingarten Realty Investors. Market value shown reflects the value of the Account’s interest in the joint venture. This portfolio contains seven neighborhood and/or community shopping centers located in Ft. Lauderdale, Miami, Orlando, and Tampa, Florida areas. (19) A portion of this portfolio was sold in 2009. (20) This investment property is held in a 75%/25% joint venture with Storage USA. Market value shown reflects the value of the Account’s interest in the joint venture, net of debt. Commercial (Non-Residential) Properties At December 31, 2009, the Account held 81 commercial (non-residential) property investments in its portfolio, including a portfolio of storage facilities located throughout the United States. Twelve of these property investments were held through joint ventures, and 26 were subject to mortgages (including
seven joint venture property investments). Although the terms vary under each lease, certain expenses, such as real estate taxes and other operating expenses, are paid or reimbursed in whole or in part by the tenants. Management believes that the Account’s portfolio is diversified by both property type and geographic location. The portfolio consists of:
•
Office. 40 property investments containing approximately 19.8 million square feet located in 14 states, the District of Columbia and the United Kingdom. As of December 31, 2009, the Account’s office properties had an aggregate market value of approximately $5.0 billion. • Industrial. 25 property investments containing approximately 30.2 million square feet located in 11 states, including a 60% interest in a portfolio of industrial properties located throughout the United States. As of December 31, 2009, the Account’s industrial properties had an aggregate market value of
approximately $1.2 billion. • Retail. 15 property investments containing approximately 21.2 million square feet located in five states, the District of Columbia and Paris, France. As of December 31, 2009, the Account’s retail properties had an aggregate market value of approximately $1.4 billion. One of the retail property investments is
an 85% interest in a portfolio containing 65 individual retail shopping centers located throughout the Eastern and Southeastern states. In addition, the Account has a 75% interest in a portfolio of storage facilities located throughout the United States containing approximately 2.3 million square feet. As of December 31, 2009, the Account’s interest in this portfolio had a market value of approximately $46.3 million. As of December 31, 2009, the market value weighted average occupancy rate of the Account’s entire commercial real estate portfolio was 91%. On a weighted basis, the overall occupancy rate of the Account’s commercial real estate portfolio was 87%. The Account’s:
•
office property investments were 92% leased on a market value weighted basis and 91% leased on a weighted basis; • industrial property investments were 87% leased on a market value weighted basis and 88% leased on a weighted basis; 22
• retail property investments were 92% leased on a market value weighted basis and 86% leased on a weighted basis; and • storage portfolio was 83% leased. Major Tenants: The following tables list the Account’s ten most significant tenants based on the total space they occupied as of December 31, 2009 in each of the Account’s commercial property types. Major Office Tenants
Occupied Square Feet
Percentage of
Percentage of Deloitte & Touche
516,864
2.6
%
0.7
% Yahoo!
467,564
2.4
%
0.7
% Southern Company Services
459,457
2.3
%
0.6
% BHP Petroleum
451,177
2.3
%
0.6
% Mellon Financial
362,293
1.8
%
0.5
% Microsoft
361,528
1.8
%
0.5
% Crowell & Moring
334,757
1.7
%
0.5
% ATMOS Energy
313,326
1.6
%
0.4
% GE Healthcare
309,278
1.6
%
0.4
% Pearson
225,299
1.1
%
0.3
% Major Industrial Tenants
Occupied Square Feet
Percentage of
Percentage of Walmart
1,099,112
3.6
%
1.5
% General Electric
1,004,000
3.3
%
1.4
% Regal West
968,535
3.2
%
1.4
% Kumho Tire
830,485
2.7
%
1.2
% PFSweb, Inc.
825,520
2.7
%
1.2
% First Quality
800,000
2.6
%
1.1
% Michelin North America
756,690
2.5
%
1.1
% Del Monte
689,660
2.3
%
1.0
% R.R. Donnelley
659,157
2.2
%
0.9
% Global Equipment
647,228
2.1
%
0.9
% Major Retail Tenants
Occupied Square Feet
Percentage of
Percentage of Walmart
802,437
3.8
%
1.1
% Publix Super Markets
630,037
3.0
%
0.9
% Ross Dress for Less
565,488
2.7
%
0.8
% Dick’s Sporting Goods
522,486
2.5
%
0.7
% Kohl’s
521,225
2.5
%
0.7
% PetSmart
496,525
2.3
%
0.7
% Michael’s
474,759
2.2
%
0.7
% Bed Bath & Beyond
457,744
2.2
%
0.6
% Belk
372,812
1.8
%
0.5
% Old Navy
371,779
1.8
%
0.5
% 23
Total Rentable
Area of
Account’s
Office Properties
Total Rentable
Area Of
Account’s
Non-Residential
Properties
Total Rentable
Area of
Account’s
Industrial Properties
Total Rentable
Area Of
Account’s
Non-Residential
Properties
Total Rentable
Area of
Account’s
Retail Properties
Total Rentable
Area Of
Account’s
Non-Residential
Properties
The following tables list the rentable area subject to expiring leases during the next five years, and an aggregate figure for expirations in 2015 and thereafter, in the Account’s commercial (non-residential) properties. While many of the leases contain renewal options with varying terms, these charts assume that
none of the tenants exercise their renewal options. Office Properties Year of
Rentable Area
Percentage of 2010
2,690,373
13.7% 2011
2,428,555
12.4% 2012
1,397,417
7.1% 2013
1,871,047
9.5% 2014
2,259,027
11.5% 2015 and thereafter
7,167,998
36.5% Total
17,814,417
90.7% Industrial Properties Year of
Rentable Area
Percentage of 2010
5,101,177
16.8% 2011
3,188,963
10.5% 2012
3,098,960
10.2% 2013
3,980,578
13.1% 2014
2,266,111
7.5% 2015 and thereafter
8,989,904
29.6% Total
26,625,693
87.7% Retail Properties Year of
Rentable Area
Percentage of 2010
1,988,898
9.4% 2011
2,096,211
9.9% 2012
2,521,401
11.9% 2013
2,149,270
10.2% 2014
1,549,783
7.3% 2015 and thereafter
7,757,049
36.8% Total
18,062,612
85.5% 24
Lease Expiration
Subject to
Expiring Leases (sq. ft.)
Total Rentable
Area of Account’s
Office Properties
Represented by
Expiring Leases
Lease Expiration
Subject to
Expiring Leases (sq. ft.)
Total Rentable
Area of Account’s
Industrial Properties
Represented by
Expiring Leases
Lease Expiration
Subject to
Expiring Leases (sq. ft.)
Total Rentable
Area of Account’s
Retail Properties
Represented by
Expiring Leases
Residential properties The Account’s residential property portfolio currently consists of 20 property investments comprised of first class or luxury multi-family, garden, mid-rise, and high-rise apartment buildings. The portfolio contains approximately 8,600 units located in nine states and has a 96% average occupancy rate as of
December 31, 2009. Four of the residential properties in the portfolio are subject to mortgages. The complexes generally contain one- to three-bedroom apartment units with a range of amenities, such as patios or balconies, washers and dryers, and central air conditioning. Many of these apartment communities
have on-site fitness facilities, including some with swimming pools. Rents on each of the properties tend to be comparable with competitive communities and are not subject to rent regulation. The Account is responsible for the expenses of operating its residential properties. The table below contains detailed information regarding the apartment complexes in the Account’s portfolio as of December 31, 2009. Property
Location
Number
Average
Avg. Rent Houston Apartment Portfolio(1)
Houston, TX
1,777
1,021
$
1,327 Palomino Park
Highlands Ranch, CO
1,184
1,109
1,100 Kierland Apartment Portfolio(1)
Scottsdale, AZ
724
1,004
1,237 South Florida Apartment Portfolio(1)
Boca Raton and Plantation, FL
550
906
1,147 Ashford Meadows
Herndon, VA
440
1,030
1,541 1050 Lenox Park
Atlanta, GA
407
1,168
1,388 The Caruth Apartments
Dallas, TX
338
1,220
1,522 The Reserve at Sugarloaf
Duluth, GA
333
996
1,024 The Lodge at Willow Creek
Denver, CO
316
928
958 Maroneal
Houston, TX
309
1,146
1,373 Glenridge Walk
Sandy Springs, GA
296
617
1,375 The Colorado
New York, NY
256
886
2,884 Regents Court
San Diego, CA
251
1,001
1,757 Larkspur Courts Apartments
Larkspur, CA
248
976
2,082 Phoenix Apartment Portfolio
Greater Phoenix Area, AZ
240
976
1,100 Lincoln Woods Apartments
Lafayette Hill, PA
216
774
1,285 The Fairways at Carolina
Margate, FL
208
1,026
1,065 Quiet Waters at Coquina
Deerfield Beach, FL
200
1,048
1,136 Legacy at Westwood
Los Angeles, CA
187
1,181
4,267 Westcreek Apartments
Westlake Village, CA
126
951
1,973
(1) The Account is party to various claims and routine litigation arising in the ordinary course of business. Management of the Account does not believe that the results of any such claims or litigation, individually or in the aggregate, will have a material effect on the Account’s business, financial position or results
of operations. 25
Of Units
Unit Size
(Square Feet)
Per Unit/
Per Month
Represents a portfolio containing multiple properties.
(a) Market Information. There is no established public trading market for securities issued by the Account. Accumulation units in the Account are sold to eligible participants at the Account’s current accumulation unit value, which is based on the value of the Account’s then current net assets and are
redeemable in accordance with the terms of the participant’s contract. For the period from January 1, 2009 to December 31, 2009, the high and low accumulation unit values for the Account were $267.644 and $193.376, respectively. For the period January 1, 2008 to December 31, 2008, the high and low
accumulation unit values for the Account were $314.978 and $267.348, respectively. Holders. The approximate number of Account contract owners at December 31, 2009 was 1,025,000.. Dividends. Not applicable. Securities Authorized for Issuance under Equity Compensation Plans. Not applicable. (b) Use of Proceeds: Not applicable. (c) Purchases of Equity Securities by Issuer: Not applicable. 26
ITEM 6. SELECTED FINANCIAL DATA. The following selected financial data should be considered in conjunction with the Account’s financial statements and notes provided in this Form 10-K (amounts in thousands except for per accumulation unit amounts).
Years Ended December 31,
2009
2008
2007
2006
2005 Investment income: Real estate income, net
$
479,657
$
500,434
$
529,412
$
444,783
$
340,090 Income from real estate joint ventures and limited partnerships
114,578
116,889
93,724
60,789
71,826 Dividends and interest
1,733
81,523
141,914
135,407
70,999 Total investment income
595,968
698,846
765,050
640,979
482,915 Expenses
95,473
153,040
140,294
83,449
56,100 Investment income, net
500,495
545,806
624,756
557,530
426,815 Net realized and unrealized (losses) gain on investments and mortgage loans payable
(3,612,505
)
(2,513,024
)
1,438,435
1,056,671
765,970 Net (decrease) increase in net assets resulting from operations
(3,112,010
)
(1,967,218
)
2,063,191
1,614,201
1,192,785 Participant transactions
(1,575,700
)
(4,339,995
)
1,464,653
1,969,781
2,110,376 TIAA Purchase of Liquidity units
1,058,700
155,600
—
—
— Net (decrease) increase in net assets
$
(3,629,010
)
$
(6,151,613
)
$
3,527,844
$
3,583,982
$
3,303,161
Years Ended December 31,
2009
2008
2007
2006
2005 Total assets
$
9,912,703
$
13,576,954
$
19,232,767
$
15,759,961
$
11,685,426 Total liabilities
2,032,789
2,068,030
1,572,230
1,627,268
1,136,715 Total net assets
$
7,879,914
$
11,508,924
$
17,660,537
$
14,132,693
$
10,548,711 Number of accumulation units outstanding
39,473
41,542
55,106
50,146
42,623 Net asset value, per accumulation unit
$
193.45
$
267.35
$
311.41
$
273.65
$
239.95 Mortgage loans payable
$
1,858,110
$
1,830,040
$
1,392,093
$
1,437,149
$
973,502 27
Quarterly Selected Financial Information Data The following selected unaudited financial data for each full quarter of 2009 and 2008 are derived from the financial statements of the Account for the years ended December 31, 2009 and 2008 (amounts in thousands).
2009
Year Ended
For the Three Months Ended
March 31
June 30
September 30
December 31 Investment income, net
$
119,440
$
130,429
$
135,536
$
115,090
$
500,495 Net realized and unrealized loss on investments and mortgage loans payable
(1,074,437
)
(1,166,159
)
(836,451
)
(535,458
)
(3,612,505
) Net decrease in net assets resulting from operations
$
(954,997
)
$
(1,035,730
)
$
(700,915
)
$
(420,368
)
$
(3,112,010
) Total return
-8.36
%
-9.96
%
-7.64
%
-5.05
%
-27.64
%
2008
Year Ended
For the Three Months Ended
March 31
June 30
September 30
December 31 Investment income, net
$
150,587
$
147,564
$
129,345
$
118,310
$
545,806 Net realized and unrealized loss on investments and mortgage loans payable
(28,912
)
(101,069
)
(462,819
)
(1,920,224
)
(2,513,024
) Net increase (decrease) in net assets resulting from operations
$
121,675
$
46,495
$
(333,474
)
$
(1,801,914
)
$
(1,967,218
) Total return
0.69
%
0.27
%
-2.07
%
-13.18
%
-14.15
% 28
December 31, 2009
December 31, 2008
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and notes contained in this report and with consideration to the sub-section entitled “Forward-Looking Statements,” which begins below, and the section entitled “Item 1A.
Risk Factors.” The past performance of the Account is not indicative of future results. Forward-Looking Statements Some statements in this Form 10-K which are not historical facts may be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements include
statements about management’s expectations, beliefs, intentions or strategies for the future, include the assumptions underlying these forward-looking statements, and are based on current expectations, estimates and projections about the real estate industry, domestic and global economic conditions, including conditions in
the credit and capital markets, the sector markets in which the Account invests and operates, management’s beliefs, assumptions made by management and the transactions described in this Form 10-K. While management believes the assumptions underlying any of its forward-looking statements and information to be
reasonable, such information may be subject to uncertainties and may involve certain risks which may be difficult to predict and are beyond management’s control. These risks and uncertainties could cause actual results to differ materially from those contained in any forward-looking statement. These risks and
uncertainties include, but are not limited to, the following:
•
The risks associated with acquiring, owning and selling real property, including general economic and real estate market conditions, the availability of financing (both for the Account and potential purchasers of the Account’s properties), disruptions in the credit and capital markets, competition for real estate
properties, leasing risk (including tenant defaults), risks of holding foreign investments, and the risk of uninsured losses at properties (including due to terrorism and acts of violence); • The risks associated with property valuations, including the fact that appraisals can be subjective in a number of respects, the fact that the Account’s appraisals are generally obtained on a quarterly basis and there may be periods in between appraisals of a property in which the value attributed to the property for
purposes of the Account’s daily accumulation unit value may be more or less than the actual realizable value of the property; • Risks associated with financing the Account’s properties, including the risk that the Account may not have the ability to obtain financing on favorable terms (or at all), which may be aggravated by general disruptions in credit and capital markets; • Investment risk associated with participant transactions, including the fact that significant net participant transfers out of the Account may impair its ability to pursue or consummate new investment opportunities that are otherwise attractive to the Account or that significant net participant transfers into the Account
may take time to invest in attractive investment opportunities; • The risks associated with joint venture partnerships, including the risk that a co-venturer may have interests or goals inconsistent with that of the Account, that a co-venturer may have financial difficulties, and the risk that the Account may have limited rights with respect to operation of the property and transfer of
the Account’s interest; • Uncertainties associated with environmental and other regulatory matters; • Conflicts of interest, including those associated with other real estate accounts and funds which TIAA or its affiliates manage and any perceived conflicts associated with TIAA’s liquidity guarantee; and • Risks associated with investments in liquid assets, including financial/credit risk, market volatility risk, interest rate volatility risk and deposit/money market risk. More detailed discussions of certain of these risk factors are contained in the section of this Form 10-K entitled “Item 1A. Risk Factors” and in this report below and also in the section entitled “Item 7A. Quantitative 29
and Qualitative Disclosures About Market Risk,” that could cause actual results to differ materially from historical experience or management’s present expectations. Caution should be taken not to place undue reliance on management’s forward-looking statements, which represent management’s views only as of the date that this report is filed. Neither management nor the Account undertake any obligation to update publicly or revise any forward-looking statement, whether as a
result of new information, changed assumptions, future events or otherwise. Commercial real estate market statistics discussed in this section are obtained by the Account from sources that management considers reliable, but some of the data are preliminary for the year or quarter ended December 31, 2009 and may be subsequently revised. Prior period data may have been adjusted to reflect
updated calculations. Investors should not rely exclusively on the data presented below in forming a judgment regarding the current or prospective performance of the commercial real estate market generally. 2009 U.S. ECONOMIC AND COMMERCIAL REAL ESTATE OVERVIEW The TIAA Real Estate Account (the “Account”) invests primarily in high-quality, core commercial real estate in order to meet its investment objective of obtaining favorable long-term returns through rental income and the appreciation of its real estate holdings. The Account does not directly invest in either
single-family residential real estate or residential mortgage-backed securities. Economic and Capital Markets Overview and Outlook Global economic and capital market conditions improved considerably during the second half of 2009. Preliminary estimates of Gross Domestic Product (“GDP”) suggest that economic output grew 5.7% during the fourth quarter of 2009, following a 2.2% increase in the third quarter of 2009, which was the
first such increase in GDP since mid-2008. Federal stimulus programs played a big role in promoting growth, including the ready availability of funds from the Troubled Asset Relief Program (“TARP”) which bolstered bank balance sheets and provided a lifeline to the troubled auto industry. For consumers, the
“cash for clunkers” program and financial assistance programs for first-time home buyers helped to stimulate automobile and housing demand. Similarly, the accommodative monetary policies of the Federal Reserve kept mortgage interest rates low and perked up the moribund housing market. The second half of 2009 also provided evidence that capital and credit markets were stabilizing. For example, major banks were able to access the equity markets for new capital and a portion of those proceeds were used to repay outstanding TARP loans. The Treasury Department subsequently announced
that TARP would require approximately $150 billion less than expected and that the program would likely be ended in the Fall of 2010. With signs that a recovery was forthcoming, investors returned to the equity markets, which produced a strong rally. The Dow Jones Industrial Average and S&P 500 started the
year at depressed levels, but ultimately gained 23% and 28%, respectively, for the year. Similarly, credit markets experienced a revival, with lending activity increasing modestly and credit spreads declining dramatically over the course of the year. The commercial real estate market received a boost from the Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”) program, which supported the issuance of the first new commercial mortgage-backed securities (“CMBS”) in over a year. The CMBS market subsequently began to stir and
several other CMBS issuances occurred without TALF loans. Public Real Estate Investment Trust (“REIT”) shares also experienced a strong rally, and a number of companies solidified their balance sheets with funds raised from issuing new shares. Nonetheless, the economy still remains weak. In particular, most companies have not started hiring. Though the pace of job losses moderated significantly in the fourth quarter of 2009 compared with prior quarters, more than four million jobs were lost during 2009. The first monthly job gains since December
2007 were reported in November 2009, which may be an indicator of an eventual growth in payrolls. Still, the unemployment rate, traditionally a lagging indicator, ended the year at approximately 10%, a level not seen since the 1982-1983 recession. Despite the overall improvement in the capital and credit markets, considerable weakness remains. First, credit is largely available only to the most creditworthy companies; weaker companies and small businesses 30
continue to lack ready access to capital. Second, banks continue to experience sizeable losses in their consumer and commercial real estate loan portfolios and are limited in their ability to lend. Further, the outlook for companies which borrowed significant amounts from the federal government such as AIG,
General Motors, GMAC, and Fannie Mae remains tenuous, as several have indicated that they will need additional financial support in the future. Economic activity expanded at a faster pace in the fourth quarter of 2009 than during the third quarter of 2009, however, most economists believe that much of the growth in GDP during those quarters was attributable to the beneficial effects of the government’s fiscal stimulus programs. For the year, GDP
declined 2.4%, which was the largest annual decline since 1946. Consequently, many economists believe persistent unemployment, limited access to credit, and tepid consumer spending will hamper the recovery. While certain monetary policy programs will be wound down, the Federal Reserve reiterated at its final
meeting in 2009 that it intends to keep the federal funds rate at or near the 0.0%-0.25% target range for “an extended period.” Similarly, purchases of agency residential mortgage-backed securities (“RMBS”) and Fannie Mae and Freddie Mac debt are ongoing, though they are expected to be terminated during the
first quarter of 2010. While the recovery may be on shaky ground, the Fed’s monetary policies and indirect support of the mortgage and housing markets are expected to bolster overall economic activity in 2010 and are likely to remain in place until the recovery is firmly established. Basic economic indicators are summarized in the table below and the data support the belief that an economic recovery is forthcoming. Evidence includes the 5.7% growth in GDP in the fourth quarter, which was due to increases in consumer spending, exports, and a slower pace of private inventory reduction.
Similarly, the moderation in job losses over the course of the year suggests that businesses are winding down their payroll and cost cutting programs. However, significant job growth is not expected until the latter half of 2010 at best. Nonetheless, economists’ forecasts, which are summarized below, reflect
expectations of healthy GDP growth in 2010 and 2011. Economic Indicators*
2008
2009
2009Q1
2009Q2
2009Q3
2009Q4
Forecasted
2010
2011 Economy(1) Gross Domestic Product (GDP)
0.4
%
-2.4
%
-6.4
%
-0.7
%
2.2
%
5.7
%
2.8
%
3.1
% Employment Growth (Thousands)
-3,078
-4,164
-2,074
-1,285
-597
-208
N/A
N/A Interest Rates(2) 10 Year Treasury
3.66
%
3.26
%
2.74
%
3.31
%
3.52
%
3.46
%
3.90
%
4.60
% Federal Funds Rate
0.0-0.25
%
0.0-0.25
%
0.0-0.25
%
0.0-0.25
%
0.0-0.25
%
0.0-0.25
%
N/A
N/A Sources: BEA, BLS, Federal Reserve, Blue Chip Consensus Forecasts
*
Data subject to revision (1) GDP growth rates are annual rates; employment numbers are monthly changes. (2) The Treasury rates are an average over the stated time period. The Federal Funds rates are as of the end of the stated time period. N/A indicates data not available. Other economic indicators, shown in the table below, reveal that the recovery will need to gather strength before it is self-sustaining and broad-based. Consumer confidence trended upwards in the fourth quarter, but remains at historically low levels. Retail sales, excluding motor vehicles and gasoline, likewise
gained some ground in the fourth quarter, but took a step back in December. The slowdown was attributed to unusually cold weather in much of the country. Inflation remained tame; the modest increase in overall prices in 2009 was due to an increase in energy prices as compared with their lows in 2008. Thus far,
excess production capacity and the moderate nature of the recovery is helping to keep price levels stable overall. Housing activity in the third and fourth quarters of 2009 was largely the result of the government’s tax credits for first-time home buyers; however, the recovery in the housing market remains in question. A sizeable inventory of unsold homes remains, despite the fact that housing construction declined in 2009 31
following an even steeper decline in 2008. As of December, single-family home building ran at an annualized rate of 456,000 units, as compared with a low of 357,000 units during the first two months of the year. Overall, housing construction remains depressed and near historic lows; permits issued for new homes,
which are a leading indicator for future construction, in 2009 were 37.5% below 2008 levels. Broad Economic Indicators*
Index 1985=100
Full Year
October
November
December
2008
2009 Consumer Confidence
58.0
45.2
48.7
50.6
53.6 % Change(1) Inflation (Consumer Price Index)
0.1
%
2.7
%
0.3
%
0.4
%
0.1
% Retail Sales (excl. auto, parts & gas)
1.6
%
-1.8
%
0.1
%
1.0
%
-0.3
% Existing Home Sales
-13.1
%
4.9
%
9.9
%
7.4
%
-16.7
% New Home Sales
-37.5
%
-22.9
%
4.3
%
-9.3
%
-7.6
% Single-family Housing Starts
-40.5
%
-28.7
%
-7.3
%
4.0
%
-6.9
% Unemployment Rate
5.8
%
9.3
%
10.1
%
10.0
%
10.0
%
*
Data subject to revision (1) Monthly figures represent change from the preceding month. Full year figures represent change from the preceding year. Annual inflation is calculated as the year over year percent change in December. Unemployment rates for the full year are the annual average. Sources: Conference Board, Census Bureau, Bureau of Labor Statistics The Federal Reserve Bank’s January 2010 Beige Book, which reported on economic conditions in the twelve Federal Reserve Districts (“Districts”) through mid-December, generally reflected the modest improvement in the overall economy. Holiday spending was noted to have picked up from depressed 2008
levels but was, nonetheless, anemic compared with typical seasonal spending. Auto sales appeared to have retained some momentum even after the expiration of the “cash for clunkers” program. Generally, there was only sporadic hiring as labor markets remained weak across the nation. A few Districts reported
signs of modest wage increases, while others reported a continuation of wage freezes. Within the financial services sector, loan demand among banks was characterized as weak or having declined further. The tepid recovery was noted to have kept price pressures low in nearly all Districts. Commercial real estate conditions were characterized as weak across the nation, with several Districts reporting further declines. In general, vacancy rates rose across most Districts and landlords in several were offering rent discounts and concessions in order to maintain occupancy levels. Economists’ views about the prospects for 2010 improved over the course of 2009. Most believe that monetary and fiscal policies helped avoid an even bigger decline in economic activity and that the policies and programs that were enacted have established a foundation for a sustainable, though modest,
expansion. Notwithstanding the high level of unemployment, tight credit and anemic housing market, economic activity in the fourth quarter built on the gains reported in the third quarter of 2009. With two consecutive quarters of growth under its belt, the economy is expected to improve over the course of 2010
and 2011 once household finances improve and businesses begin hiring again. The consensus forecast of economists surveyed as part of the January 2010 Blue Chip Economic Indicators publication was for GDP growth of 2.8% in 2010, followed by growth of 3.1% in 2011. The Federal Reserve Open Market
Committee (“FOMC”) staff generally concurred with this assessment but expected that the severity of the financial crisis will temper the strength of the recovery. Overall, FOMC staff expects GDP to grow slightly above its inherent long-term potential over the upcoming two year period. Employment growth is
expected to be moderate, with the unemployment rate lingering at relatively high levels as businesses only slowly begin hiring again. Excess production capacity is keeping inflationary expectations low and there appears to be minimal risk of rising prices over the near term. However, there is concern among some
economists that inflation could spike over the longer term, unless the $1 trillion of fiscal stimulus used to stem the financial crisis can be pulled out of circulation at a propitious point in the economic cycle. 32
2009
2009
2009
Real Estate Market Conditions and Outlook (Beginning with the fourth quarter of 2009, all of the Account’s vacancy data will be calculated as a percentage of net rentable space leased, weighted by square footage. The third quarter 2009 data presented below has been adjusted to reflect this change. Industry sources such as CB Richard Ellis—Econometric
Advisors (“CBRE-EA”), formerly known as Torto Wheaton Research, calculate vacancy and availability data based on similar square footage calculations. Investors should not rely exclusively on the data presented below in forming a judgment regarding the current or prospective performance of the commercial real
estate market generally). Preliminary data from Real Capital Analytics (“RCA”), a frequently cited industry source of commercial real estate transactions data, showed that transactional volume fell 63% in 2009 and was down nearly 90% from the peak in 2007. Nonetheless, $17.6 billion of property was sold during the fourth quarter of
2009, which was an increase of 43% over the third quarter of 2009. The improvement in sales in the latter half of 2009 was due to the combination of a modest improvement in credit availability and some sellers’ acceptance of current market pricing. According to the Moody’s/REAL Commercial Property Price
Index (“CPPI”), commercial real estate prices in the fourth quarter of 2009 were 41% below the peak achieved in late 2007. The CPPI increased 4.1% in December of 2009, which was the second consecutive monthly increase. While data from other sources such as the National Council of Real Estate Investment
Fiduciaries (“NCREIF”) show smaller (31%) but still significant value declines, the table below summarizes commercial property price declines as estimated by the Moody’s CPPI. Overall, Moody’s estimates that property prices have declined 29% over the past 12 months. Within the property sectors, apartment,
office, and industrial property value declines were all on the order of 20% as of the end of the fourth quarter of 2009. Retail fared better with a 19.0% decline, but the sector was impacted earlier in the cycle, and its cumulative decline has been of a similar magnitude.
Sales Price Change
December 2008-
3Q08 to 3Q09
Top 10 MSAs* All Property Types
-29.2
% Apartments
-20.4
%
-24.4
% Office
-19.8
%
-14.6
% Retail
-19.0
%
-18.4
% Industrial
-23.2
%
-27.3
%
*
Based on total value of property sold in Metropolitan Statistical Area (“MSA”).
Source: Moody’s/REAL CPPI and Real Capital Analytics. Recent moderation in property value declines was noted by Moody’s, consistent with fourth quarter of 2009 data from NCREIF, which showed that the appreciation or value component of the NCREIF National Property Index (“NPI”) index declined 3.7% in the fourth quarter as compared with a decline of
4.9% in the third quarter. Overall, total returns, which were -2.11% in the fourth quarter of 2009, experienced a smaller rate of decline. For 2009 as a whole, however, total NCREIF NPI returns were -16.8%. Nonetheless, the declines moderated over the course of the year. For the year as a whole, the appreciation
component declined 22.0%. Income returns were 1.6% in the fourth quarter and a solid 6.2% for the year. Commercial real estate market conditions, which historically lag trends in the overall economy, have not yet benefited from the recent modest improvement in economic conditions. For example, vacancy rates for all property types rose in the fourth quarter; however, the rate of increase was more moderate
compared with prior quarters. Given the likelihood of a lackluster recovery, a significant improvement in real estate market conditions is not expected until the latter half of 2010 at best and more likely into early 2011. The necessary prerequisites for a recovery in commercial real estate market conditions include a
sustained improvement in employment growth and an improvement in credit availability for small businesses. In the interim, landlords will be competing for tenants that are intent upon reducing their space requirements and costs. Corporations are not expected to add substantially to their employment totals or
space requirements until confidence about economic and business prospects improves materially. While expectations for a recovery in the U.S. economy appear favorable, the strength of the recovery will vary by region. The table below summarizes the top five markets in which the Account had exposure as of December 31, 2009. The top five markets (by market value) represent 41% of the Account’s total
real 33
December 2009
National
estate portfolio in terms of value and, despite elevated vacancy rates across the nation, the Account’s properties in each of these markets remained well leased, as indicated in the table below.
Metropolitan Statistical Area (MSA)
Percent Leased
# of Property
MSA as a
MSA as a Washington-Arlington-Alexandria DC-VA-MD-WV
94.7%
9
12.9%
11.7% Boston-Quincy MA
90.8%
5
7.5%
6.8% Houston-Bay Town-Sugar Land TX
93.5%
3
7.1%
6.4% Los Angeles-Long Beach-Glendale CA
94.1%
8
6.9%
6.2% San Francisco-San Mateo-Redwood City CA
94.1%
4
6.4%
5.8%
*
Weighted by market value, which differs from the calculations provided for market comparisons to CBRE-EA data and are used here to reflect the fair value of the Account’s monetary investments in those markets.
Office Demand for office space is closely correlated with growth in office-using employment sectors such as finance and professional and business services. During the fourth quarter 2009, both sectors improved. Financial services shed just 8,000 jobs as compared with an average decline of over 100,000 per quarter
during the first three quarters of 2009; professional and business services added 172,000 jobs over the fourth quarter of 2009. Much of the increase in professional and business services employment was attributable to hiring by temporary employment agencies, which often leads to permanent hiring. However,
preliminary data from CBRE-EA suggest that businesses continue to exercise caution with respect to their space needs. According to CBRE-EA, the national office vacancy rate increased to 16.3% in the fourth quarter as compared to 16.1% during the third quarter of 2009. In comparison, 10.5% of the space in the
Account’s office portfolio was not leased as of the fourth quarter of 2009. Per CBRE-EA, metro area vacancy rates increased in most of the Account’s top office markets during the fourth quarter of 2009; the only exception was Washington, DC where modest employment growth resulted in a dip in the overall
vacancy rate to 14.1%. Additionally, the metro area vacancy rates in each of the Account’s top office markets were below the national average, except Seattle where vacancy was roughly in-line with the national average. The vacancy rate in the Seattle metro area rose steadily over the course of 2009 due to the
delivery of over four million square feet of new office space. Despite a fourth quarter increase in vacancy at one of the Account’s Seattle properties, overall, the Account’s properties there have a combined average vacancy rate below 10%. The table below compares the average vacancy rate of properties in the
Account’s top office markets with their respective metropolitan area averages.
Account Vacancy
Metropolitan
Sector Metropolitan Statistical Area (MSA)
Total Sector
% of Total
2009Q3
2009Q4
2009Q3
2009Q4 Office National
10.3%
10.5%
16.1%
16.3% 1 Washington-Arlington-Alexandria DC-VA-MD-WV
$
994.7
10.3%
6.9%
6.9%
14.4%
14.1% 2 Boston-Quincy MA
$
630.0
6.5%
8.8%
9.6%
12.8%
13.1% 3 San Francisco-San Mateo-Redwood City CA
$
510.3
5.3%
6.1%
6.3%
13.9%
14.4% 4 Seattle-Bellevue-Everett WA
$
430.3
4.4%
7.2%
9.7%
16.2%
16.7% 5 Houston-Bay Town-Sugar Land TX
$
409.0
4.2%
5.0%
6.0%
15.3%
15.8%
*
Source: CBRE-EA. Vacancy is defined as the percentage of space vacant. The Account’s vacancy is defined as the weighted percentage of unleased space.
Industrial Industrial market conditions weakened further in the fourth quarter of 2009 in spite of the rebound in GDP that began in the third quarter of 2009. GDP has historically been a reliable predictor of industrial 34
Market Value
Weighted
Investments
% of Total Real
Estate Portfolio
% of Total
Investments
Statistical Area
Vacancy*
by MSA ($M)
Investments
space demand as key components of GDP such as industrial production, international trade flows, inventory growth, and employment growth in manufacturing and wholesale trade all drive warehouse demand. However, the recovery in this sector has thus far been anemic and excess production and storage capacity
have yet to be absorbed. According to CBRE-EA, industrial availability rates increased to an average of 13.9% during the fourth quarter of 2009, up from 13.5% in the third quarter of 2009. By comparison, the vacancy rate for the Account’s industrial portfolio is in line with the national average at 13.6%. On the
whole, availability rates in most of the Account’s top industrial markets increased during the fourth quarter of 2009 per CBRE-EA. A dip in the availability rate in Riverside, CA, the Account’s top market, was an encouraging sign. Per CBRE-EA, availability rates in Los Angeles remained relatively stable and
were, once again, the lowest in the nation. The vacancy rate in the Account’s Los Angeles industrial properties declined but remained above-average. While metro area availability rates in the Atlanta, Dallas, and Chicago markets were each above average, the Account’s properties in these markets were well-leased.
The table below compares the average vacancy rate of properties in the Account’s top industrial markets to their respective metropolitan area averages.
Account Vacancy
Metropolitan
Sector Metropolitan Statistical Area (MSA)
Total Sector
% of Total
2009Q3
2009Q4
2009Q3
2009Q4 Industrial National
11.5%
13.6%
13.5%
13.9% 1 Riverside-San Bernardino-
Ontario CA
$
290.3
3.0%
21.1%
21.1%
16.0%
15.7% 2 Dallas-Plano-Irving TX
$
159.4
1.6%
4.8%
6.4%
15.7%
16.1% 3 Chicago-Naperville-Joliet IL
$
109.2
1.1%
0.9%
0.9%
14.2%
14.9% 4 Los Angeles-Long Beach-
Glendale CA
$
94.7
1.0%
13.0%
11.5%
8.0%
8.1% 5 Atlanta-Sandy Springs-
Marietta GA
$
91.7
1.0%
2.1%
3.0%
17.5%
17.8%
*
Source: CBRE—EA. Availability is defined as the percentage of space available for rent. The Account’s vacancy is defined as the weighted percentage of unleased space.
Multi-Family Apartment vacancies held relatively stable over the course of 2009, ending the year at 7.4% nationally compared to 7.0% in fourth quarter 2008 (year-over-year comparisons in this sector better reflect the seasonality inherent in apartment leasing). Nonetheless, the apartment sector still faces significant
headwinds due to high unemployment and a glut of single-family homes and condominiums offered for rent. While market conditions remain challenging, the Account’s apartment properties are well-leased, with an average vacancy rate of 4.5% as of the fourth quarter of 2009. The table below shows that the
average vacancy rate for the Account’s properties in each of its top markets is below both the national average and the average for its respective metropolitan market. The only exception was Houston, where the vacancy rate of the Account’s properties rose during the quarter to meet the national average, but
nonetheless remained below the Houston market average. Of particular note, leasing activity at the Account’s New York City property has been healthy despite significant job cuts by the banks and investment banks that dominate the city’s financial services sector. Leasing activity at the property was aided in part
by rent reductions as landlords throughout Manhattan have reduced rents in order to attract and retain tenants. 35
Statistical Area
Vacancy*
by MSA ($M)
Investments
Account Vacancy
Metropolitan
Sector Metropolitan Statistical Area (MSA)
Total Sector
% of Total
2009Q3
2009Q4
2009Q3
2009Q4 Apartment National
3.9%
4.5%
7.4%
7.4% 1 Houston-Bay Town-Sugar
Land TX
$
211.9
2.2%
4.4%
7.4%
9.9%
10.3% 2 Denver-Aurora CO
$
175.5
1.8%
2.8%
3.8%
6.9%
7.2% 3 Atlanta-Sandy Springs-
Marietta GA
$
116.3
1.2%
2.8%
2.8%
11.0%
10.8% 4 New York-Wayne-White
Plains NY-NJ
$
110.1
1.1%
1.9%
1.2%
6.5%
6.4% 5 Phoenix-Mesa-Scottsdale AZ
$
99.8
1.0%
5.0%
4.8%
11.5%
11.6%
*
Source: CBRE-EA. Vacancy is defined as the percentage of units vacant. The Account’s vacancy is defined as the weighted percentage of unleased space.
Retail The retail sector began to show signs of improvement during the latter half of 2009. While shoppers remained cautious, holiday spending in 2009 improved compared to 2008. Though 2008 was an exceptionally weak year, retailers have seen sales either stabilize or start to grow modestly. Retailers have also
adjusted to consumers’ emphasis on thrift and value by streamlining inventories and new orders in order to limit discounting. Per CBRE-EA, availability rates in neighborhood and community centers increased to an average of 12.5% in the fourth quarter of 2009 as compared to 12.3% in the third quarter.
However, the fourth quarter’s increase was more moderate than in prior quarters and a growing number of markets experienced a decline in local availability rates. In comparison, the Account’s retail portfolio has a 14.7% “availability rate,” which includes vacant space that is leased but not occupied (some retailers
have closed stores but continue to pay rent). Tenant demand for retail space is dependent upon a rebound in consumer spending; minimal gains are expected given household debt burdens, job concerns, and the low level of consumer confidence. Until sales pick up, retail markets are expected to struggle as retailers
put expansion plans on hold and look to close underperforming stores. 2009 Summary and 2010 Outlook Commercial real estate market conditions continued to deteriorate over the course of 2009. While most economists agree the recession ended during the second half of the year, there has been little, if any, improvement in commercial real estate market conditions since these lag overall economic trends. While
vacancy rates for all property types increased over the course of the year, the rate of increase moderated from quarter to quarter. As shown in the table below, construction in 2009 is well below that of prior cycles and, in addition, is expected to drop further in 2010. This falloff in construction, coupled with an eventual pickup in employment growth, could ultimately establish the conditions necessary for a substantial improvement in
commercial real estate market conditions.
Historic and Projected Construction*
Average
Forecasted
1989-1991
1999-2001
2006-2008
2009**
2010 Office
85
93
67
56
26 Industrial
183
255
183
74
54 Apartment
257
212
224
177
60 Retail
46
32
29
14
4
*
in millions of sq. ft. except apartments, which are in thousands of units. ** 2009 numbers are still forecasts Source: CBRE-EA 36
Statistical Area
Vacancy*
by Metro ($M)
Investments
Cycle
Cycle
Cycle
Management of the Account has tailored portfolio initiatives to reflect current market conditions. A primary objective has been to maintain occupancy levels, even if a reduction in rental rates (with shorter lease terms when possible) or additional concessions are required to retain tenants. As of the fourth
quarter of 2009, the Account’s properties were 85% leased. The drive to maintain occupancies helped sustain the Account’s income return component. Income return has historically been a significant portion of the Account’s total return and since the first quarter of 2008 has offset a portion of the declines in
property values, as shown in the graph below. For 2009, the Account’s income return was 7.4%. Notably, the Account’s property value declines moderated somewhat in the fourth quarter of 2009. Another key objective in 2009 was to rebalance the portfolio’s property type concentrations and reallocate its exposure towards selected major markets. Six properties were sold during the fourth quarter of 2009 and a total of seven properties were sold for the year. In addition, six partial sales were completed
in the fourth quarter. Properties targeted for sale were either located in non-target or underperforming markets with uncertain prospects for foreseeable recovery, or were sold to reallocate the Account’s property type concentrations. These sales generated cash proceeds which management believes will serve to
enhance liquidity and which can be available to meet participant redemption requests, repay debt and/or make new acquisitions of properties management believes may be undervalued in the Account’s target markets. Management believes that there could be opportunities to acquire high quality properties at
significant discounts in 2010 and 2011 as properties encumbered by maturing debts and deteriorating values are now over-levered and their owners and/or lenders are forced to sell their equity positions. In the course of addressing its debt obligations in 2010, the Account may inevitably own some underperforming properties that are subject to debt, where insufficient cash flow from the property may cause such a property to be in noncompliance with certain covenants imposed by the terms of such debt, and/or
where cash flow may be inadequate to make required payment on such debt or to repay principal when due (each of which could result in a default on the loan). In such a case, management will evaluate the options available to the Account, consistent with the Account’s long-term investment strategy. Management believes that rebalancing the portfolio, an initiative which began in 2009 and will continue into 2010, will better position the Account to achieve stronger returns once economic and real estate market conditions improve. As the industry moves into the recovery phase, management’s intent is that
the Account’s portfolio will consist of properties within markets that best align with the overall investment strategy. Similarly, management believes that the Account’s returns stand to benefit from the conservative “core” investment strategy that focuses on institutional quality properties, markets and locations, and
particularly stabilized assets with strong historical occupancy and favorable lease expiration schedules. Investments as of December 31, 2009 As of December 31, 2009, the Account had total net assets of $7.9 billion, a 6.1% decrease from the end of the third quarter of 2009 and a 31.5% decrease from December 31, 2008. The decrease in the Account’s net assets from December 31, 2008 to December 31, 2009 was primarily caused by the depreciation
in value 37
of the Account’s wholly-owned real estate properties and those owned in joint venture investments (approximately 86% of the decrease), while net participant transfers out of the Account (taking into account purchases by TIAA under the liquidity guarantee) accounted for approximately 14% of the decrease. The
depreciation in value during 2009 was partially offset by net investment income of $500.5 million, which declined approximately 8.3% from $545.8 million during 2008. As of December 31, 2009, the Account owned a total of 101 real estate property investments (89 of which were wholly-owned, 12 of which were held in joint ventures). The real estate portfolio included 40 office property investments (5 of which were held in joint ventures and one located in London, England),
25 industrial property investments (including one held in a joint venture), 20 multi-family property investments, 15 retail property investments (including five held in joint ventures and one located in Paris, France), and a 75% joint venture interest in a portfolio of storage facilities. Of the 101 real estate property investments, 26 are subject to debt (including seven joint venture property investments). Total principal outstanding on the Account’s wholly-owned real estate portfolio as of December 31, 2009 was approximately $1.9 billion. The Account’s joint venture values shown in the
Statement of Investments are presented net of debt, but, when that debt is also considered, total principal outstanding on the Account’s portfolio as of December 31, 2009 was $3.9 billion. As of December 31, 2009, the loan to value ratio of the Account is 33.1%. As of December 31, 2009, the Account has no
outstanding debt on which the Account itself is an obligor. Management believes that the Account’s real estate portfolio is diversified by location and property type. The Account’s largest investment, 1001 Pennsylvania Avenue located in Washington, DC, represented 5.49% of total real estate investments and 4.96% of total investments. As discussed in the Account’s
prospectus, the Account does not intend to buy and sell its real estate investments simply to make short-term profits. Rather, the Account’s general strategy in selling real estate investments is to dispose of those assets that management believes (i) have maximized in value, (ii) have underperformed or face
deteriorating property-specific or market conditions, (iii) need significant capital infusions in the future, (iv) are appropriate to dispose of in order to remain consistent with the Account’s intent to diversify the Account by property type and geographic location, (including reallocating the Account’s exposure to or
away from certain property types in certain geographic locations), or (v) otherwise do not satisfy the investment objectives of the Account. The Account could reinvest any sale proceeds that it does not need to pay operating expenses or to meet debt service or redemption requests (e.g., cash withdrawals or
transfers, and any redemption of TIAA’s liquidity units in the future). During 2009 there were no property investment acquisitions. The Account sold seven property investments and eight partial property investments for an aggregate net sales price (less selling expenses) of approximately $404.4 million. The properties sold recognized an aggregate realized loss of approximately $281.8 million. In connection with the properties sold, a $23.5
million mortgage was assumed by the buyer which recognized a realized loss of $371 thousand. The properties are listed below (amounts in thousands): 38
Property Investments Sold in 2009
Property Name Property Type City State
Net Sales Price The Market at Southpark Retail Littleton CO
$
21,721 New Jersey CalEast Industrial Portfolio Industrial Monroe and Brunswick NJ
24,770 4200 West Cypress Office Tampa FL
21,898 Park Place on Turtle Creek Office Dallas TX
23,347 Preston Sherry Plaza(1) Office Dallas TX
7,577 Capitol Place Office Sacramento CA
39,475 980 9th street & 1010 8th Street Office Sacramento CA
96,053 San Montego Apartments (Phoenix
Apartment Portfolio)(2) Apartment Phoenix AZ
19,880 Miramar Townhomes (Houston
Apartment Portfolio)(2) Apartment Houston TX
8,792 San Melia Apartments (Phoenix
Apartment Portfolio)(2) Apartment Chandler AZ
47,597 San Brisas (Phoenix Apartment
Portfolio)(2) Apartment Phoenix AZ
18,991 Paragon (Kierland Apartment
Portfolio)(2) Apartment Phoenix AZ
34,185 El Mundo (Houston Apartment
Portfolio)(2) Apartment Houston TX
11,102 Plaza Del Oro Townhomes (Houston
Apartment Portfolio)(2) Apartment Houston TX
7,937 San Marin Garden Homes (Houston
Apartment Portfolio)(2) Apartment Houston TX
21,038 Total
$
404,363
(1)
Net of $23.5 million of debt assumed by buyer on sale of investment (2) Partial sales of apartment portfolios which were part of existing portfolios The following charts reflect the diversification of the Account’s real estate assets by region and property type and list its ten largest investments by gross market value. All information is based on the fair values of the investments at December 31, 2009. Diversification by Fair Value(1)
East
West
South
Midwest
Foreign(2)
Total Office
23.5
%
17.3
%
12.3
%
1.2
%
2.7
%
57.0
% Apartment
2.4
%
5.5
%
5.3
%
0.0
%
0.0
%
13.2
% Industrial
1.4
%
6.4
%
4.2
%
1.4
%
0.0
%
13.4
% Retail
3.4
%
0.9
%
8.7
%
0.4
%
2.3
%
15.7
% Storage
Facilities
0.2
%
0.2
%
0.2
%
0.1
%
0.0
%
0.7
% Total
30.9
%
30.3
%
30.7
%
3.1
%
5.0
%
100.0
%
(1)
Fair values for wholly-owned properties are reflected gross of any debt, whereas fair values for joint venture investments are reflected net of any debt. (2) Represents real estate investments in the United Kingdom and France. Properties in the “East” region are located in: CT, DC, DE, KY, MA, MD, ME, NC, NH, NJ, NY, PA, RI, SC, VA, VT, WV Properties in the “West” region are located in: AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY Properties in the “South” region are located in: AL, AR, FL, GA, LA, MS, OK, TN, TX Properties in the “Midwest” region are located in: IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI 39
(less selling expense)
Top Ten Largest Real Estate Investments
Property or Joint Venture
Name City State Type
Value ($M)(a)
Property as a
Property as a 1001 Pennsylvania Avenue Washington DC Office
480.6(c
)
5.49
4.96 Four Oaks Place Houston TX Office
409.0(d
)
4.67
4.22 DDR Joint Venture Various USA Retail
312.2(e
)
3.57
3.22 Fourth and Madison Seattle WA Office
295.0(f
)
3.37
3.04 50 Fremont San Francisco CA Office
284.3(g
)
3.25
2.93 99 High Street Boston MA Office
253.6(h
)
2.90
2.62 The Florida Mall Orlando FL Retail
252.4(i
)
2.88
2.60 780 Third Avenue New York City NY Office
240.1
2.74
2.48 Westferry Circus London UK Office
239.0(j
)
2.73
2.47 The Newbry Boston MA Office
230.4
2.63
2.38
(a)
Value as reported in the December, 31, 2009 Statement of Investments. Investments owned 100% by the Account are reported based on fair value. Investments in joint ventures are reported at fair value and are presented at the Account’s ownership interest. (b) Total Real Estate Portfolio excludes the mortgage loan receivable. (c) This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $267.1M. (d) This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $228.1M. (e) This property investment is an 85%/15% joint venture with Developers Diversified Realty Corporation (DDR), and consists of 65 retail properties located in 13 states and is presented net of debt of $1.3 billion. (f) This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $148.3M. (g) This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $147.0M. (h) This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $68.7M. (i) This property investment is a 50%/50% joint venture with Simon Property Group, L.P., and is presented net of debt of $122.4M. (j) This property investment is presented gross of debt. The value of the Account’s interest less the fair value of leverage is $41.0M. As of December 31, 2009, the Account’s net assets totaled $7.9 billion. At December 31, 2009, the Account held a total of 101 real estate property investments (including its interests in 12 real estate-related joint ventures). As of that date, the Account also held investments in a mortgage loan receivable
representing 0.73% of total investments, real estate limited partnerships, representing 2.07% of Total Investments, U.S. Treasury Bills representing 2.13% of total investments, and government agency notes representing 4.80% of total investments. 40
% of Total
Real Estate
Portfolio(b)
% of Total
Investments
Results of Operations Year Ended December 31, 2009 Compared to Year Ended December 31, 2008 Performance The Account’s total return was -27.64% for the year ended December 31, 2009 as compared to -14.15% for the year ended 2008. The Account’s performance during the year ended December 31, 2009 reflects a decline in the aggregate net asset value of the Account’s real estate property investments, including
investments owned in joint ventures and limited partnerships, lower income from marketable securities and unrealized losses from the mortgage loans payable. The twelve months of 2009 saw continued valuation declines resulting from the weakened economy and tightened financial and credit markets. Transaction
activity continued to remain at historically low levels and capital depreciation occurred in most markets. The Account’s annualized total returns (after expenses) over the past one, three, five, and ten year periods ended December 31, 2009 were -27.64%, -10.92%, -1.67% and 3.07% respectively. As of December 31, 2009, the Account’s annualized total return since inception was 4.65%. The Account’s total net assets decreased from $11.5 billion at December 31, 2008 to $7.9 billion at December 31, 2009. The primary driver of this 31.5% decrease was depreciation in value of the Account’s wholly owned, joint venture, and limited partnership real estate investments (approximately 86% of the
decrease), while net participant withdrawals and transfers out of the Account (net of the $1.1 billion of Liquidity Units purchased by TIAA) accounted for approximately 14% of the decrease. Income and Expenses The Account’s real estate holdings, including real estate joint ventures and limited partnerships, generated approximately 99.7% and 88.3% of the Account’s total investment income (before deducting Account level expenses) during the years ended December 31, 2009 and 2008, respectively. The 14.7%
decrease in the Account’s total investment income was primarily due to a 97.9% decrease in the Account’s dividend income and interest income and a 4.2% decrease in net real estate income. Gross real estate rental income decreased by approximately $31.0 million or 3.2% for the year ended December 31, 2009, as compared to the same period in 2008. Approximately $19.2 million of the decrease is primarily due to the property investment sales that occurred during 2008 and 2009. In addition to the
reduction in rental income due to property investment sales, the Account also experienced a decrease in revenue due to various property specific items such as rent concessions, lower rents, increased vacancies at certain properties and reductions in common charges for many properties as a result of lower overall
property operating expenses. Total real estate property level expenses and taxes for wholly-owned property investments for the year ended December 31, 2009 decreased to $468.7 million as compared to $478.9 million for the year ended December 31, 2008. The overall decline in expenses was primarily due to a 7.2% decrease in operating
expenses, a 3.2% decrease in real estate taxes offset by a 14.3% increase in interest expense. Operating expenses decreased during 2009 primarily due to an overall reduction in repairs and maintenance, utility expense, insurance expense, bad debt expense, and various other miscellaneous operating expenses. In
addition to the reduction of general expenses, the property investment sales during 2008 and 2009 eliminated some operating expense. Real estate taxes decreased due to lower tax assessments and reduced number of properties under management. The increase in interest expense is due to $557 million of new debt
financing that was obtained during the third and fourth quarters of 2008. Income from real estate joint ventures and limited partnerships was $114.6 million for the year ended December 31, 2009, as compared to $116.9 million for the year ended December 31, 2008. This 2.0% decrease was due to a decrease in gross rental income from joint venture properties as a result of increased
vacancies and select rent reductions. More specifically, the DDR Joint Venture experienced an increase in vacancies in late 2008 which resulted in lower income in 2009. Investment income on the Account’s investments in marketable securities decreased by 97.9%, from $81.5 million for the year ended December 31, 2008 to $1.7 million for the comparable period in 2009. The variance was due to the decrease in the rates of return on the marketable securities as well as a lower
marketable security invested balance for 2009 compared to the year ended December 31, 2008. 41
The Account incurred overall Account level expenses of $95.5 million for the year ended December 31, 2009, which represents a 37.6% decrease from $153.0 million for the same period in 2008. The decreases in investment advisory and administrative and distribution charges are due to two factors. First, during
the first quarter of 2008, increased costs were allocated to the Account associated with new technology investments in 2008 that have been reduced significantly during the year ended December 31, 2009. Finally, the general decline in the costs allocated to manage and distribute the Account is consistent with the
reduction in the average net assets of the Account. In the future, investment advisory charges were not expected to decline at the same rate as net assets as certain portions of these costs are not directly associated to the net asset value of the Account. Mortality and expense risk charges and liquidity guarantee
expenses declined during the year ended December 31, 2009 primarily due to lower net assets as compared to the same period in 2008. The decline of the liquidity guarantee expenses resulting from the decline in net assets was partially offset by the increase in the fees that TIAA charges to provide the liquidity
guarantee from 10 basis points to 15 basis points which was effective as of May 1, 2009. Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable The Account had net realized and unrealized losses on investments and mortgage loans payable of $3.6 billion for the year ended December 31, 2009, a $1.1 billion increase when compared to a net realized and unrealized loss of $2.5 billion for the year ended December 31, 2008. The increase in net realized
and unrealized losses on investments and mortgage loans payable was primarily driven by net realized and unrealized losses on the Account’s wholly-owned real estate property investments of $2.5 billion for the year ended December 31, 2009 compared to a loss of $1.9 billion during the same period in 2008. The
Account’s interests in joint ventures and limited partnerships posted a net realized and unrealized loss of $909.3 million and $120.9 million, respectively, for a net total of over $1.0 billion for the year ended December 31, 2009. When compared to the year ended December 31, 2008, joint ventures and limited
partnerships posted a net realized and unrealized loss of $652.4 million and $50.4 million, respectively, for a net total of $702.8 million. The net realized and unrealized losses on wholly-owned real estate property investments and those held in joint ventures and limited partnerships were due to the decline in value of the Account’s existing real estate assets, which reflected the net effects of a weaker overall economy, a decline in value of the
underlying property investments within the joint ventures and limited partnership funds and continued shortage of liquidity in the commercial real estate markets during the year ended December 31, 2009. Real estate market values have declined throughout 2009 primarily due to increasing actual and projected
vacancy rates resulting in longer tenant replacement timeframes, lower market rents, and higher capitalization rates. Mortgage loans payable experienced a net realized and unrealized loss of approximately $55.1 million during the year ended December 31, 2009 compared to a net realized and unrealized gain of $109.8 million in the same period in 2008. Valuation adjustments associated with mortgage loans payable are highly
dependent upon interest rates, spreads, investment return demands, the performance of the underlying real estate investment, and where applicable, foreign exchange. Of the $55.1 million realized and unrealized loss, foreign exchange fluctuations (due to a weakening U.S. dollar during the year ended 2009)
accounted for approximately $23.8 million of the total year-to-date loss. The remaining $30.9 million loss related to mortgage payable values is reflected in the fluctuations in the U.S. treasury rates and higher loan to value ratios on the Account’s underlying properties (as a result of the significant declines in
property values) and a $0.4 million realized loss due to the debt that was assumed in connection with the sale of a property investment. During the year ended December 31, 2009, the Account also sold one retail property investment, one industrial property investment, five office property investments and eight partial apartment property investments for net proceeds of approximately $394.8 million and realized a loss of $281.8 million. Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 Performance The Account’s total return was -14.2% for the year ended December 31, 2008. This was a significant decline compared to the positive return of 13.8% for the year ended December 31, 2007. The Account’s performance during the year ended December 31, 2008 reflects a decline in the aggregate net asset value
of the Account’s real estate property investments, including investments owned in joint ventures and limited partnerships, as well as lower income from marketable securities. 42
After several years of increasing investor demand for commercial real estate and historic capital appreciation, the weakened economy and faltering financial and credit markets have brought transaction activity to historically low levels, bringing a halt to capital appreciation in many markets. The number of
individual property investments with valuation decreases has increased significantly as evidenced by the Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable. Management believes that real estate is an investment that should be considered from a long term perspective. The
Account’s annualized total returns (after expenses) over the past one, three, five, and 10-year periods ended December 31, 2008 were -14.15%, 3.67%, 7.41%, and 7.29%, respectively. As of December 31, 2008, the Account’s annualized total return since inception was 7.60%. The Account’s total net assets decreased from $17.7 billion at December 31, 2007 to $11.5 billion at December 31, 2008. The primary drivers of this 34.8% decrease were the net participant transfers out of the Account ($4.6 billion) and depreciation in value of the Account’s wholly owned, joint venture, and
limited partnership real estate investments ($2.5 billion annualized depreciation on investments and mortgage loans payable). Income and Expenses The Account’s net investment income, after deduction of all expenses, was 12.6% lower for the year ended December 31, 2008, as compared to the same period in 2007. The Account’s real estate holdings, including real estate joint ventures and limited partnerships, generated approximately 88.3% and 81.5% of the Account’s total investment income (before deducting Account level expenses) during the years ended December 31, 2008 and 2007, respectively. The 12.6%
decrease in the Account’s total investment income was due to a 59.2% decrease in the Account’s dividend income and a 41.0% decrease in interest income generated from fewer investments in marketable securities, including real estate equity securities, commercial paper, government notes, and an investment in a
commercial mortgage loan receivable. Gross real estate rental income decreased approximately 0.8% for the year ended December 31, 2008, as compared to the same period in 2007. This decrease is primarily due to a decrease in the number of wholly-owned real estate investment property investments held by the Account. The number of wholly-
owned properties decreased from 99 as of December 31, 2007 to 96 as of December 31, 2008. Total real estate property level expenses and taxes for wholly-owned property investments for the year ended December 31, 2008 increased to $478.9 million as compared to $458.0 million for the year ended December 31, 2007. The overall change in expenses was primarily due to a 4.0% increase in operating
expenses, a 4.8% increase in real estate taxes and a 5.9% increase in interest expense. Operating expenses increased during 2008 primarily due to increased bad debts and insurance costs. Real estate taxes increased due to higher tax assessments in 2008 as compared to 2007. The increase in interest expense is due to
$557 million of new debt financing that was obtained during the third and fourth quarters of 2008. Income from real estate joint ventures and limited partnerships was $116.9 million for the year ended December 31, 2008, as compared to $93.7 million for the year ended December 31, 2007. This 24.7% increase was due to an increase in gross rental income from properties owned in joint ventures, which
increased substantially with the acquisition of the joint venture interest in the DDR Retail Portfolio in the first quarter of 2007, but was somewhat offset by a decrease in income from the disposition of the 161 North Clark joint venture during 2007. Investment income on the Account’s investments in marketable securities decreased by 42.6%, from $141.9 million for the year ended December 31, 2007 to $81.5 million for the comparable period in 2008. The variance was due to the decrease of the Account’s investments in marketable securities from $3.8
billion as of December 31, 2007 to $0.5 billion as of December 31, 2008, coupled with a decrease in the rates of return on the marketable securities. The Account incurred overall Account level expenses of $153.0 million for the year ended December 31, 2008, which represents a 9.1% increase from $140.3 million for the same period in 2007. The increase is primarily due to an increase in actual administrative and distribution expenses associated with
managing and distributing the Account. Total administrative and distribution expenses increased to $77.6 million for the year ended December 31, 2008, as compared to $63.6 million for the year ended December 31, 2007. This increase in expenses primarily resulted from larger allocated operational expenses
including costs associated 43
with new technology investments. The increase in overall expenses (due primarily to increased administrative and distribution expenses) was somewhat offset by a $1.6 million decrease in investment advisory charges. This decline was due to a decrease of overall costs that are allocated to the Account. Net Realized and Unrealized Gains and Losses on Investments and Mortgage Loans Payable The Account had net realized and unrealized losses on investments and mortgage loans payable of $2.5 billion for the year ended December 31, 2008, a 274.7% decrease compared to a net realized and unrealized gain of $1.4 billion for the year ended December 31, 2007. The overall variance was driven by two
factors. First, the decrease in net realized and unrealized gains and losses on investments and mortgage loans payable was primarily driven by a net realized and unrealized loss on the Account’s wholly-owned real estate property investments of $1.9 billion for the year ended December 31, 2008 compared to a gain
of $1.0 billion during the same period in 2007. Second, the Account’s interests in joint ventures and limited partnerships posted a net realized and unrealized loss of $702.8 million for the year ended December 31, 2008 as compared to a substantial net realized and unrealized gain of $462.1 million for the year ended
December 31, 2007. The variance in the net realized and unrealized gains and losses on wholly-owned real estate property investments and those held in joint ventures was due to the decline in value of the Account’s existing real estate assets, which reflected the net effects of a weaker overall economy and
continued shortage of liquidity in the commercial real estate markets during 2008. Approximately $1.9 billion or 76% of the 2008 net realized and unrealized loss on investments and mortgage loans payable occurred in the fourth quarter of 2008. This significant increase in the net realized and unrealized loss, in
comparison to the 2007 net realized and unrealized gain, was the direct result of increases in rates which are used in appraisal valuations (discount rates, overall and implied capitalization rates and terminal rates) which are key components of the determination of the investments fair value. In general, weighted
average appraisal rates increased between 65 and 89 basis points in 2008 when compared to 2007. This increase in weighted average appraisal rates was one of the key drivers causing the increase of net realized and unrealized loss in 2008. Additional factors causing the increase in the net realized and unrealized net
loss in 2008 include decrease in rental growth estimates, decrease in rental rates, tenant bankruptcies and decreases in occupancy. During 2008, the Account’s property fundamentals such as occupancy and overall property net operating income remained stable when compared to 2007. The Account also posted a net realized and unrealized gain on its marketable securities of $4.8 million for the year ended December 31, 2008, as compared to a net realized and unrealized loss of $101.5 million in the same period of 2007. The net gains on the Account’s marketable securities for the year ended
December 31, 2008 were primarily due to the reversal of the unrealized loss as a result of the sale of the Account’s investments in publicly-traded marketable real estate equity securities (REIT stocks) in June 2008. The sale of these securities was executed over several days for total proceeds of $477.4 million, and
the Account realized a loss of $11.2 million. The disposition of these REIT stocks was a decision by the Account’s management to reduce risk within its marketable securities investment portfolio. As circumstances warrant and in continued furtherance of its investment objective and strategy, the Account may invest
in REIT stocks in the future. The losses in the Account’s marketable securities during the year ended December 31, 2007 were primarily due to unrealized losses due to the Account’s investments in REIT stocks. The U.S. REIT market struggled through a volatile 2007 and ended the year down by more than 17%. The Account had unrealized gains on its mortgage loans payable in the amount of $109.8 million and unrealized losses on its mortgage loan receivable of approximately $0.8 million for the year ended December 31, 2008, as compared to net unrealized gains of $53.9 million and an unrealized loss of $2.1 million,
respectively, for the same period in 2007. The net unrealized gain or loss on mortgage loans payable and mortgage loans receivable for the period reflected the fluctuations in the U.S. Treasury rates and commercial real estate mortgage loan spreads during the year ended December 31, 2008, which are used as a
basis to value the commercial mortgage loans on the wholly-owned real estate property investments. For a mortgage loan payable, a negative fair value adjustment decreases the value of the payable and therefore results in an unrealized gain to the Account. Conversely, for a mortgage loan receivable, a negative
fair value adjustment decreases the value of the receivable and results in an unrealized loss. During 2008, the Account sold one apartment property investment, one office portfolio investment, two industrial property investments and one partial industrial portfolio investment for total net proceeds of $91.4 million and recognized a net loss of $18.4 million. 44
Liquidity and Capital Resources As of December 31, 2009 and 2008, the Account’s liquid assets (i.e., cash, marketable securities, and receivables for short-term securities sold) had a value of $696.1 million and $533.8 million, respectively (approximately 7.2% and 4.0% of the Account’s total investments at such dates, respectively). When
compared to December 31, 2008, the Account’s liquid assets have increased by approximately $162.3 million, primarily as a result of proceeds from selective asset sales, many of which occurred in the fourth quarter of 2009. During the year ended December 31, 2009, the Account received $703.5 million in premiums, had an outflow of $1.9 billion in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds (excluding the aggregate $1.1 billion of purchases of Liquidity Units by TIAA), and
$365.3 million of annuity and other periodic payments, withdrawals, and death benefits. During the year ended December 31, 2008, the Account received $1.0 billion in premiums, had an outflow of $4.6 billion in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds
(excluding the aggregate $155.6 million of purchases of Liquidity Units by TIAA), and $707.9 million of annuity and other periodic payments, withdrawals, and death benefits. During the three months ended December 31, 2009, the Account received $168.7 million in premiums and had an outflow of $181.0 million in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds. In comparison, the Account received $215.2 million in premiums and
had an outflow of $2.1 billion in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds during the three months ended December 31, 2008. Primarily as a result of significant net participant transfers out of the Account, on December 24, 2008, pursuant to TIAA’s existing liquidity guarantee obligation, the TIAA general account purchased $155.6 million of Liquidity Units issued by the Account. Subsequent to December 24, 2008 and through June 1,
2009, the TIAA general account purchased an additional $1.059 billion in the aggregate of Liquidity Units in a number of separate transactions. During the period June 2, 2009 through March 18, 2010, the TIAA general account did not purchase any additional Liquidity Units. As disclosed under “Establishing and
Managing the Account—the Role of TIAA—Liquidity Guarantee” in the Account’s prospectus, in accordance with this liquidity guarantee obligation, TIAA guarantees that all participants in the Account may redeem their accumulation units at their accumulation unit value next determined after their transfer or cash
withdrawal request is received in good order. While net redemption activity has significantly slowed since the first quarter of 2009, management cannot predict the extent to which future TIAA Liquidity Unit purchases, if any, will be required under this liquidity guarantee, nor can management predict when such
Liquidity Units will be redeemed by the Account in part, or in full. Management believes that TIAA has the ability to meet its obligations under this liquidity guarantee. TIAA’s obligation to provide Account participants liquidity through purchases of Liquidity Units is not subject to an express regulatory or contractual limitation, although as described in the paragraph below, the independent fiduciary may (but is not obligated to) require the reduction of TIAA’s interest
through sales of assets from the Account if TIAA’s interest exceeds the trigger point. Even if the independent fiduciary so requires, TIAA’s obligation to provide liquidity under the guarantee, which is required by the New York State Insurance Department, will continue. Whenever TIAA owns Liquidity Units, the duties of the Account’s independent fiduciary, as part of its monitoring of the Account, include reviewing the purchase and redemption of Liquidity Units by TIAA to ensure the Account uses the correct accumulation unit values. In addition, the independent
fiduciary’s responsibilities include:
•
establishing the percentage of total accumulation units that TIAA’s ownership should not exceed (the “trigger point”) and creating a method for reviewing the trigger point; • approving any adjustment of TIAA’s ownership interest in the Account and, in its discretion, requiring an adjustment if TIAA’s ownership of Liquidity Units reaches the trigger point; and • once the trigger point has been reached, participating in any program to reduce TIAA’s ownership in the Account by utilizing cash flow or liquid investments in the Account, or by utilizing the proceeds from asset sales. If the independent fiduciary were to determine that TIAA’s ownership should be reduced
following the trigger point, its role in participating in any asset sales program would include (i) participating in the selection of properties for sale, (ii) providing sales guidelines and (iii) approving 45
those sales if, in the independent fiduciary’s opinion, such sales are desirable to reduce TIAA’s ownership of Liquidity Units.
As of the date of this annual report, the independent fiduciary, which has the right to adjust the trigger point, has established the trigger point at 45% of the outstanding accumulation units and it will continue to monitor TIAA’s ownership interest in the Account and provide further recommendations as
necessary. As of December 31, 2009, TIAA owned approximately 12.0% of the outstanding accumulation units of the Account. In establishing the appropriate trigger point, including whether or not to require certain actions once the trigger point has been reached, the independent fiduciary will assess, among other
things and to the extent consistent with the Prohibited Transaction Exemption (PTE 96-76) issued by the U.S. Department of Labor in 1996 with respect to the liquidity guarantee and the independent fiduciary’s duties under ERISA, the risk that a conflict of interest could arise due to the level of TIAA’s ownership
interest in the Account. Management continues to believe that the net negative outflow experienced during 2008 and most of 2009 may be a reflection of participant concerns with the downturn in the U.S. and global economy, the turmoil in the capital and credit markets, and their current and potential future net effect on commercial
real estate in particular. While net outflow activity has decreased significantly over the past six months, management cannot predict whether the net outflows will continue at an increasingly higher rate, or at all in the future. If net outflows were to continue at the same or at a higher rate, it could have a negative
impact on the Account’s operations and returns. Additionally, continued net outflow activity could require TIAA to purchase additional Liquidity Units, perhaps to a significant degree. While the independent fiduciary is vested with oversight and approval over any redemption of TIAA’s liquidity units, it is expected that, unless the trigger point has been reached, redemptions would only occur: (i) once the Account has experienced net participant inflows for an extended period of time and (ii)
if the Account is otherwise projected to maintain a level of liquid assets, taking into account any pending cash needs (including for debt service and outstanding principal balances at maturity), at or close to its long-term investment goal (currently at least 15% of the Account’s assets). The independent fiduciary
may, however, authorize or direct the redemption of TIAA’s liquidity units (or a portion thereof) at any time and TIAA will request the approval of the independent fiduciary before liquidity units are redeemed. Upon termination and liquidation of the Account (wind-up), any liquidity units held by TIAA will be
the last units redeemed, unless the independent fiduciary directs otherwise. The Account’s net investment income continues to be an additional source of liquidity for the Account even though it has decreased from $545.8 million for the year ended December 31, 2008 to $500.5 million for the year ended December 31, 2009. While the Account’s liquid investments have dropped below 15% of its total investments during this recent period of significant net participant outflows, the Account’s investment strategy remains to invest between 75% and 85% of its assets directly in real estate or real estate-related investments with the goal
of producing favorable long-term returns primarily through rental income and appreciation. In the near term, the Account’s cash and marketable securities will likely comprise less than 10% of the Account’s investments, but management intends to increase the Account’s holdings in cash and short-term marketable
securities to the extent practicable, consistent with its investment strategy and objective. As of December 31, 2009, cash and short-term marketable securities comprised approximately 7.2% of the Account’s investments. The Account’s liquid assets continue to be available to purchase additional suitable real estate properties and to meet the Account’s debt obligations, expense needs, and participant redemption requests (i.e., cash withdrawals, benefit payments, or transfers). The Account has approximately $704.3 million in
principal amount of debt obligations due during 2010 related to wholly-owned real estate investments and the Account’s share of debt associated with its investments in joint ventures. Management believes that the Account, and the joint venture entities in which the Account invests, will have the ability to address these obligations in a number of ways, including among others, refinancing or extending such debt or repaying the principal due at maturity. Leverage The Account may borrow money and assume or obtain a mortgage on a property (i.e., to make leveraged real estate investments). Also, to meet any short-term cash needs, the Account may obtain a line of 46
credit that may be unsecured and/or contain terms that may require the Account to secure the loan with one or more of its properties. The Account is authorized to borrow money in accordance with its investment guidelines. Under the Account’s current investment guidelines, which were modified as to borrowing in mid-2009, the Account’s loan to value ratio (as defined below) is to be maintained at or below 30%. However, until December
31, 2011, the Account is authorized to incur and/or maintain indebtedness on its properties in an aggregate principal amount not to exceed the aggregate principal amount of debt outstanding as of the date of adoption of such guidelines (approximately $4.0 billion). Such incurrences of debt from time to time may
include:
placing new debt on properties; • refinancing outstanding debt; • assuming debt on acquired properties or interests in the Account’s properties; and/or • extending the maturity date of outstanding debt. In calculating this limit, only the Account’s actual percentage interest in any borrowings is included, and not that percentage interest held by any joint venture partner. Further, the Account may only borrow up to 70% of the then-current value of a property, although construction loans may be for 100% of the
costs incurred in developing a property. As of December 31, 2009 the Account did not have any construction loans. Also, at the time the Account (or a joint venture in which the Account is a partner) enters into a revolving line of credit, management deems the maximum amount which may be drawn under that
line of credit as fully incurred, regardless of whether the maximum amount available has been drawn from time to time. In addition, by December 31, 2011, management intends to reduce the Account’s ratio of outstanding principal amount of debt to total gross asset value (i.e., a “loan to value ratio”) to 30% or less and thereafter intends to maintain its loan to value ratio at or below 30% (measured at the time of incurrence and
after giving effect thereto). As of December 31, 2009, the Account’s loan to value ratio was approximately 33.1%. Recent Transactions The following describes property transactions by the Account in the fourth quarter of 2009. Except as noted, the expenses for operating the properties purchased are either borne or reimbursed, in whole or in part, by the property tenants, although the terms vary under each lease. The Account is responsible for
operating expenses not reimbursed under the terms of a lease. All rental rates are quoted on an annual basis unless otherwise noted. Purchases None. Sales New Jersey CalEast Industrial Portfolio On October 1, 2009, the Account sold an industrial investment portfolio in Monroe and Brunswick, New Jersey for a sales price of approximately $25.5 million and realized a loss of approximately $17.1 million. The Account purchased the property investment on December 22, 2003. The original investment in
this portfolio was $39.9 million and costs to date were $42.6 million. San Melia Apartments (Phoenix Apartment Portfolio) On October 30, 2009, the Account completed a partial sale of the Phoenix apartment investment portfolio in Chandler, Arizona for a sales price of approximately $47.8 million and realized a loss of approximately $35.8 million. The Account purchased the property investment on June 23, 2006. The original
investment in this apartment property was $82.5 million and costs to date were $83.7 million. 47
•
San Brisas (Phoenix Apartment Portfolio) On November 5, 2009, the Account completed a partial sale of the Phoenix apartment investment portfolio in Phoenix, Arizona for a sales price of approximately $19.0 million and realized a loss of approximately $11.4 million. The Account purchased the property investment on June 23, 2006. The original
investment in this apartment property was $29.9 million and costs to date were $30.4 million. Paragon (Kierland Apartment Portfolio) On November 5, 2009, the Account completed a partial sale of the Kierland apartment investment portfolio in Phoenix, Arizona for a sales price of approximately $34.2 million and realized a loss of approximately $30.2 million. The Account purchased the property investment on June 23, 2006. The original
investment in this apartment property was $63.9 million and costs to date were $64.4 million. 4200 West Cypress On November 16, 2009, the Account sold an office property investment in Tampa, Florida for a sales price of approximately $22.3 million and realized a loss of approximately $13.3 million. The Account purchased the property investment on December 29, 2003. The original investment in this property was
$32.9 million and costs to date were $35.6 million. El Mundo (Houston Apartment Portfolio) On November 24, 2009, the Account completed a partial sale of the Houston apartment investment portfolio in Houston, Texas for a sales price of approximately $11.2 million and realized a loss of approximately $8.1 million. The Account purchased the property investment on June 23, 2006. The original
investment in this apartment property was $18.1 million and costs to date were $19.4 million. Plaza Del Oro Townhomes (Houston Apartment Portfolio) On November 24, 2009, the Account completed a partial sale of an apartment investment portfolio in Houston, Texas for a sales price of approximately $8.0 million and realized a loss of approximately $5.1 million. The Account purchased the property investment on June 23, 2006. The original investment in
this apartment property was $12.6 million and costs to date were $13.1 million. San Marin Garden Homes (Houston Apartment Portfolio) On November 24, 2009, the Account completed a partial sale of an apartment investment portfolio in Houston, Texas for a sales price of approximately $21.3 million and realized a loss of approximately $12.2 million. The Account purchased the property investment on June 23, 2006. The original investment in
this apartment property was $32.0 million and costs to date were $33.4 million. Park Place on Turtle Creek On December 16, 2009, the Account sold an office property investment in Dallas, Texas for a sales price of approximately $23.7 million and realized a loss of approximately $23.0 million. The Account purchased the property investment on June 29, 2006. The original investment in this office property was $44.4
million and costs to date were $46.7 million. Preston Sherry Plaza On December 16, 2009, the Account sold an office property investment in Dallas, Texas for a sales price of approximately $31.5 million and realized a loss of approximately $15.8 million. The Account purchased the property investment and assumed its debt of $23.5 million on June 1, 2007. The original
investment in this office property was $21.6 million and costs to date (net of debt) were $23.8 million. The debt was assumed by the purchaser of this property at the time of sale. 48
Capitol Place On December 17, 2009, the Account sold an office property investment in Sacramento, California for a sales price of approximately $40.0 million and realized a loss of approximately $3.9 million. The Account purchased the property investment on August 28, 2003. The original investment in this office property
was $38.8 million and costs to date were $43.9 million. 980 9th Street & 1010 8th Street On December 18, 2009, the Account sold an office property investment in Sacramento, California for a sales price of approximately $97.0 million and realized a loss of approximately $76.5 million. The Account purchased the property investment on July 18, 2005. The original investment in this office property
was $159.5 million and costs to date were $173.5 million. Financings None. Contractual Obligations The following table sets forth a summary regarding the Account’s known contractual obligations, including required interest payments for those items that are interest bearing, at December 31, 2009 (amounts in thousands):
Amounts Due During Years Ending December 31,
2010
2011
2012
2013
2014
Thereafter
Total Mortgage Loans Payable: Principal Payments
$
330,842
$
13,067
$
221,840
$
552,853
$
225,273
$
563,215
$
1,907,090 Interest Payments(1)
98,694
91,863
91,423
78,312
40,338
52,718
453,348 Total Mortgage Loans Payable
429,536
104,930
313,263
631,165
265,611
615,933
2,360,438 Joint Venture Funding Commitments
1,313
—
—
—
—
—
1,313 Other Commitments(2)
44,317
—
—
—
—
—
44,317 Tenant improvements(3)
44,869
44,869 Total Contractual Obligations
$
520,035
$
104,930
$
313,263
$
631,165
$
265,611
$
615,933
$
2,450,937
(1)
These amounts represent interest payments due on mortgage loans payable based on the stated rates and, where applicable, the foreign currency exchange rates at December 31, 2009. (2) This includes the Account’s commitment to purchase interests in four limited partnerships, which could be called by the partner at any time. (3) This amount represents tenant improvements committed to by the Account in tenant leases that have not been incurred as of the year ended December 31, 2009. Note that the Contractual Obligations table above does not include payments on debt held in Investments in Joint Ventures which are the obligation of the individual joint venture entities. See Note 7 to the Account’s Financial Statements—Investments in Joint Ventures and Limited Partnerships. Effects of Inflation and Increasing Operating Expenses Inflation, along with increased insurance, taxes, utilities and security costs, may increase property operating expenses in the future. Any such increases in operating expenses are generally billed to tenants either through contractual lease provisions in office, industrial, and retail properties or through rent
increases in apartment complexes. The Account remains responsible for the expenses for unleased space in a property as well as expenses which may not be reimbursed under the terms of an existing lease. Critical Accounting Policies The financial statements of the Account are prepared in conformity with accounting principles generally accepted in the United States of America. 49
In preparing the Account’s financial statements, management is required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Management bases its estimates on historical experience and assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Accounting for Investments at Fair Value The Financial Accounting Standards Board (“FASB”) has provided authoritative guidance for fair value measurements and disclosures. Additionally, the guidance defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the United States, and
requires certain disclosures about fair value measurements. This guidance indicates, among other things, that a fair value measurement under an exit price model assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal
market, the most advantageous market for the asset or liability. This guidance also permits entities to elect to measure financial instruments and certain financial assets and liabilities at fair value and expanded the use of fair value measurements when warranted. The Account reports all investments and mortgage loans payable at fair value. Valuation Hierarchy The Account groups financial assets and certain financial liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, if any, and the observability of the assumptions used to determine fair value. These levels are: Level 1—Valuations using unadjusted quoted prices for assets traded in active markets, such as stocks listed on the New York Stock Exchange. Active markets are defined as having the following characteristics for the measured asset or liability: (i) many transactions, (ii) current prices, (iii) price quotes not
varying substantially among market makers, (iv) narrow bid/ask spreads and (v) most information regarding the issuer is publicly available. Level 1 assets, which may be held by the Account from time to time, include real estate related marketable securities (such as publicly traded REIT stocks). Level 2—Valuations for assets and liabilities traded in less active, dealer or broker markets. Fair values are primarily obtained from third party pricing services for identical or comparable assets or liabilities. Level 2 inputs for fair value measurements are inputs, other than quoted prices included within Level 1,
that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include:
a.
Quoted prices for similar assets or liabilities in active markets; b. Quoted prices for identical or similar assets or liabilities in markets that are not active (that is, markets in which there are few transactions for the asset (or liability), the prices are not current, price quotations vary substantially either over time or among market makers (for example, some brokered
markets), or in which little information is released publicly); c. Inputs other than quoted prices that are observable within the market for the asset (or liability) (for example, interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks, and default rates that are observable at commonly quoted intervals); and d. Inputs that are derived principally from or corroborated by observable market data by correlation or other means (for example, market-corroborated inputs). Examples of securities which may be held by the account and included in Level 2 include Certificate of Deposits, Commercial Paper, Government Agency Bonds and Variable Notes. Level 3—Valuations for assets and liabilities that are derived from other valuation methodologies, including pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and
projections that are not observable in the market, and require significant professional judgment in determining the fair value assigned to such assets or liabilities. Examples of Level 3 assets and liabilities which may be held by the Account from time to time include investments in real estate, investments in joint
ventures and limited partnerships, mortgage loans receivable and mortgage loans payable. 50
An investment’s categorization within the valuation hierarchy described above is based upon the lowest level of input that is significant to the fair value measurement. The Account’s investments and mortgage loans payable are stated at fair value. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon vendor-provided, evaluated prices or internally-developed models that primarily use market-based
or independently-sourced market data, including interest rate yield curves, market spreads, and currency rates. Valuation adjustments will be made to reflect changes in credit quality, counterparty’s creditworthiness, the Account’s creditworthiness, liquidity, and other observable and unobservable inputs that are
applied consistently over time. The methods described above are considered to produce fair values that represent a good faith estimate of what an unaffiliated buyer in the marketplace would pay to purchase the asset or would receive to transfer the liability. Since fair value calculations involve significant professional judgment in the
application of both observable and unobservable attributes, actual realizable values or future fair values may differ from amounts reported. Furthermore, while the Account believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial instruments, while reasonable, could result in different estimates of fair value at the reporting date. The following is a description of the valuation methodologies used for investments measured at fair value. Valuation of Real Estate Properties Investments in real estate properties are stated at fair value, as determined in accordance with policies and procedures reviewed by the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. Accordingly, the Account does not record depreciation. The
Account’s real estate properties are generally classified within Level 3 of the valuation hierarchy. Fair value for real estate properties is defined as the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date. Determination of fair value involves
judgment because the actual market value of real estate can be determined only by negotiation between the parties in a sales transaction. The Account’s primary objective when valuing its real estate investments will be to produce a valuation that represents a fair and accurate estimate of the fair value of its
investments. Implicit in the Account’s definition of fair value is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
•
Buyer and seller are typically motivated; • Both parties are well informed or well advised, and acting in what they consider their best interests; • A reasonable time is allowed for exposure in the open market; • Payment is made in terms of cash or in terms of financial arrangements comparable thereto; and • The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates, and interest and inflation rates. As a result, determining real estate and investment values involves many assumptions. Key inputs and assumptions include rental income and expense
amounts, related rental income and expense growth rates, discount rates and capitalization rates. Valuation techniques include discounted cash flow analysis, prevailing market capitalization rates or multiples applied to earnings from the property, analysis of recent comparable sales transactions, actual sale
negotiations and bona fide purchase offers received from third parties. Amounts ultimately realized from each investment may vary significantly from the market value presented. Actual results could differ significantly from those estimates. Real estate properties owned by the Account are initially valued based on an independent appraisal at the time of the closing of the purchase, which may result in a potential unrealized gain or loss reflecting the difference between an investment’s fair value (i.e., exit price) and its cost basis (which is inclusive of
transaction costs). Subsequently, each property is appraised each quarter by an independent external appraiser. In general, the Account obtains appraisals of its real estate properties spread out throughout the quarter, which is 51
intended to result in appraisal adjustments, and thus, adjustments to the valuations of its holdings (to the extent such adjustments are made) that happen regularly throughout each quarter and not on one specific day in each period. Further, management reserves the right to order an appraisal and/or conduct another valuation outside of the normal quarterly process when facts or circumstances at a specific property change. For example, under certain circumstances a valuation adjustment could be made when bids are obtained for
properties held for sale by the Account. In addition, adjustments may be made for events or circumstances indicating an impairment of a tenant’s ability to pay amounts due to the Account under a lease (including due to a bankruptcy filing of that tenant). Also, adjustments may be made to reflect factors (such as
sales values for comparable properties or local employment rate) bearing uniquely on a particular region in which the Account holds properties. TIAA’s internal appraisal staff oversees the entire appraisal process, in conjunction with the Account’s independent fiduciary (the independent fiduciary is more fully
described in the paragraph below). Any differences in the conclusions of TIAA’s internal appraisal staff and the independent appraiser will be reviewed by the independent fiduciary, which will make a final determination on the matter (which may include ordering a subsequent independent appraisal). An independent fiduciary, Real Estate Research Corporation, has been appointed by a special subcommittee of the Investment Committee of the Board to, among other things, oversee the appraisal process. The independent fiduciary must approve all independent appraisers used by the Account. All appraisals
are performed in accordance with Uniform Standards of Professional Appraisal Practices (“USPAP”), the real estate appraisal industry standards created by The Appraisal Foundation. Real estate appraisals are estimates of property values based on a professional’s opinion. Appraisals of properties held outside of
the U.S. are performed in accordance with industry standards commonly applied in the applicable jurisdiction. These independent appraisers are always expected to be MAI-designated members of the Appraisal Institute (or its European equivalent, RICS) and state certified appraisers from national or regional
firms with relevant property type experience and market knowledge. Also, the independent fiduciary can require additional appraisals if factors or events have occurred that could materially change a property’s value and such change is not reflected in the quarterly valuation review, or otherwise to ensure that the Account is valued appropriately. The independent fiduciary must
also approve any valuation change of real estate related assets where a property’s value changed by more than 6% from the most recent independent annual appraisal, or if the value of the Account would change by more than 4% within any calendar quarter or more than 2% since the prior calendar month. When
a real estate property is subject to a mortgage, the mortgage is valued independently of the property and its fair value is reported separately. The independent fiduciary reviews and approves all mortgage valuation adjustments before such adjustments are recorded by the Account. The Account continues to use the
revised value for each real estate property and mortgage loan payable to calculate the Account’s daily net asset value until the next valuation review or appraisal. Valuation of Real Estate Joint Ventures Real estate joint ventures are stated at the fair value of the Account’s ownership interests of the underlying entities. The Account’s ownership interests are valued based on the fair value of the underlying real estate, any related mortgage loans payable, and other factors, such as ownership percentage,
ownership rights, buy/sell agreements, distribution provisions and capital call obligations. Upon the disposition of all real estate investments by an investee entity, the Account will continue to state its equity in the remaining net assets of the investee entity during the wind down period, if any, which occurs prior to
the dissolution of the investee entity. The Account’s real estate joint ventures are generally classified within level 3 of the valuation hierarchy. Valuation of Real Estate Limited Partnerships Limited partnership interests are stated at the fair value of the Account’s ownership in the partnership which is based on the most recent net asset value of the partnership as reported by the sponsor. Since market quotations are not readily available, the limited partnership interests are valued at fair value as
determined in good faith under the direction of the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. These investments are generally classified within level 3 of the valuation hierarchy. 52
Valuation of Marketable Securities Equity securities listed or traded on any national market or exchange are valued at the last sale price as of the close of the principal securities market or exchange on which such securities are traded or, if there is no sale, at the mean of the last bid and asked prices on such market or exchange, exclusive of
transaction costs. Such marketable securities are generally classified within level 1 of the valuation hierarchy. Debt securities, other than money market instruments, are generally valued at the most recent bid price or the equivalent quoted yield for such securities (or those of comparable maturity, quality and type). Money market instruments, with maturities of one year or less, are valued in the same manner as debt
securities or derived from a pricing matrix. Debt securities are generally classified within level 2 of the valuation hierarchy. Equity and fixed income securities traded on a foreign exchange or in foreign markets are valued using their closing values under the valuation methods generally accepted in the country where traded, as of the valuation date. This value is converted to U.S. dollars at the exchange rate in effect on the valuation
day. Under certain circumstances (for example, if there are significant movements in the United States markets and there is an expectation the securities traded on foreign markets will adjust based on such movements when the foreign markets open the next day), the Account may adjust the value of equity or fixed
income securities that trade on a foreign exchange or market after the foreign exchange or market has closed. Equity securities traded on a foreign exchange or in foreign markets are generally classified within level 1 of the valuation hierarchy. Fixed income securities traded on a foreign exchange or in foreign
markets are generally classified within level 2 of the valuation hierarchy. Equity and fixed income securities traded in foreign markets that are adjusted based upon significant movements in the United States markets are generally classified within level 2 of the valuation hierarchy. Valuation of Mortgage Loan Receivable Mortgage loans receivable are stated at fair value and are initially valued at the face amount of the mortgage loan funding. Subsequently, mortgage loans receivable are valued at least quarterly based on market factors, such as market interest rates and spreads for comparable loans, the liquidity for mortgage
loans of similar characteristics, the performance of the underlying collateral and the credit quality of the counterparty. The Account’s mortgage loan receivable is classified within level 3 of the valuation hierarchy. Valuation of Mortgage Loans Payable Mortgage loans payable are stated at fair value. The estimated fair value of mortgage loans payable is based on the amount at which the liability could be transferred to a third party exclusive of transaction costs. Mortgage loans payable are valued at least quarterly based on market factors, such as market
interest rates and spreads for comparable loans, the performance of the underlying collateral (such as the loan-to-value ratio and the cash flow of the underlying collateral), the liquidity for mortgage loans of similar characteristics, the maturity date of the loan, the return demands of the market, and the credit
quality of the Account. The Account’s mortgage loans payable are generally classified within level 3 of the valuation hierarchy. Interest expense for mortgage loans payable is recorded on the accrual basis taking into account the outstanding principal and contractual interest rates. Foreign currency transactions and translation Portfolio investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of securities, income receipts and expense payments made in foreign currencies are translated into U.S. dollars at
the exchange rates prevailing on the respective dates of the transactions. The effect of any changes in foreign currency exchange rates on portfolio investments and mortgage loans payable is included in net realized and unrealized gains and losses on investments and mortgage loans payable. Net realized gains and
losses on foreign currency transactions include disposition of foreign currencies, and currency gains and losses between the accrual and receipt dates of portfolio investment income and between the trade and settlement dates of portfolio investment transactions and, when applicable, include maturities of forward
foreign currency contracts. 53
Accumulation and Annuity Funds The Accumulation Fund represents the net assets attributable to participants in the accumulation phase of their investment (“Accumulation Fund”). The Annuity Fund represents the net assets attributable to the participants currently receiving annuity payments (“Annuity Fund”). The net increase or decrease
in net assets from investment operations is apportioned between the accounts based upon their relative daily net asset values. Once an Account participant begins receiving lifetime annuity income benefits, monthly payment levels cannot be reduced as a result of the Account’s adverse mortality experience. In
addition, the contracts pursuant to which the Account is offered are required to stipulate the maximum expense charge for all Account-level expenses that can be assessed, which is equal to 2.50% of average net assets per year. The Account pays a fee to TIAA to assume these mortality and expense risks. Accounting for Investments Real estate transactions are accounted for as of the date on which the purchase or sale transactions for the real estate properties close (settlement date). The Account recognizes a realized gain on the sale of a real estate property to the extent that the contract sales price exceeds the cost-to-date of the property
being sold. A realized loss occurs when the cost-to-date exceeds the sales price. Any accumulated unrealized gains and losses are reversed in the calculation of realized gains and losses. Rent from real estate properties consists of all amounts earned under tenant operating leases, including base rent, recoveries of real estate taxes and other expenses and charges for miscellaneous services provided to tenants. Rental income is recognized in accordance with the billing terms of the lease
agreements. The Account bears the direct expenses of the real estate properties owned. These expenses include, but are not limited to, fees to local property management companies, property taxes, utilities, maintenance, repairs, insurance, and other operating and administrative costs. An estimate of the net
operating income earned from each real estate property is accrued by the Account on a daily basis and such estimates are adjusted when actual operating results are determined. The Account has limited ownership interests in various private real estate funds (limited partnerships and one limited liability corporation) and a private real estate investment trust (collectively, the “limited partnerships”). The Account records its contributions as increases to the investments, and distributions
from the investments are treated as either income or return of capital, as determined by the management of the limited partnerships. Unrealized gains and losses are calculated based upon the net asset value of the limited partnership and recorded when the financial statements of the limited partnerships are
received by the Account; however as circumstances warrant, prior to the receipt of financial statements of the limited partnership, the Account will estimate the value of its interests in good faith and will from time to time seek input from the issuer or the sponsor of the investment vehicle. Changes in value based
on such estimates are recorded by the Account as unrealized gains and losses. Income from real estate joint ventures is recorded based on the Account’s proportional interest of the income distributed by the joint venture. Income earned by the joint venture, but not yet distributed to the Account by the joint venture investment, is recorded as unrealized gains and losses on real estate joint
ventures. Transactions in marketable securities are accounted for as of the date the securities are purchased or sold (trade date). Interest income is recorded as earned. Dividend income is recorded on the ex-dividend date or as soon as the Account is informed of the dividend. Realized gains and losses on securities
transactions are accounted for on the specific identification method. New Accounting Pronouncements In June 2007, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants (“AICPA”) issued a Statement of Position (“SOP”) which clarifies which entities are required to apply the provisions of the Investment Companies Audit and Accounting Guide
(“Guide”) and provides guidance on accounting by parent companies and equity method investors for investments in investment companies. In February 2008, FASB indefinitely delayed the effective date of the SOP to allow time to consider significant issues related to the implementation of the SOP. In February 2009, the Emerging Issues Task Force (“EITF”) added an issue to its agenda related to the application of the Guide, which will be discussed at a future meeting. The FASB staff created a working 54
group to assist the EITF in addressing this issue. Management of the Account will continue to monitor FASB and EITF developments and will evaluate the financial reporting implications to the Account, as necessary. In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), which amends guidance related to the identification of a variable interest entity, variable interests, the primary beneficiary, and expands required note
disclosures to provide greater transparency to the users of financial statements. In December 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities”, which amended Codification with the guidance
contained in SFAS No. 167. In February 2010, the FASB issued ASU No. 2010-10, “Amendments for Certain Investment Funds”, which defers the applicability of ASU No. 2009-17 in certain instances. These standards are effective on January 1, 2010 and management of the Account has concluded that the
adoption of these standards will not result in a significant impact to the Account’s financial position or results of operations. In August 2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value.” This ASU clarifies the application of certain valuation techniques in circumstances in which a quoted price in an active market for the identical liability is not available and clarifies that inputs to the valuation should not
be adjusted when estimating the fair value of a liability in which contractual terms restrict transferability. This ASU became effective on October 1, 2009 and the adoption did not have a significant impact to the Account’s financial position or results of operations. In September 2009, the FASB issued ASU No. 2009-12, “Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” This ASU permits, as a practical expedient, an investor the ability to estimate the fair value of an investment in certain entities on the basis of the net asset
value per share of the investment (or its equivalent) determined as of the reporting entity’s measurement date. The investee must satisfy specific requirements before the investor is permitted to utilize this practical expedient as a method of valuation. The amendments in this ASU are effective for interim and
annual periods ending after December 15, 2009. The adoption of this ASU did not have a significant impact to the Account’s financial position or results of operations. In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” which requires new disclosures related to the transfer in and out of levels 1 and 2, and the separate disclosure of purchases, sales, issuances and settlements when reconciling activity in level 3. This
ASU also amends prior disclosure requirements to call for the disaggregation of assets and liabilities into appropriate subsets, and the disclosure of valuation techniques and inputs for recurring and nonrecurring fair value measurements in levels 2 and 3. The new disclosure requirement for reconciling level 3 activity
is effective January 1, 2011 and all other new or amended disclosure requirements are effective January 1, 2010 for the Account. These changes will not impact the Account’s financial position or results of operations. In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements”. This ASU amends Topic 855, “Subsequent Events” by not requiring a reporting entity that files financial statements with the Securities and Exchange Commission (“SEC filers”), or a
conduit bond obligor to disclose the date through which subsequent events are evaluated. This ASU is effective for SEC filers upon issuance of the final ASU. The Account has adopted this revision as of December 31, 2009 and accordingly will not disclose the date through which subsequent events were evaluated. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Account’s real estate holdings, including real estate joint ventures and limited partnerships, which, as of December 31, 2009, represented 92.3% of the Account’s total investments, expose the Account to a variety of risks. These risks include, but are not limited to:
•
General Real Estate Risk—The risk that the Account’s property values or rental and occupancy rates could go down due to general economic conditions, a weak market for real estate generally, disruptions in the credit and/or capital markets, or changing supply and demand for certain types of properties; • Appraisal Risk—The risk that the sale price of an Account property (i.e., the value that would be determined by negotiations between independent parties) might differ substantially from its estimated or appraised value, leading to losses or reduced profits to the Account upon sale; 55
• Risk Relating to Property Sales—The risk that the Account might not be able to sell a property at a particular time for its full value, particularly in a poor market. This might make it difficult to raise cash quickly and also could lead to Account losses; • Risks of Borrowing—The risk that interest rate changes may impact Account returns if the Account takes out a mortgage on a property, buys a property subject to a mortgage or holds a property subject to a mortgage; and • Foreign Currency Risk—The risk that the value of the Account’s foreign investments, related debt, or rental income could increase or decrease due to changes in foreign currency exchange rates or foreign currency exchange control regulations, and hedging against such changes, if undertaken by the Account,
may entail additional costs and be unsuccessful. Given the significant concentration (92.3% as of December 31, 2009) of the Account’s total investments in real estate and real estate related assets, the Account’s net asset value will experience a more pronounced impact from valuation adjustments to its real properties than it would during periods in which the
Account held its target of between 75% and 85% of its investments in real estate and real estate related assets. The Account believes the diversification of its real estate portfolio, both geographically and by sector, along with its quarterly valuation procedure, helps manage the real estate and appraisal risks
described above. As of December 31, 2009, 7.7% of the Account’s total investments were comprised of marketable securities and an adjustable rate mortgage loan receivable. Marketable securities include high-quality short-term debt instruments (i.e., commercial paper and government agency notes). The Statement of
Investments for the Account sets forth the general financial terms of these instruments, along with their fair values, as determined in accordance with procedures described in Note 1 to the Account’s financial statements. The Account’s marketable securities other than its mortgage loan receivable are considered
held for trading purposes. Currently, the Account does not invest in derivative financial investments, nor does the Account engage in any hedging activity other than the interest rate cap agreements contained in two mortgage loans payable the Account entered into during the third quarter of 2008. These interest
rate cap agreements (which cap the interest rate on each mortgage loan payable at 6.50%) are discussed in Note 8 to the Account’s financial statements contained herein. The Account’s investments in cash equivalents, marketable securities (whether debt or equity), and mortgage loans receivable are subject to the following general risks:
•
Financial/Credit Risk—The risk, for debt securities, that the issuer will not be able to pay principal and interest when due (and/or declare bankruptcy or be subject to receivership) and, for equity securities such as common or preferred stock, that the issuer’s current earnings will fall or that its overall financial
soundness will decline, reducing the security’s value. • Market Volatility Risk—The risk that the Account’s investments will experience price volatility due to changing conditions in the financial markets regardless of the credit quality or financial condition of the underlying issuer. This risk is particularly acute to the extent the Account holds equity securities, which
have experienced significant short-term price volatility over the past year. Also, to the extent the Account holds debt securities; changes in overall interest rates can cause price fluctuations. • Interest Rate Volatility—The risk that interest rate volatility may affect the Account’s current income from an investment. • Deposit/Money Market Risk—The risk that, to the extent the Account’s cash held in bank deposit accounts exceeds federally insured limits as to that bank, the Account could experience losses if banks fail. The Account does not believe it has exposure to significant concentration of deposit risk. In addition,
there is some risk that investments held in money market accounts can suffer losses. In addition, to the extent the Account were to hold mortgage-backed securities (including commercial mortgage-backed securities (“CMBS”), these securities are subject to prepayment risk or extension risk (i.e., the risk that borrowers will repay the loans earlier or later than anticipated). If the underlying
mortgage assets experience faster than anticipated repayments of principal, the Account could fail to recoup some or all of its initial investment in these securities, since the original price paid by the Account was based in part on assumptions regarding the receipt of interest payments. If the underlying mortgage
assets are repaid later than anticipated, the Account could lose the opportunity to reinvest the anticipated cash flows at a time when interest rates might be rising. The rate of prepayment depends on a variety of geographic, social and other functions, including prevailing market interest rates and general economic
factors. The market value of these securities is also highly sensitive to changes in interest rates. Note that the potential for appreciation, which 56
could otherwise be expected to result from a decline in interest rates, may be limited by any increased prepayments. These securities may be harder to sell than other securities. In addition to these risks, real estate equity securities (such as REIT stocks) and mortgage-backed securities would be subject to many of the same general risks inherent in real estate investing, making mortgage loans and investing in debt securities. For more information on the risks associated with all of the
Account’s investments, see Item 1.A. “Risk Factors” in this Form 10-K. 57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS
Page
59
60
61
62
63
64
65
80
86 58
TIAA REAL ESTATE ACCOUNT
REPORT OF MANAGEMENT RESPONSIBILITY To the Participants of the The accompanying financial statements of the TIAA Real Estate Account (“Account”) of Teachers Insurance and Annuity Association of America (“TIAA”) are the responsibility of TIAA’s management. They have been prepared in accordance with accounting principles generally accepted in the United States of
America and have been presented fairly and objectively in accordance with such principles. TIAA has established and maintains an effective system of internal controls over financial reporting designed to provide reasonable assurance that assets are properly safeguarded, that transactions are properly executed in accordance with management’s authorization, and to carry out the ongoing responsibilities of
management for reliable financial statements. In addition, TIAA’s internal audit personnel provide regular reviews and assessments of the internal controls and operations of the Account, and the Senior Vice President of Internal Audit regularly reports to the Audit Committee of the TIAA Board of Trustees. The independent registered public accounting firm of PricewaterhouseCoopers LLP has audited the accompanying financial statements for the years ended December 31, 2009, 2008 and 2007. To maintain auditor independence and avoid even the appearance of a conflict of interest, it continues to be the Account’s
policy (consistent with TIAA’s specific auditor independence policies, which are designed to avoid such conflicts) that any management advisory or consulting services would be obtained from a firm other than the independent accounting firm. The independent auditors’ report expresses an independent opinion on
the fairness of presentation of the Account’s financial statements. The Audit Committee of the TIAA Board of Trustees, comprised entirely of independent, non-management trustees, meets regularly with management, representatives of the independent registered public accounting firm and internal audit group personnel to review matters relating to financial reporting, internal
controls and auditing. In addition to the annual independent audit of the Account’s financial statements, the New York State Insurance Department and other state insurance departments regularly examine the operations and financial statements of the Account as part of their periodic corporate examinations.
March 18, 2010
/s/ Roger W. Ferguson, Jr.
Roger W. Ferguson, Jr.
/s/ Georganne C. Proctor
Georganne C. Proctor 59
TIAA Real Estate Account:
President and
Chief Executive Officer
Executive Vice President and
Chief Financial Officer
To the Participants of the The TIAA Audit Committee (“Committee”) oversees the financial reporting process of the TIAA Real Estate Account (“Account”) on behalf of TIAA’s Board of Trustees. The Committee operates in accordance with a formal written charter (copies of which are available upon request) which describes the Audit
Committee’s responsibilities. All members of the Committee are independent, as defined under the listing standards of the New York Stock Exchange. Management has the primary responsibility for the Account’s financial statements, development and maintenance of a strong system of internal controls and disclosure controls, and compliance with applicable laws and regulations. In fulfilling its oversight responsibilities, the Committee reviewed and approved the
audit plans of the internal audit group and the independent registered public accounting firm in connection with their respective audits of the Account. The Committee also meets regularly with the internal audit group and the independent registered public accounting firm, both with and without management
present, to discuss the results of their examinations, their evaluation of internal controls, and the overall quality of financial reporting. As required by its charter, the Committee will evaluate rotation of the independent registered public accounting firm whenever circumstances warrant, but in no event will the
evaluation be later than between their fifth and tenth years of service. The Committee reviewed and discussed the accompanying audited financial statements with management, including a discussion of the quality and appropriateness of the accounting principles and financial reporting practices followed, the reasonableness of significant judgments, and the clarity and completeness of
disclosures in the financial statements. The Committee has also discussed the audited financial statements with PricewaterhouseCoopers LLP, the independent registered public accounting firm responsible for expressing an opinion on the conformity of these audited financial statements with accounting principles
generally accepted in the United States of America. The discussion with PricewaterhouseCoopers LLP focused on their judgments concerning the quality and appropriateness of the accounting principles and financial reporting practices followed by the Account, the clarity and completeness of the financial statements and related disclosures, and other significant
matters, such as any significant changes in accounting policies, internal controls, management judgments and estimates, and the nature of any uncertainties or unusual transactions. In addition, the Committee discussed with PricewaterhouseCoopers LLP the auditors’ independence from management and the
Account, and has received a written disclosure regarding such independence, as required by the Securities and Exchange Commission. Based on the review and discussions referred to above, the Committee has approved the release of the accompanying audited financial statements for publication and filing with appropriate regulatory authorities. Rosalie J. Wolf, Audit Committee Chair March 18, 2010 60
TIAA Real Estate Account:
Jeffrey R. Brown, Audit Committee Member
Lawrence H. Linden, Audit Committee Member
Donald K. Peterson, Audit Committee Member
David L. Shedlarz, Audit Committee Member
TIAA REAL ESTATE ACCOUNT
December 31,
December 31, ASSETS Investments, at fair value: Real estate properties
$
7,437,344
$
10,305,040 Real estate joint ventures and limited partnerships
1,514,876
2,463,196 Marketable securities
671,267
511,711 Mortgage loan receivable
71,273
71,767 Total investments
9,694,760
13,351,714 Cash and cash equivalents
24,859
22,127 Due from investment advisor
4,290
— Other
188,794
203,113 TOTAL ASSETS
9,912,703
13,576,954 LIABILITIES Mortgage loans payable—Note 8
1,858,110
1,830,040 Payable for securities transactions
49
108 Due to investment advisor
—
9,892 Accrued real estate property level expenses
151,808
203,874 Security deposits held
22,822
24,116 TOTAL LIABILITIES
2,032,789
2,068,030 NET ASSETS Accumulation Fund
7,636,115
11,106,246 Annuity Fund
243,799
402,678 TOTAL NET ASSETS
$
7,879,914
$
11,508,924 NUMBER OF ACCUMULATION UNITS OUTSTANDING—
39,473
41,542 NET ASSET VALUE, PER ACCUMULATION UNIT—Note 9
$
193.45
$
267.35 See notes to the financial statements. 61
STATEMENTS OF ASSETS AND LIABILITIES
(In thousands, except per accumulation unit amounts)
2009
2008
(cost: $9,408,978 and $10,031,744)
(cost: $2,437,795 and $2,329,850)
(cost: $671,235 and $511,703)
(cost: $75,000 and $75,000)
(cost: $12,593,008 and $12,948,297)
(principal outstanding: $1,907,090 and $1,910,121)
Notes 9 and 10
TIAA REAL ESTATE ACCOUNT
Years Ended December 31,
2009
2008
2007 INVESTMENT INCOME Real estate income, net: Rental income
$
948,315
$
979,295
$
987,434 Real estate property level expenses and taxes: Operating expenses
238,705
257,351
247,473 Real estate taxes
128,734
132,979
126,926 Interest expense
101,219
88,531
83,623 Total real estate property level expenses and taxes
468,658
478,861
458,022 Real estate income, net
479,657
500,434
529,412 Income from real estate joint ventures and limited partnerships
114,578
116,889
93,724 Interest
1,733
76,444
129,474 Dividends
—
5,079
12,440 TOTAL INVESTMENT INCOME
595,968
698,846
765,050 Expenses—Note 2: Investment advisory charges
42,521
47,622
49,239 Administrative and distribution charges
35,805
77,577
63,593 Mortality and expense risk charges
4,736
8,116
8,052 Liquidity guarantee charges
12,411
19,725
19,410 TOTAL EXPENSES
95,473
153,040
140,294 INVESTMENT INCOME, NET
500,495
545,806
624,756 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND MORTGAGE LOANS PAYABLE Net realized gain (loss) on investments: Real estate properties
(281,798
)
(18,097
)
127,835 Real estate joint ventures and limited partnerships
—
(17
)
70,765 Marketable securities
1
(11,041
)
47,180 Mortgage loans payable
(371
)
—
— Total realized (loss) gain on investments:
(282,168
)
(29,155
)
245,780 Net change in unrealized appreciation (depreciation) on: Real estate properties
(2,244,931
)
(1,905,930
)
898,173 Real estate joint ventures and limited partnerships
(1,030,179
)
(702,797
)
391,333 Marketable securities
22
15,820
(148,659
) Mortgage loans receivable
(494
)
(753
)
(2,141
) Mortgage loans payable
(54,755
)
109,791
53,949 Net change in unrealized (depreciation) appreciation
(3,330,337
)
(2,483,869
)
1,192,655 NET REALIZED AND UNREALIZED
(3,612,505
)
(2,513,024
)
1,438,435 NET (DECREASE) INCREASE IN NET ASSETS
$
(3,112,010
)
$
(1,967,218
)
$
2,063,191 See notes to the financial statements. 62
STATEMENTS OF OPERATIONS
(In thousands)
on investments and mortgage loans payable
(LOSS) GAIN ON INVESTMENTS AND
MORTGAGE LOANS PAYABLE
RESULTING FROM OPERATIONS
TIAA REAL ESTATE ACCOUNT
Years Ended December 31,
2009
2008
2007 FROM OPERATIONS Investment income, net
$
500,495
$
545,806
$
624,756 Net realized (loss) gain on investments
(282,168
)
(29,155
)
245,780 Net change in unrealized (depreciation) appreciation on investments and mortgage loans payable
(3,330,337
)
(2,483,869
)
1,192,655 NET (DECREASE) INCREASE IN NET
(3,112,010
)
(1,967,218
)
2,063,191 FROM PARTICIPANT TRANSACTIONS Premiums
703,493
1,008,233
1,186,870 Purchase of Liquidity Units by TIAA
1,058,700
155,600
— Net transfers (to) from TIAA
(546,270
)
(1,912,937
)
153,137 Net transfers (to) from CREF Accounts
(1,207,394
)
(2,519,837
)
832,782 Net transfers (to) from TIAA-CREF Funds
(160,181
)
(207,547
)
(51,612
) Annuity and other periodic payments
(43,805
)
(99,518
)
(95,776
) Withdrawals and death benefits
(321,543
)
(608,389
)
(560,748
) NET (DECREASE) INCREASE IN NET
(517,000
)
(4,184,395
)
1,464,653 NET (DECREASE) INCREASE IN NET ASSETS
(3,629,010
)
(6,151,613
)
3,527,844 NET ASSETS Beginning of period
11,508,924
17,660,537
14,132,693 End of period
$
7,879,914
$
11,508,924
$
17,660,537 See notes to the financial statements. 63
STATEMENTS OF CHANGES IN NET ASSETS
(In thousands)
ASSETS RESULTING FROM OPERATIONS
ASSETS RESULTING FROM
PARTICIPANT TRANSACTIONS
TIAA REAL ESTATE ACCOUNT
Years Ended December 31,
2009
2008
2007 CASH FLOWS FROM OPERATING ACTIVITIES Net (decrease) increase in net assets resulting from operations
$
(3,112,010
)
$
(1,967,218
)
$
2,063,191 Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash provided by (used in) operating activities: Purchase of real estate properties
—
(164,104
)
(639,704
) Amortization of discount on debt
—
—
531 Capital improvements on real estate properties
(141,493
)
(131,926
)
(136,861
) Proceeds from sale of real estate properties
408,794
93,113
568,120 Purchases of long term investments
(81,308
)
(61,041
)
(1,136,799
) Proceeds from sale of long term investments
—
480,952
468,512 Net purchases in other investments
(160,084
)
2,864,516
(1,236,572
) Decrease in payable for securities transactions
(59
)
(758
)
(353
) Change in due (from)/due to investment advisor
(14,182
)
21,088
(2,734
) Decrease (increase) in other assets
14,319
(1,290
)
36,052 (Decrease) increase in accrued real estate property level expenses
(1,900
)
6,801
(11,871
) (Decrease) increase in security deposits held
(1,294
)
(516
)
5,389 Net realized loss (gain) on investments and mortgage loans payable
282,168
29,155
(245,780
) Net unrealized loss (gain) on investments and mortgage loans payable
3,330,337
2,483,869
(1,192,655
) NET CASH PROVIDED BY (USED IN)
523,288
3,652,641
(1,461,534
) CASH FLOWS FROM FINANCING ACTIVITIES Mortgage loans proceeds received
—
548,567
— Principal payments of mortgage loans payable
(3,556
)
(830
)
(560
) Premiums
703,493
1,008,233
1,186,870 Purchase of Liquidity Units by TIAA
1,058,700
155,600
— Net transfers (to) from TIAA
(546,270
)
(1,912,937
)
153,137 Net transfers to CREF Accounts
(1,207,394
)
(2,519,837
)
832,782 Net transfers to TIAA-CREF Funds
(160,181
)
(207,547
)
(51,612
) Annuity and other periodic payments
(43,805
)
(99,518
)
(95,776
) Withdrawals and death benefits
(321,543
)
(608,389
)
(560,748
) NET CASH (USED IN) PROVIDED BY
(520,556
)
(3,636,658
)
1,464,093 NET INCREASE IN CASH
2,732
15,983
2,559 CASH Beginning of period
22,127
6,144
3,585 End of period
$
24,859
$
22,127
$
6,144 SUPPLEMENTAL DISCLOSURES: Cash paid for interest
$
102,572
$
88,723
$
83,063 Debt assumed in acquisition of properties
$
—
$
—
$
8,922 Debt transferred in sale of property
$
(23,500
)
$
—
$
— See notes to the financial statements. 64
STATEMENTS OF CASH FLOWS
(In thousands)
OPERATING ACTIVITIES
FINANCING ACTIVITIES
TIAA REAL ESTATE ACCOUNT Note 1—Organization and Significant Accounting Policies Business: The TIAA Real Estate Account (“Account”) is a segregated investment account of Teachers Insurance and Annuity Association of America (“TIAA”) and was established by resolution of TIAA’s Board of Trustees (the “Board”) on February 22, 1995, under the insurance laws of the State of New York,
for the purpose of funding variable annuity contracts issued by TIAA. The Account offers individual and group accumulating annuity contracts (with contributions made on a pre-tax or after-tax basis), as well as individual lifetime and term-certain variable payout annuity contracts (including the payment of death
benefits to beneficiaries). Investors are entitled to transfer funds to or from the Account, and make withdrawals from the Account on a daily basis under certain circumstances. Funds invested in the Account for each category of contract are expressed in terms of units, and unit values will fluctuate depending on the
Account’s performance. The investment objective of the Account is a favorable long-term rate of return primarily through rental income and capital appreciation from real estate investments owned by the Account. The Account holds real estate properties directly and through subsidiaries wholly-owned by TIAA for the benefit of the
Account. The Account also holds interests in real estate joint ventures and limited partnerships in which the Account does not hold a controlling interest; as such, such interests are not consolidated for financial statement purposes. The Account also invests in mortgage loans receivable collateralized by commercial
real estate properties. The Account also invests in publicly-traded securities and other instruments to maintain adequate liquidity levels for operating expenses, capital expenditures and to fund benefit payments (withdrawals, transfers and related transactions). The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America which may require the use of estimates made by management. Actual results may vary from those estimates and such differences may be material. The following is a summary of the
significant accounting policies of the Account. Basis of Presentation: The accompanying financial statements include the Account and those subsidiaries wholly-owned by TIAA for the benefit of the Account. All significant intercompany accounts and transactions between the Account and such subsidiaries have been eliminated. Accounting for Investments at Fair Value: The Financial Accounting Standards Board (“FASB”) has provided authoritative guidance for fair value measurements and disclosures. Additionally, the guidance defines fair value, establishes a framework for measuring fair value under generally accepted accounting
principles in the United States, and requires certain disclosures about fair value measurements. This guidance indicates, among other things, that a fair value measurement under an exit price model assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or
liability or, in the absence of a principal market, the most advantageous market for the asset or liability. This guidance also permits entities to elect to measure financial instruments and certain financial assets and liabilities at fair value and expand the use of fair value measurements when warranted. The Account reports all investments and mortgage loans payable at fair value. Valuation Hierarchy: The Account groups financial assets and certain financial liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, if any, and the observability of the assumptions used to determine fair value. These levels are: Level 1—Valuations using unadjusted quoted prices for assets traded in active markets, such as stocks listed on the New York Stock Exchange. Active markets are defined as having the following characteristics for the measured asset or liability: (i) many transactions, (ii) current prices, (iii) price quotes not varying
substantially among market makers, (iv) narrow bid/ask spreads and (v) most information regarding the issuer is publicly available. Level 1 assets, which may be held by the Account from time to time, include real estate related marketable securities (such as publicly traded REIT stocks). Level 2—Valuations for assets and liabilities traded in less active, dealer or broker markets. Fair values are primarily obtained from third party pricing services for identical or comparable assets or liabilities. Level 2 65
NOTES TO THE FINANCIAL STATEMENTS
inputs for fair value measurements are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: a. Quoted prices for similar assets or liabilities in active markets; b. Quoted prices for identical or similar assets or liabilities in markets that are not active (that is, markets in which there are few transactions for the asset (or liability), the prices are not current, price quotations vary substantially either over time or among market makers (for example, some brokered
markets), or in which little information is released publicly); c. Inputs other than quoted prices that are observable within the market for the asset (or liability) (for example, interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks, and default rates that are observable at commonly quoted intervals); and d. Inputs that are derived principally from or corroborated by observable market data by correlation or other means (for example, market-corroborated inputs). Examples of securities which may be held by the Account and included in Level 2 include Certificates of Deposit, Commercial Paper, Government Agency Notes and Variable Notes. Level 3—Valuations for assets and liabilities that are derived from other valuation methodologies, including pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and
projections that are not observable in the market, and require significant professional judgment in determining the fair value assigned to such assets or liabilities. Examples of Level 3 assets and liabilities which may be held by the Account from time to time include investments in real estate, investments in joint
ventures and limited partnerships, mortgage loans receivable and mortgage loans payable. An investment’s categorization within the valuation hierarchy described above is based upon the lowest level of input that is significant to the fair value measurement. The Account’s investments and mortgage loans payable are stated at fair value. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon vendor-provided, evaluated prices or internally-developed models that primarily use market-based or
independently-sourced market data, including interest rate yield curves, market spreads, and currency rates. Valuation adjustments will be made to reflect changes in credit quality, counterparty’s creditworthiness, the Account’s creditworthiness, liquidity, and other observable and unobservable inputs that are
applied consistently over time. The methods described above are considered to produce fair values that represent a good faith estimate of what an unaffiliated buyer in the marketplace would pay to purchase the asset or would receive to transfer the liability. Since fair value calculations involve significant professional judgment in the application
of both observable and unobservable attributes, actual realizable values or future fair values may differ from amounts reported. Furthermore, while the Account believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments, while reasonable, could result in different estimates of fair value at the reporting date. As discussed below in more detail, as the Account generally obtains independent external appraisals on a quarterly basis, there may be circumstances in the interim in
which the true realizable value of a property is not reflected in the Account’s daily net asset value calculation or in the Account’s periodic financial statements. This disparity may be more apparent when the commercial and/or residential real estate markets experience an overall and possibly dramatic decline (or
increase) in property values in a relatively short period of time between appraisals. The following is a description of the valuation methodologies used for investments measured at fair value. Valuation of Real Estate Properties: Investments in real estate properties are stated at fair value, as determined in accordance with policies and procedures reviewed by the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. Accordingly, the Account does not
record depreciation. The Account’s real estate properties are generally classified within Level 3 of the valuation hierarchy. Fair value for real estate properties is defined as the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date.
Determination of fair value involves judgment because the actual market value of real estate can be determined only by 66
negotiation between the parties in a sales transaction. The Account’s primary objective when valuing its real estate investments will be to produce a valuation that represents a fair and accurate estimate of the fair value of its investments. Implicit in the Account’s definition of fair value is the consummation of a sale
as of a specified date and the passing of title from seller to buyer under conditions whereby:
•
Buyer and seller are typically motivated; • Both parties are well informed or well advised, and acting in what they consider their best interests; • A reasonable time is allowed for exposure in the open market; • Payment is made in terms of cash or in terms of financial arrangements comparable thereto; and • The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates, and interest and inflation rates. As a result, determining real estate and investment values involves many assumptions. Key inputs and assumptions include rental income and expense
amounts, related rental income and expense growth rates, discount rates and capitalization rates. Valuation techniques include discounted cash flow analysis, prevailing market capitalization rates or multiples applied to earnings from the property, analysis of recent comparable sales transactions, actual sale
negotiations and bona fide purchase offers received from third parties. Amounts ultimately realized from each investment may vary significantly from the market value presented. Actual results could differ significantly from those estimates. Real estate properties owned by the Account are initially valued based on an independent appraisal at the time of the closing of the purchase, which may result in a potential unrealized gain or loss reflecting the difference between an investment’s fair value (i.e., exit price) and its cost basis (which is inclusive of
transaction costs). Subsequently, each property is appraised each quarter by an independent external appraiser. In general, the Account obtains appraisals of its real estate properties spread out throughout the quarter, which is intended to result in appraisal adjustments, and thus, adjustments to the valuations of its holdings (to the
extent such adjustments are made) that happen regularly throughout each quarter and not on one specific day in each period. Further, management reserves the right to order an appraisal and/or conduct another valuation outside of the normal quarterly process when facts or circumstances at a specific property change. For example, under certain circumstances a valuation adjustment could be made when bids are obtained for properties
held for sale by the Account. In addition, adjustments may be made for events or circumstances indicating an impairment of a tenant’s ability to pay amounts due to the Account under a lease (including due to a bankruptcy filing of that tenant). Also, adjustments may be made to reflect factors (such as sales values
for comparable properties or local employment rate) bearing uniquely on a particular region in which the Account holds properties. TIAA’s internal appraisal staff oversees the entire appraisal process, in conjunction with the Account’s independent fiduciary (the independent fiduciary is more fully described in the
paragraph below). Any differences in the conclusions of TIAA’s internal appraisal staff and the independent appraiser will be reviewed by the independent fiduciary, which will make a final determination on the matter (which may include ordering a subsequent independent appraisal). An independent fiduciary, Real Estate Research Corporation, has been appointed by a special subcommittee of the Investment Committee of the Board to, among other things, oversee the appraisal process. The independent fiduciary must approve all independent appraisers used by the Account. All appraisals are
performed in accordance with Uniform Standards of Professional Appraisal Practices (“USPAP”), the real estate appraisal industry standards created by The Appraisal Foundation. Real estate appraisals are estimates of property values based on a professional’s opinion. Appraisals of properties held outside of the
U.S. are performed in accordance with industry standards commonly applied in the applicable jurisdiction. These independent appraisers are always expected to be MAI-designated members of the Appraisal Institute (or its European equivalent, RICS) and state certified appraisers from national or regional firms
with relevant property type experience and market knowledge. 67
Also, the independent fiduciary can require additional appraisals if factors or events have occurred that could materially change a property’s value and such change is not reflected in the quarterly valuation review, or otherwise to ensure that the Account is valued appropriately. The independent fiduciary must also
approve any valuation change of real estate related assets where a property’s value changed by more than 6% from the most recent independent annual appraisal, or if the value of the Account would change by more than 4% within any calendar quarter or more than 2% since the prior calendar month. When a real
estate property is subject to a mortgage, the property is valued independently of the mortgage and the property and mortgage fair values are reported separately (see—“Valuation of Mortgage Loans Payable” below). The independent fiduciary reviews and approves all mortgage valuation adjustments before such
adjustments are recorded by the Account. The Account continues to use the revised value for each real estate property and mortgage loan payable to calculate the Account’s daily net asset value until the next valuation review or appraisal. Valuation of Real Estate Joint Ventures: Real estate joint ventures are stated at the fair value of the Account’s ownership interests of the underlying entities. The Account’s ownership interests are valued based on the fair value of the underlying real estate, any related mortgage loans payable, and other factors,
such as ownership percentage, ownership rights, buy/sell agreements, distribution provisions and capital call obligations. Upon the disposition of all real estate investments by an investee entity, the Account will continue to state its equity in the remaining net assets of the investee entity during the wind down period,
if any, which occurs prior to the dissolution of the investee entity. The Account’s real estate joint ventures are generally classified within level 3 of the valuation hierarchy. Valuation of Real Estate Limited Partnerships: Limited partnership interests are stated at the fair value of the Account’s ownership in the partnership which is based on the most recent net asset value of the partnership, as reported by the sponsor. Since market quotations are not readily available, the limited
partnership interests are valued at fair value as determined in good faith under the direction of the Investment Committee of the Board and in accordance with the responsibilities of the Board as a whole. These investments are generally classified within level 3 of the valuation hierarchy. Valuation of Marketable Securities: Equity securities listed or traded on any national market or exchange are valued at the last sale price as of the close of the principal securities market or exchange on which such securities are traded or, if there is no sale, at the mean of the last bid and asked prices on such market
or exchange, exclusive of transaction costs. Such marketable securities are generally classified within level 1 of the valuation hierarchy. Debt securities, other than money market instruments, are generally valued at the most recent bid price or the equivalent quoted yield for such securities (or those of comparable maturity, quality and type). Money market instruments, with maturities of one year or less, are valued in the same manner as debt
securities or derived from a pricing matrix. Debt securities are generally classified within level 2 of the valuation hierarchy. Equity and fixed income securities traded on a foreign exchange or in foreign markets are valued using their closing values under the valuation methods generally accepted in the country where traded, as of the valuation date. This value is converted to U.S. dollars at the exchange rate in effect on the valuation day.
Under certain circumstances (for example, if there are significant movements in the United States markets and there is an expectation the securities traded on foreign markets will adjust based on such movements when the foreign markets open the next day), the Account may adjust the value of equity or fixed
income securities that trade on a foreign exchange or market after the foreign exchange or market has closed. Equity securities traded on a foreign exchange or in foreign markets are generally classified within level 1 of the valuation hierarchy. Fixed income securities traded on a foreign exchange or in foreign
markets are generally classified within level 2 of the valuation hierarchy. Equity and fixed income securities traded in foreign markets that are adjusted based upon significant movements in the United States markets are generally classified within level 2 of the valuation hierarchy. Valuation of Mortgage Loan Receivable: Mortgage loans receivable are stated at fair value and are initially valued at the face amount of the mortgage loan funding. Subsequently, mortgage loans receivable are valued at least quarterly based on market factors, such as market interest rates and spreads for
comparable loans, the liquidity for mortgage loans of similar characteristics, the performance of the underlying collateral and the credit quality of the counterparty. The Account’s mortgage loan receivable is classified within level 3 of the valuation hierarchy. 68
Valuation of Mortgage Loans Payable: Mortgage loans payable are stated at fair value. The estimated fair value of mortgage loans payable is based on the amount at which the liability could be transferred to a third party exclusive of transaction costs. Mortgage loans payable are valued at least quarterly based on
market factors, such as market interest rates and spreads for comparable loans, the performance of the underlying collateral (such as the loan-to-value ratio and the cash flow of the underlying collateral), the liquidity for mortgage loans of similar characteristics, the maturity date of the loan, the return demands of
the market, and the credit quality of the Account. The Account’s mortgage loans payable are generally classified within level 3 of the valuation hierarchy. Interest expense for mortgage loans payable is recorded on the accrual basis taking into account the outstanding principal and contractual interest rates. Foreign currency transactions and translation: Portfolio investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of securities, income receipts and expense payments made in foreign
currencies are translated into U.S. dollars at the exchange rates prevailing on the respective dates of the transactions. The effect of any changes in foreign currency exchange rates on portfolio investments and mortgage loans payable is included in net realized and unrealized gains and losses on investments and
mortgage loans payable. Net realized gains and losses on foreign currency transactions include disposition of foreign currencies, and currency gains and losses between the accrual and receipt dates of portfolio investment income and between the trade and settlement dates of portfolio investment transactions and,
when applicable, include maturities of forward foreign currency contracts. Accumulation and Annuity Funds: The Accumulation Fund represents the net assets attributable to participants in the accumulation phase of their investment (“Accumulation Fund”). The Annuity Fund represents the net assets attributable to the participants currently receiving annuity payments (“Annuity
Fund”). The net increase or decrease in net assets from investment operations is apportioned between the accounts based upon their relative daily net asset values. Once an Account participant begins receiving lifetime annuity income benefits, monthly payment levels cannot be reduced as a result of the Account’s
adverse mortality experience. The Account pays a fee to TIAA to assume these mortality and expense risks. In addition, the contracts pursuant to which the Account is offered are required to stipulate the maximum expense charge for all Account level expenses that can be assessed, which is equal to 2.50% of
average net assets per year. Accounting for Investments: Real estate transactions are accounted for as of the date on which the purchase or sale transactions for the real estate properties close (settlement date). The Account recognizes a realized gain on the sale of a real estate property to the extent that the contract sales price exceeds the
cost-to-date of the property being sold. A realized loss occurs when the cost-to-date exceeds the sales price. Any accumulated unrealized gains and losses are reversed in the calculation of realized gains and losses. Rent from real estate properties consists of all amounts earned under tenant operating leases, including base rent, recoveries of real estate taxes and other expenses and charges for miscellaneous services provided to tenants. Rental income is recognized in accordance with the billing terms of the lease agreements.
The Account bears the direct expenses of the real estate properties owned. These expenses include, but are not limited to, fees to local property management companies, property taxes, utilities, maintenance, repairs, insurance, and other operating and administrative costs. An estimate of the net operating income
earned from each real estate property is accrued by the Account on a daily basis and such estimates are adjusted when actual operating results are determined. The Account has limited ownership interests in various private real estate funds (limited partnerships and one limited liability corporation) and a private real estate investment trust (collectively, the “limited partnerships”). The Account records its contributions as increases to the investments, and distributions from
the investments are treated as either income or return of capital, as determined by the management of the limited partnerships. Unrealized gains and losses are calculated based upon the net asset value of the limited partnership and recorded when the financial statements of the limited partnerships are received by
the Account; however as circumstances warrant, prior to the receipt of financial statements of the limited partnership, the Account will estimate the value of its interests in good faith and will from time to time seek input from the issuer or the sponsor of the investment vehicle. Changes in value based on such
estimates are recorded by the Account as unrealized gains and losses. 69
Income from real estate joint ventures is recorded based on the Account’s proportional interest of the income distributed by the joint venture. Income earned by the joint venture, but not yet distributed to the Account by the joint venture investment, is recorded as unrealized gains and losses on real estate joint
ventures. Transactions in marketable securities are accounted for as of the date the securities are purchased or sold (trade date). Interest income is recorded as earned. Dividend income is recorded on the ex-dividend date or as soon as the Account is informed of the dividend. Realized gains and losses on securities
transactions are accounted for on the specific identification method. The Account’s net assets as of the close of each valuation day are valued by taking the sum of:
•
the value of the Account’s cash, cash equivalents, and investments in short-term and other debt instruments; • the value of the Account’s other securities and other non real estate assets; • the value of the individual real properties (based on the most recent valuation of that property) and other real estate-related investments owned by the Account; • an estimate of the net operating income accrued by the Account from its properties, other real estate-related investments and non real estate-related investments (including short-term marketable securities); and • actual net operating income received from the Account’s properties, other real estate-related investments and non real estate-related investments (only to the extent any such item of income differs from the estimated income accrued for on such investments). and then reducing the sum by the Account’s liabilities, including the daily investment management fee and certain other expenses attributable to operating the Account. After the end of every quarter, the Account reconciles the amount of expenses deducted from the Account (which is established in order to approximate the costs that the Account will incur) with the expenses the Account actually incurred. If there is a difference, the Account adds it to or deducts it from the
Account in equal daily installments over the remaining days of the following quarter. Material differences may be repaid in the current calendar quarter. The Account’s at-cost deductions are based on projections of Account assets and overall expenses, and the size of any adjusting payments will be directly affected
by the difference between management’s projections and the Account’s actual assets or expenses. Cash: The Account maintains cash balances in bank deposit accounts which, at times, exceed federally insured limits. The Account’s management monitors these balances to mitigate the exposure of risk due to concentration and has not experienced any losses from such concentration. Federal Income Taxes: Based on provisions of the Internal Revenue Code, Section 817, the Account is taxed as a segregated asset account of TIAA and as such, the Account should incur no material federal income tax attributable to the net investment activity of the Account. Management has concluded that the
Account does not have any uncertain tax positions as of December 31, 2009. Due to/from Investment Advisor: Due to/from investment advisor represents amounts that were paid or received by TIAA on behalf of the Account. Amounts generally are paid or received by the Account within one or two business days and no interest is charged on these amounts. Reclassifications: Certain prior period amounts have been reclassified to conform to the current presentation. These reclassifications did not affect the total assets, total net assets or net increase in net assets previously reported. Note 2—Management Agreements and Arrangements Investment advisory services for the Account are provided by TIAA employees, under the direction of the Board and its Investment Committee, pursuant to investment management procedures adopted by TIAA for the Account. TIAA’s investment management decisions for the Account are subject to review by
the Account’s independent fiduciary. TIAA also provides all portfolio accounting and related services for the Account. 70
Effective January 1, 2008, the Account entered into the Distribution Agreement for the Contracts Funded by the TIAA Real Estate Account (the “Distribution Agreement”), dated January 1, 2008, by and among TIAA, for itself and on behalf of the Account, and TIAA-CREF Individual and Institutional Services,
LLC (“Services”), a wholly- owned subsidiary of TIAA, a registered broker-dealer and a member of the Financial Industry Regulatory Authority. Pursuant to the Distribution Agreement, Services performs distribution services for the Account which include, among other things, (i) distribution of annuity contracts
issued by TIAA and funded by the Account, (ii) advising existing annuity contract owners in connection with their accumulations and (iii) helping employers implement and manage retirement plans. The Distribution Agreement is terminable by either party upon 60 days written notice and terminates automatically
upon any assignment thereof. Also effective January 1, 2008, TIAA performs administrative functions for the Account, which include, among other things, (i) computing the Account’s daily unit value, (ii) maintaining accounting records and performing accounting services, (iii) receiving and allocating premiums, (iv) calculating and making
annuity payments, (v) processing withdrawal requests, (vi) providing regulatory compliance and reporting services, (vii) maintaining the Account’s records of contract ownership and (viii) otherwise assisting generally in all aspects of the Account’s operations. TIAA and Services provide their services at cost. TIAA and Services receive payments from the Account on a daily basis according to formulas established each year and adjusted periodically with the objective of keeping the payments as close as possible to the Account’s expenses actually incurred. Any
differences between actual expenses and the amounts paid by the Account are adjusted quarterly. TIAA also provides a liquidity guarantee to the Account, for a fee, to ensure that sufficient funds are available to meet participant transfer and cash withdrawal requests in the event that the Account’s cash flows and liquid investments are insufficient to fund such requests. TIAA ensures sufficient funds are
available for such transfer and withdrawal requests by purchasing accumulation units of the Account. See Note 3—Related Party Transactions below. To the extent TIAA owns accumulation units issued pursuant to the liquidity guarantee, the independent fiduciary monitors and oversees, among other things, TIAA’s
ownership interest in the Account and may require TIAA to eventually redeem some of its units, particularly when the Account has uninvested cash or liquid investments available. TIAA also receives a fee for assuming certain mortality and expense risks. The expenses for the services noted above that are provided to the Account by TIAA and Services are identified in the accompanying Statements of Operations and are reflected in Note 9—Condensed Financial Information. Note 3—Related Party Transactions Pursuant to its existing liquidity guarantee obligation, as of December 31, 2009, the TIAA General Account owned 4.7 million accumulation units (which are generally referred to as “Liquidity Units”) issued by the Account. Since December 2008 and through December 31, 2009, TIAA has paid an aggregate of $1.2
billion to purchase these Liquidity Units in multiple transactions (approximately $1.1 billion since the beginning of 2009). In accordance with this liquidity guarantee obligation, TIAA guarantees that all participants in the Account may redeem their accumulation units at their accumulation unit value next determined after their transfer or cash withdrawal request is received in good order. Liquidity Units owned by TIAA are valued in
the same manner as accumulation units owned by the Account’s participants. Management believes that TIAA has the ability to meet its obligations under the liquidity guarantee. As discussed in the Account’s prospectus and in accordance with a prohibited transaction exemption from the U.S. Department of Labor (PTE 96-76), the Account’s independent fiduciary, Real Estate Research Corporation, has certain responsibilities with respect to the Account that it has undertaken or is
currently undertaking with respect to TIAA’s purchase of Liquidity Units, including among other things, reviewing the purchase and redemption of Liquidity Units by TIAA to ensure the Account uses the correct unit values. In addition, as set forth in PTE 96-76, the independent fiduciary’s responsibilities include: 71
•
establishing the percentage of total accumulation units that TIAA’s ownership should not exceed (the “trigger point”) and creating a method for changing the trigger point; • approving any adjustment of TIAA’s ownership interest in the Account and, in its discretion, requiring an adjustment if TIAA’s ownership of Liquidity Units reaches the trigger point; and • once the trigger point has been reached, participating in any program to reduce TIAA’s ownership in the Account by utilizing cash flow or liquid investments in the Account, or by utilizing the proceeds from asset sales. The independent fiduciary’s role in participating in any such asset sales program
would include (i) participating in the selection of properties for sale, (ii) providing sales guidelines and (iii) approving those sales if, in the independent fiduciary’s opinion, such sales are desirable to reduce TIAA’s ownership of Liquidity Units. The independent fiduciary, which has the right to adjust the trigger point, has established the trigger point at 45% of the outstanding accumulation units and it will continue to monitor TIAA’s ownership interest in the Account and provide further recommendations as necessary. As of December 31, 2009, TIAA
owned approximately 12.0% of the outstanding accumulation units of the Account. Subsequent to December 31, 2009, pursuant to this liquidity guarantee obligation, TIAA has not made any additional purchases of Liquidity Units. As discussed in Note 2—Management Agreements and Arrangements, TIAA and Services provide services to the Account on an at cost basis. See Note 9—Condensed Financial Information for details of the expense charge and expense ratio. Note 4—Credit Risk Concentrations Concentrations of credit risk arise when a number of properties or tenants are located in a similar geographic region such that the economic conditions of that region could impact tenants’ obligations to meet their contractual obligations or cause the values of individual properties to decline. The Account has no
significant concentrations of tenants as no single tenant has annual contract rent that makes up more than 2% of the Rental Income of the Account. The substantial majority of the Account’s wholly-owned real estate investments and investments in joint ventures are located in the United States. The following table represents the diversification of the Account’s portfolio by region and property type: Diversification by Fair Value(1)
East
West
South
Midwest
Foreign(2)
Total Office
23.5
%
17.3
%
12.3
%
1.2
%
2.7
%
57.0
% Apartment
2.4
%
5.5
%
5.3
%
0.0
%
0.0
%
13.2
% Industrial
1.4
%
6.4
%
4.2
%
1.4
%
0.0
%
13.4
% Retail
3.4
%
0.9
%
8.7
%
0.4
%
2.3
%
15.7
% Storage Facilities
0.2
%
0.2
%
0.2
%
0.1
%
0.0
%
0.7
% Total
30.9
%
30.3
%
30.7
%
3.1
%
5.0
%
100.0
%
(1)
Fair values for wholly-owned properties are reflected gross of any debt, whereas fair values for joint venture investments are reflected net of any debt. (2) Represents real estate investments in the United Kingdom and France. Properties in the “East” region are located in: CT, DC, DE, KY, MA, MD, ME, NC, NH, NJ, NY, PA, RI, SC, VA, VT, WV Properties in the “West” region are located in: AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY Properties in the “South” region are located in: AL, AR, FL, GA, LA, MS, OK, TN, TX Properties in the “Midwest” region are located in: IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI 72
Note 5—Leases The Account’s real estate properties are leased to tenants under operating lease agreements which expire on various dates through 2058. Aggregate minimum annual rentals for the properties owned, excluding short-term residential and storage facility leases, are as follows (in thousands):
Years Ending 2010
$
883,503 2011
769,113 2012
664,623 2013
547,659 2014
446,682 Thereafter
1,312,602 Total
$
4,624,182 Certain leases provide for additional rental amounts based upon the recovery of actual operating expenses in excess of specified base amounts. Note 6—Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables show the major categories of assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and December 31, 2008, using unadjusted quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant
unobservable inputs (Level 3) (in thousands): Description
Level 1:
Level 2:
Level 3:
Total at Real estate properties
$
—
$
—
$
7,437,344
$
7,437,344 Real estate joint ventures and limited partnerships
—
—
1,514,876
1,514,876 Marketable securities
—
671,267
—
671,267 Mortgage loan receivable
—
—
71,273
71,273 Total Investments at December 31, 2009
$
—
$
671,267
$
9,023,493
$
9,694,760 Mortgage loans payable
$
—
$
—
$
(1,858,110
)
$
(1,858,110
) Description
Level 1:
Level 2:
Level 3:
Total at Real estate properties
$
—
$
—
$
10,305,040
$
10,305,040 Real estate joint ventures and limited partnerships
—
—
2,463,196
2,463,196 Marketable securities
—
511,711
—
511,711 Mortgage loan receivable
—
—
71,767
71,767 Total Investments at December 31, 2008
$
—
$
511,711
$
12,840,003
$
13,351,714 Mortgage loans payable
$
—
$
—
$
(1,830,040
)
$
(1,830,040
) 73
December 31,
Quoted
Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
December 31,
2009
Quoted
Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
December 31,
2008
The following tables show the reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during years ended December 31, 2009 and December 31, 2008 (in thousands):
Real Estate
Real Estate
Mortgage
Total
Mortgage For the year ended Beginning balance January 1, 2009
$
10,305,040
$
2,463,196
$
71,767
$
12,840,003
$
(1,830,040
) Total realized and unrealized gains (losses) included in changes in net assets
(2,526,729
)
(1,030,179
)
(494
)
(3,557,402
)
(55,126
) Purchases, issuances, and settlements(1)
(340,967
)
81,859
—
(259,108
)
27,056 Ending balance December 31, 2009
$
7,437,344
$
1,514,876
$
71,273
$
9,023,493
$
(1,858,110
) For the year ended Beginning balance January 1, 2008
$
11,983,715
$
3,158,870
$
72,520
$
15,215,105
$
(1,392,093
) Total realized and unrealized gains (losses) included in changes in net assets
(1,924,026
)
(702,814
)
(753
)
(2,627,593
)
109,791 Purchases, issuances, and settlements(1)
245,351
7,140
—
252,491
(547,738
) Ending balance December 31, 2008
$
10,305,040
$
2,463,196
$
71,767
$
12,840,003
$
(1,830,040
)
(1)
This line includes the net of contributions, distributions, and accrued operating income for real estate joint ventures and limited partnerships as well as principal payments on mortgage loans payable.
The amount of total gains (losses) included in changes in net assets attributable to the change in unrealized gains (losses) relating to investments and mortgage loans payable using significant unobservable inputs still held as of the reporting date is as follows (in thousands):
Real Estate
Real Estate
Mortgage
Total
Mortgage For the year ended
$
(2,520,545
)
$
(1,030,179
)
$
(494
)
$
(3,551,218
)
$
(54,881
) For the year ended
$
(1,921,932
)
$
(702,797
)
$
(753
)
$
(2,625,482
)
$
109,791 Note 7—Investments in Joint Ventures and Limited Partnerships The Account owns interests in several real estate properties through joint ventures and receives distributions and allocations of profits and losses from the joint ventures based on the Account’s ownership interest percentages. Several of these joint ventures have mortgage loans payable on the properties owned. At
December 31, 2009, the Account held 12 investments in joint ventures with non-controlling ownership interest percentages that ranged from 50% to 85%. Certain joint ventures and limited partnerships are subject to adjusted distribution percentages when earnings in the investment reach a pre-determined
threshold. The Account’s equity in the joint ventures at December 31, 2009 and December 31, 2008 was $1.3 billion and $2.2 billion, respectively. The Account’s most significant joint venture investment is the DDR TC LLC joint venture, which is the third largest investment in the Account as of December 31, 2009. The Account’s share of the mortgage loans payable within the joint venture investments at fair value was approximately $1.8 and $1.9 billion at December 31, 2009 and December 31, 2008, respectively. The 74
Properties
Joint Ventures
and Limited
Partnerships
Loan
Receivable
Level 3
Investments
Loans
Payable
December 31, 2009:
December 31, 2008:
Properties
Joint Ventures
and Limited
Partnerships
Loan
Receivable
Level 3
Investments
Loans
Payable
December 31, 2009
December 31, 2008
Account’s share in the outstanding principal of the mortgage loans payable on joint ventures was approximately $2.0 billion at December 31, 2009 and December 31, 2008. A condensed summary of the financial position and results of operations of the joint ventures is shown below (in thousands).
December 31, 2009
December 31, 2008 Assets Real estate properties, at fair value
$
4,618,202
$
5,947,028 Other assets
89,569
95,411 Total assets
$
4,707,771
$
6,042,439 Liabilities and Equity Mortgage loans payable, at fair value
$
2,526,666
$
2,571,843 Other liabilities
52,639
58,378 Total liabilities
2,579,305
2,630,221 Equity
2,128,466
3,412,218 Total liabilities and equity
$
4,707,771
$
6,042,439
Years Ended December 31,
2009
2008
2007 Operating Revenues and Expenses Revenues
$
519,239
$
562,031
$
534,469 Expenses
317,428
333,700
315,077 Excess of revenues over expenses
$
201,811
$
228,331
$
219,392 Principal payment schedule on mortgage loans payable at joint ventures as of December 31, 2009 is as follows (in thousands):
Amount 2010
$
540,054 2011
119,905 2012
721,565 2013
90,578 2014
2,280 Thereafter
1,225,217 Total maturities
$
2,699,599 In February 2010, a loan in the principal amount of $21.5 million with respect to one of the Account’s joint venture properties that was scheduled to mature in 2010 was paid off by the joint venture with proceeds from a line of credit. Also, in February 2010, the maturity date of a loan in the principal amount of
$168.3 million with respect to one of the Account’s joint venture properties was extended from 2010 to 2011. In March 2010, the DDR TC joint venture sold 16 properties for $424.3 million and $386.4 million of debt was assumed by the purchaser, resulting in a net purchase price of $37.9 million. The sale resulted in a realized loss of $179.7 million (resulting in a $152.7 million realized loss to the Account). Management of the Account monitors the financial position of the Account’s joint venture partners. To the extent that management of the Account determines that a joint venture partner has financial or liquidity concerns, management will evaluate all actions and remedies available to the Account under the
applicable joint venture agreement to minimize any potential adverse implications to the Account. The Account invests in limited partnerships that own real estate properties and other real estate related assets and receives distributions from the limited partnerships based on the Account’s ownership interest percentages. At December 31, 2009, the Account held five limited partnership investments and one
private real estate equity investment trust (all of which featured non-controlling ownership interests) with ownership interest percentages that ranged from 5.27% to 18.46%. The Account’s ownership interest in limited partnerships was $200.3 million and $286.5 million at December 31, 2009 and December 31, 2008,
respectively. 75
Note 8—Mortgage Loans Payable At December 31, 2009, the Account had outstanding mortgage loans payable secured by the following properties (in thousands):
Property
Interest Rate and
Principal
Maturity 701 Brickell(1)
2.23% paid monthly(6)
$
126,000
October 1, 2010 Four Oaks Place(2)
2.23% paid monthly(6)
200,000
October 1, 2010 Ontario Industrial Portfolio(3)
7.42% paid monthly
8,469
May 1, 2011 1 & 7 Westferry Circus(4)
5.40% paid quarterly
216,754
November 15, 2012 Reserve at Sugarloaf(3)
5.49% paid monthly
25,145
June 1, 2013 South Frisco Village
5.85% paid monthly
26,251
June 1, 2013 Fourth & Madison
6.40% paid monthly
145,000
August 21, 2013 1001 Pennsylvania Avenue
6.40% paid monthly
210,000
August 21, 2013 50 Fremont
6.40% paid monthly
135,000
August 21, 2013 Pacific Plaza(3)
5.55% paid monthly
8,579
September 1, 2013 Wilshire Rodeo Plaza
5.28% paid monthly
112,700
April 11, 2014 1401 H Street
5.97% paid monthly
115,000
December 7, 2014 The Colorado(3)
5.65% paid monthly
86,719
November 1, 2015 99 High Street
5.52% paid monthly
185,000
November 11, 2015 The Legacy at Westwood(3)
5.95% paid monthly
41,515
December 1, 2015 Regents Court(3)
5.76% paid monthly
35,468
December 1, 2015 The Caruth(3)
5.71% paid monthly
41,490
December 1, 2015 Lincoln Centre
5.51% paid monthly
153,000
February 1, 2016 Publix at Weston Commons
5.08% paid monthly
35,000
January 1, 2036 Total Principal Outstanding
1,907,090 Fair Value Adjustment(7)
(48,980
) Total mortgage loans payable
$
1,858,110
(1)
The Account entered into a debt agreement that included an interest rate cap with its lender to reduce its exposure to the variability of changes in interest rates until maturity of the underlying debt. The interest rate on the entire $126 million mortgage is capped at 6.50%. (2) The Account entered into a debt agreement that included an interest rate cap with its lender to reduce its exposure to the variability of changes in interest rates until maturity of the underlying debt. The interest rate on the entire $200 million mortgage is capped at 6.50%. (3) The mortgage is adjusted monthly for principal payments. (4) The mortgage is denominated in British pounds and the principal payment had been converted to U.S. dollars using the exchange rate as of December 31, 2009. The quarterly payments are interest only, with a balloon payment at maturity. The interest rate is fixed. The cumulative foreign currency translation adjustment (since inception) was an unrealized gain of $16 million. (5) Interest rates are fixed, unless stated otherwise. (6) The interest rate for these mortgages is a variable rate at the one month London Interbank Offered Rate (“LIBOR”) plus 200 basis points and is reset monthly. (7) The fair value adjustment appraises the difference (positive or negative) between the principal amount of outstanding debt and the fair value of outstanding debt. See Note 1 of these financial statements. 76
Payment Frequency(5)
Amounts as of
December 31, 2009
Principal payment schedule on mortgage loans payable as of December 31, 2009 is due as follows (in thousands):
Amount 2010
$
330,842 2011
13,067 2012
221,840 2013
552,853 2014
225,273 Thereafter
563,215 Total maturities
$
1,907,090 Note 9—Condensed Financial Information Selected condensed financial information for an Accumulation Unit of the Account is presented below.
Years Ended December 31,
2009
2008
2007
2006
2005 Per Accumulation Unit data: Rental income
$
22.649
$
18.794
$
17.975
$
16.717
$
15.604 Real estate property level expenses and taxes
11.193
9.190
8.338
7.807
7.026 Real estate income, net
11.456
9.604
9.637
8.910
8.578 Other income
2.778
3.808
4.289
3.931
3.602 Total income
14.234
13.412
13.926
12.841
12.180 Expense charges(1)
2.280
2.937
2.554
1.671
1.415 Investment income, net
11.954
10.475
11.372
11.170
10.765 Net realized and unrealized gain (loss) on investments and mortgage loans payable
(85.848
)
(54.541
)
26.389
22.530
18.744 Net (decrease) increase in Accumulation Unit Value
(73.894
)
(44.066
)
37.761
33.700
29.509 Accumulation Unit Value: Beginning of period
267.348
311.414
273.653
239.953
210.444 End of period
193.454
267.348
311.414
273.653
239.953 Total return
(27.64
)%
(14.15
)%
13.80%
14.04%
14.02% Ratios to Average net Assets: Expenses(1)
1.01%
0.95%
0.87%
0.67%
0.63% Investment income, net
5.29%
3.38%
3.88%
4.49%
4.82% Portfolio turnover rate: Real estate properties
0.75%
0.64%
5.59%
3.62%
6.72% Marketable securities
—
25.67%
13.03%
51.05%
77.63% Accumulation Units outstanding at end of period (in thousands):
39,473
41,542
55,106
50,146
42,623 Net assets end of period (in thousands)
$
7,879,914
$
11,508,924
$
17,660,537
$
14,132,693
$
10,548,711
(1)
Expense charges per Accumulation Unit and the Ratio of Expenses to Average net Assets reflect Account-level expenses and exclude real estate property level expenses which are included in net real estate income. If the real estate property level expense were included, the expense charge per Accumulation Unit for the twelve months ended December 31, 2009 would be $13.473 ($12.127,
$10.892, $9.478, and $8.441, for the years ended December 31, 2008, 2007, 2006 and 2005, respectively), and the Ratio of Expenses to Average Net Assets for the twelve months ended December 31, 2009 would be 5.960% (3.91%, 3.71%, 3.81% and 3.78% for the years ended December 31, 2008, 2007, 2006, and 2005, respectively).
77
Note 10—Accumulation Units Changes in the number of Accumulation Units outstanding were as follows (in thousands):
For The Years Ended,
2009
2008
2007 Outstanding: Beginning of period
41,542
55,106
50,146 Credited for premiums
3,141
3,271
3,795 Credited for Purchase of units by TIAA (see Note 3)
4,139
577
— Net units credited (cancelled) for transfers, net disbursements and amounts applied to the Annuity Fund
(9,349
)
(17,412
)
1,165 End of period
39,473
41,542
55,106 Note 11—Commitments and Subsequent Events As of December 31, 2009, the Account had outstanding commitments to purchase interests in four limited partnerships. As of December 31, 2009, approximately $44.3 million remains to be funded under these commitments, which could be called in full or in part by the limited partnership at any time. The Account is party to various claims and routine litigation arising in the ordinary course of business. Management of the Account does not believe that the results of any such claims or litigation, individually, or in the aggregate, will have a material effect on the Account’s business, financial position, or results of
operations. During the normal course of business, the Account enters into discussions and agreements to purchase or sell real estate properties. Other than the sale of 16 properties within the DDR TC joint venture that are discussed in Note 7, no other properties were sold subsequent to December 31, 2009. Pursuant to the liquidity guarantee obligation, TIAA has made no additional purchases of Liquidity Units subsequent to December 31, 2009. See Note 3—Related Party Transactions for further discussion of these transactions. Note 12—New Accounting Pronouncements In June 2007, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants (“AICPA”) issued a Statement of Position (“SOP”) which clarifies which entities are required to apply the provisions of the Investment Companies Audit and Accounting Guide
(“Guide”) and provides guidance on accounting by parent companies and equity method investors for investments in investment companies. In February 2008, FASB indefinitely delayed the effective date of the SOP to allow time to consider significant issues related to the implementation of the SOP. In February 2009, the Emerging Issues Task Force (“EITF”) added an issue to its agenda related to the application of the Guide, which will be discussed at a future meeting. The FASB staff created a working group to assist the EITF in addressing this issue. Management of the Account will continue to monitor
FASB and EITF developments and will evaluate the financial reporting implications to the Account, as necessary. In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), which amends guidance related to the identification of a variable interest entity, variable interests, the primary beneficiary, and expands required note
disclosures to provide greater transparency to the users of financial statements. In December 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities”, which amended Codification with the guidance
contained in SFAS No. 167. In February 2010, the FASB issued ASU No. 2010-10, “Amendments for Certain Investment Funds”, which defers the applicability of ASU No. 2009-17 in certain instances. These standards are effective on January 1, 2010 and management of the Account has concluded that the
adoption of these standards will not result in a significant impact to the Account’s financial position or results of operations. In August 2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value.” This ASU clarifies the application of certain valuation techniques in circumstances in which a quoted price in an active 78
market for the identical liability is not available and clarifies that inputs to the valuation should not be adjusted when estimating the fair value of a liability in which contractual terms restrict transferability. This ASU became effective on October 1, 2009 and the adoption did not have a significant impact to the
Account’s financial position or results of operations. In September 2009, the FASB issued ASU No. 2009-12, “Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” This ASU permits, as a practical expedient, an investor the ability to estimate the fair value of an investment in certain entities on the basis of the net asset value
per share of the investment (or its equivalent) determined as of the reporting entity’s measurement date. The investee must satisfy specific requirements before the investor is permitted to utilize this practical expedient as a method of valuation. The amendments in this ASU are effective for interim and annual
periods ending after December 15, 2009. The adoption of this ASU did not have a significant impact to the Account’s financial position or results of operations. In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” which requires new disclosures related to the transfer in and out of levels 1 and 2, and the separate disclosure of purchases, sales, issuances and settlements when reconciling activity in level 3. This ASU
also amends prior disclosure requirements to call for the disaggregation of assets and liabilities into appropriate subsets, and the disclosure of valuation techniques and inputs for recurring and nonrecurring fair value measurements in levels 2 and 3. The new disclosure requirement for reconciling level 3 activity is
effective January 1, 2011 and all other new or amended disclosure requirements are effective January 1, 2010 for the Account. These changes will not impact the Account’s financial position or results of operations. In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements”. This ASU amends Topic 855, “Subsequent Events” by not requiring a reporting entity that files financial statements with the Securities and Exchange Commission (“SEC filers”), or a
conduit bond obligor to disclose the date through which subsequent events are evaluated. This ASU is effective for SEC filers upon issuance of the final ASU. The Account has adopted this revision as of December 31, 2009 and accordingly will not disclosure the date through which subsequent events were
evaluated. 79
REAL ESTATE PROPERTIES—76.71% and 77.18%
Location/Description
Type
Fair Value
2009
2008 Alabama: Inverness Center
Office
$
90,315
$
102,891 Arizona: Camelback Center
Office
37,774
58,000 Kierland Apartment Portfolio
Apartments
78,060
146,830 Phoenix Apartment Portfolio
Apartments
21,767
129,244 California: 3 Hutton Centre Drive
Office
28,752
45,710 50 Fremont Street
Office
284,283
(1)
386,600
(1) 88 Kearny Street
Office
61,600
99,815 275 Battery Street
Office
164,390
220,025 980 9th Street and 1010 8th Street
Office
—
151,600 Rancho Cucamonga Industrial Portfolio
Industrial
57,327
102,300 Capitol Place
Office
—
50,000 Centerside I
Office
27,012
46,400 Centre Pointe and Valley View
Industrial
18,929
29,000 Great West Industrial Portfolio
Industrial
65,000
93,600 Larkspur Courts
Apartments
50,111
71,500 Northern CA RA Industrial Portfolio
Industrial
42,437
63,456 Ontario Industrial Portfolio
Industrial
167,998
(1)
278,000
(1) Pacific Plaza
Office
60,075
(1)
104,970
(1) Regents Court
Apartments
50,505
(1)
59,000
(1) Southern CA RA Industrial Portfolio
Industrial
75,817
107,218 The Legacy at Westwood
Apartments
77,836
(1)
89,224
(1) Wellpoint
Office
37,400
46,000 Westcreek
Apartments
23,061
31,500 West Lake North Business Park
Office
32,407
54,425 Westwood Marketplace
Retail
77,077
95,100 Wilshire Rodeo Plaza
Office
151,209
(1)
213,783
(1) Colorado: Palomino Park
Apartments
143,907
173,000 The Lodge at Willow Creek
Apartments
31,624
40,000 The Market at Southpark
Retail
—
29,000 Connecticut: Ten & Twenty Westport Road
Office
126,860
174,400 Florida: 701 Brickell Avenue
Office
198,630
(1)
255,000 4200 West Cypress Street
Office
—
41,568 North 40 Office Complex
Office
33,969
64,398 Plantation Grove
Retail
9,600
11,950 Pointe on Tampa Bay
Office
35,060
49,700 Publix at Weston Commons
Retail
38,100
(1)
50,987
(1) Quiet Waters at Coquina Lakes
Apartments
19,918
21,810 Seneca Industrial Park
Industrial
62,341
101,296 See notes to the financial statements. 80
Location/Description
Type
Fair Value
2009
2008 Florida: (continued) South Florida Apartment Portfolio
Apartments
$
48,366
$
62,155 Suncrest Village Shopping Center
Retail
12,329
15,800 The Fairways of Carolina
Apartments
18,628
20,942 Urban Centre
Office
80,282
113,274 France: Printemps de L’Homme
Retail
200,995
247,621 Georgia: Atlanta Industrial Portfolio
Industrial
39,519
54,001 Glenridge Walk
Apartments
30,326
37,575 Reserve at Sugarloaf
Apartments
37,710
(1)
44,900
(1) Shawnee Ridge Industrial Portfolio
Industrial
52,219
69,000 Windsor at Lenox Park
Apartments
48,223
57,550 Illinois: Chicago Caleast Industrial Portfolio
Industrial
48,304
63,932 Chicago Industrial Portfolio
Industrial
60,908
78,022 Oak Brook Regency Towers
Office
64,265
75,937 Parkview Plaza
Office
44,360
65,846 Maryland: Broadlands Business Park
Industrial
23,600
27,520 GE Appliance East Coast Distribution Facility
Industrial
28,900
40,500 Massachusetts: 99 High Street
Office
253,557
(1)
320,107
(1) Needham Corporate Center
Office
16,196
32,494 Northeast RA Industrial Portfolio
Industrial
24,845
30,794 The Newbry
Office
230,375
315,600 Minnesota: Champlin Marketplace
Retail
13,801
17,101 Nevada: UPS Distribution Facility
Industrial
7,600
12,100 New Jersey: Konica Photo Imaging Headquarters
Industrial
15,100
18,300 Marketfair
Retail
65,594
90,759 Morris Corporate Center III
Office
66,478
94,955 NJ Caleast Industrial Portfolio
Industrial
—
49,000 Plainsboro Plaza
Retail
26,962
33,500 South River Road Industrial
Industrial
28,656
43,872 New York: 780 Third Avenue
Office
240,077
341,000 The Colorado
Apartments
110,144
(1)
153,006
(1) Pennsylvania: Lincoln Woods
Apartments
28,728
32,025 See notes to the financial statements. 81
Location/Description
Type
Fair Value
2009
2008 Tennessee: Airways Distribution Center
Industrial
$
12,600
$
17,400 Summit Distribution Center
Industrial
12,300
22,700 Texas: Dallas Industrial Portfolio
Industrial
125,275
141,328 Four Oaks Plac
Office
409,027
(1)
438,000
(1) Houston Apartment Portfolio
Apartments
179,717
267,468 Lincoln Centre
Office
202,029
(1)
269,000
(1) Park Place on Turtle Creek
Office
—
40,094 Pinnacle Industrial Portfolio
Industrial
34,148
38,733 Preston Sherry Plaza
Office
—
38,400
(1) South Frisco Village
Retail
26,900
(1)
36,300
(1) The Caruth
Apartments
49,641
(1)
61,349
(1) The Maroneal
Apartments
32,179
38,456 United Kingdom: 1 & 7 Westferry Circus
Office
239,036
(1)
232,802
(1) Virginia: 8270 Greensboro Drive
Office
34,200
57,000 Ashford Meadows Apartments
Apartments
71,105
79,319 One Virginia Square
Office
40,503
51,797 The Ellipse at Ballston
Office
65,505
84,018 Washington: Creeksides at Centerpoint
Office
18,724
27,200 Fourth and Madison
Office
295,000
(1)
407,500
(1) Millennium Corporate Park
Office
116,548
162,193 Northwest RA Industrial Portfolio
Industrial
17,800
24,100 Rainier Corporate Park
Industrial
65,277
81,035 Regal Logistics Campus
Industrial
47,955
67,000 Washington DC: 1001 Pennsylvania Avenue
Office
480,622
(1)
550,757
(1) 1401 H Street, NW
Office
143,555
(1)
194,600
(1) 1900 K Street, NW
Office
204,000
245,000 Mazza Gallerie
Retail
65,500
83,003 TOTAL REAL ESTATE PROPERTIES (Cost $9,408,978 and $10,031,744)
7,437,344
10,305,040 See notes to the financial statements. 82
OTHER REAL ESTATE-RELATED INVESTMENTS—15.63% and 18.45% REAL ESTATE JOINT VENTURES—13.56% and 16.30%
Location/Description
Fair Value
2009
2008 California: CA-Colorado Center LP Yahoo Center (50% Account Interest)
$
133,227
(2)
$
239,748
(2) CA-Treat Towers LP Treat Towers (75% Account Interest)
66,435
105,074 Florida: Florida Mall Associates, Ltd The Florida Mall (50% Account Interest)
252,432
(2)
281,941
(2) TREA Florida Retail, LLC Florida Retail Portfolio (80% Account Interest)
162,204
196,202 West Dade Associates Miami International Mall (50% Account Interest)
76,856
(2)
105,312
(2) Georgia: GA-Buckhead LLC Prominence in Buckhead (75% Account Interest)
30,952
78,209 Massachusetts: MA-One Boston Place REIT One Boston Place (50.25% Account Interest)
129,922
212,083 Tennessee: West Town Mall, LLC West Town Mall (50% Account Interest)
37,262
(2)
73,969
(2) Virginia: Teachers REA IV, LLC Tyson’s Executive Plaza II (50% Account Interest)
26,275
36,048 Various: DDR TC LLC DDR Joint Venture (85% Account Interest)
312,182
(2,3)
712,773
(2,3) Storage Portfolio I, LLC Storage Portfolio (75% Account Interest)
46,269
(2,3)
67,621
(2,3) Strategic Ind Portfolio I, LLC IDI Nationwide Industrial Portfolio (60% Account Interest)
40,587
(2,3)
67,731
(2,3) TOTAL REAL ESTATE JOINT VENTURES (Cost $2,142,016 and $2,068,714)
1,314,603
2,176,711 LIMITED PARTNERSHIPS - 2.07% and 2.15% Cobalt Industrial REIT (10.998% Account Interest)
20,341
31,784 Colony Realty Partners LP (5.27% Account Interest)
12,123
29,000 Heitman Value Partners Fund (8.43% Account Interest)
13,736
16,334 Lion Gables Apartment Fund (18.46% Account Interest)
142,999
186,471 MONY/Transwestern Mezz RP II (16.67% Account Interest)
9,267
17,710 Transwestern Mezz Realty Partners III, LLC (11.708% Account Interest)
1,807
5,186 TOTAL LIMITED PARTNERSHIPS (Cost $295,779 and $261,136)
200,273
286,485 TOTAL REAL ESTATE JOINT VENTURES AND LIMITED PARTNERSHIPS (Cost $2,437,795 and $2,329,850)
1,514,876
2,463,196 See notes to the financial statements. 83
TIAA REAL ESTATE ACCOUNT MARKETABLE SECURITIES—6.93% and 3.83%
Principal Issuer
Yield(4)
Maturity
Fair Value
2009
2008
2009
2008
$
—
$
40,000 Bank of Nova Scotia
0.193%
1/2/09
$
—
$
39,999
—
50,000 Abbey National North America LLC
0.071%
1/5/09
—
49,998
—
50,000 Rabobank USA Financial Corp
0.122%
1/5/09
—
49,999
—
50,000 HSBC Finance Corporation
0.304%
1/7/09
—
49,997
—
25,000 Societe Generale North America, Inc.
0.243%
1/13/09
—
24,997
—
22,400 Toyota Motor Credit Corp.
0.406%
1/23/09
—
22,395
—
8,200 Toyota Motor Credit Corp.
0.659%
2/4/09
—
8,196 TOTAL COMMERCIAL PAPER (Cost $0 and $245,585)
—
245,581
GOVERNMENT AGENCY NOTES—4.80% and 1.99%
—
25,000 Fannie Mae Discount Notes
0.030%
1/6/09
—
25,000
—
14,200 Fannie Mae Discount Notes
0.081%
1/30/09
—
14,200
—
33,400 Fannie Mae Discount Notes
0.152%
2/3/09
—
33,400
4,700
— Fannie Mae Discount Notes
0.041%
1/13/10
4,700
—
25,000
— Fannie Mae Discount Notes
0.091%
1/19/10
25,000
—
49,300
— Fannie Mae Discount Notes
0.020%
1/27/10
49,299
—
25,000
— Fannie Mae Discount Notes
0.051%
2/4/10
24,999
—
20,000
— Fannie Mae Discount Notes
0.091%
2/8/10
19,999
—
18,873
— Fannie Mae Discount Notes
0.071%
2/16/10
18,872
—
10,000
— Fannie Mae Discount Notes
0.101%
3/1/10
9,999
—
17,470
— Fannie Mae Discount Notes
0.167%
5/5/10
17,463
—
—
18,100 Federal Home Loan Bank Discount Notes
0.071%
1/5/09
—
18,100
—
50,000 Federal Home Loan Bank Discount Notes
0.041%
1/12/09
—
50,000
—
11,330 Federal Home Loan Bank Discount Notes
0.051%
1/21/09
—
11,330
—
100,000 Federal Home Loan Bank Discount Notes
0.081%
1/22/09
—
100,000
10,990
— Federal Home Loan Bank Discount Notes
0.001%
1/4/10
10,990
—
4,419
— Federal Home Loan Bank Discount Notes
0.041%
1/13/10
4,419
—
44,000
— Federal Home Loan Bank Discount Notes
0.081%
1/15/10
44,000
—
25,300
— Federal Home Loan Bank Discount Notes
0.071%
1/22/10
25,300
—
41,200
— Federal Home Loan Bank Discount Notes
0.051%
2/24/10
41,200
—
15,770
— Federal Home Loan Bank Discount Notes
0.081%
3/5/10
15,770
—
—
14,100 Freddie Mac Discount Notes
0.203%
1/5/09
—
14,100
10,000
— Freddie Mac Discount Notes
0.091%
1/20/10
10,000
—
50,541
— Freddie Mac Discount Notes
0.041-0.076%
1/25/10
50,540
—
11,800
— Freddie Mac Discount Notes
0.051%
2/2/10
11,800
—
47,000
— Freddie Mac Discount Notes
0.030%
2/16/10
46,998
—
19,010
— Freddie Mac Discount Notes
0.132%
2/26/10
19,009
—
5,736
— Freddie Mac Discount Notes
0.081%
3/1/10
5,736
—
9,000
— Freddie Mac Discount Notes
0.071%
3/8/10
8,999
— TOTAL GOVERNMENT AGENCY NOTES (Cost $465,072 and $266,118)
465,092
266,130 See notes to the financial statements. 84
STATEMENT OF INVESTMENTS
December 31, 2009 and December 31, 2008
(Dollar values shown in thousands)
COMMERCIAL PAPER—0.00% and 1.84%
Date
TIAA REAL ESTATE ACCOUNT UNITED STATES TREASURY BILLS—2.13% and 0.00%
Principal Issuer
Yield(4)
Maturity
Fair Value
2009
2008
2009
2008
$
24,515
$
— United States Treasury Bills
0.066-0.152%
2/25/10
$
24,514
$
—
47,200
— United States Treasury Bills
0.137-0.162%
4/22/10
47,189
—
52,530
— United States Treasury Bills
0.122-0.147%
5/13/10
52,506
—
62,015
— United States Treasury Bills
0.127-0.147%
5/20/10
61,981
—
20,000
— United States Treasury Bills
0.137%
5/27/10
19,985
— TOTAL UNITED STATES TREASURY BILLS (Cost $206,163 and $0)
206,175
— TOTAL MARKETABLE SECURITIES (Cost $671,235 and $511,703)
671,267
511,711
MORTGAGE LOAN RECEIVABLE—0.73% and 0.54% Borrower
Current Rate(5)
75,000
75,000 Klingle Corporation
1.040%
7/10/11
71,273
71,767 TOTAL MORTGAGE LOAN RECEIVABLE (Cost $75,000 and $75,000)
71,273
71,767 TOTAL INVESTMENTS (Cost $12,593,008 and $12,948,297)
$
9,694,760
$
13,351,714
(1)
The investment has a mortgage loan payable outstanding, as indicated in Note 8. (2) The market value reflects the Account’s interest in the joint venture and is net of debt. (3) Properties within this investment are located throughout the United States. (4) Yield represents the annualized yield at the date of purchase. (5) Current rate represents the interest rate on this investment at December 31, 2009. At December 31, 2008, the interest rate on this investment was 2.57%. See notes to the financial statements. 85
STATEMENT OF INVESTMENTS
December 31, 2009 and December 31, 2008
(Dollar values shown in thousands)
Date
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Participants of the TIAA Real Estate Account and the Board of Trustees of Teachers Insurance and Annuity Association of America: In our opinion, the
accompanying statements of assets and liabilities, including the statement of
investments, and the related statements of operations, of changes in net assets
and of cash flows, present fairly, in all material respects, the financial
position of the TIAA Real Estate Account (the “Account”) at December
31, 2009 and 2008, the results of its operations, the changes in its net assets
and its cash flows for each of the three years in the period ended December 31,
2009 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Account’s management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. /s/ PricewaterhouseCoopers LLP Charlotte, North Carolina 86
March 18, 2010
ADDITIONAL INFORMATION ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. ITEM 9A. CONTROLS AND PROCEDURES. (a) The registrant maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the registrant’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the registrant’s Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and participation of the registrant’s management, including the registrant’s CEO and CFO, the registrant conducted an evaluation of the effectiveness of the registrant’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of December 31, 2009.
Based upon management’s review, the CEO and the CFO concluded that the registrant’s disclosure controls and procedures were effective as of December 31, 2009. (b) Management’s Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Account. The Account’s internal control over financial reporting is a process designed under the supervision of the
Account’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Account’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Management has made a comprehensive review, evaluation, and assessment of the Account’s internal control over financial reporting as of December 31, 2009. In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on that assessment, management concluded that, as of December 31, 2009, the Account’s internal control over financial reporting is effective. This annual report does not include an attestation report of the registrant’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Registrant’s independent registered public accounting firm pursuant to
temporary rules of the U.S. Securities and Exchange Commission that permit the company to provide only management’s report in this annual report. (c) Changes in internal control over financial reporting. There have been no changes in the registrant’s internal control over financial reporting that occurred during the registrant’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, the registrant’s internal control over
financial reporting. ITEM 9B. OTHER INFORMATION Not applicable. 87
ITEMS 10 AND 11. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE OF THE REGISTRANT; EXECUTIVE COMPENSATION. The Real Estate Account has no officers or directors and no TIAA trustee or executive officer receives compensation from the Account. The Trustees and certain principal executive officers of TIAA as of March 1, 2010, their dates of birth, and their principal occupations during the last five years, are as
follows: Trustees Ronald L. Thompson, 6/17/49 Jeffrey R. Brown, 2/16/68 Robert C. Clark, 2/26/44 Lisa W. Hess, 8/8/55 Edward M. Hundert, M.D., 10/1/56 Lawrence H. Linden, 2/19/47 Maureen O’Hara, 6/13/53 Donald K. Peterson, 8/13/49 Sidney A. Ribeau, 12/3/47 Dorothy K. Robinson, 2/18/51 88
Former Chairman and Chief Executive Officer, Midwest Stamping and Manufacturing Company through 2005. Director, Chrysler Group, LLC and Washington University in St. Louis.
William G. Karnes Professor of Finance and Director of the Center for Business and Public Policy, University of Illinois at Urbana-Champaign. Research Associate of the National Bureau of Economic Research (NBER) and Associate Director of the NBER Retirement Research Center. Former member
of the Social Security Advisory Board from 2006 to 2008, and Director of the Countryside School.
Harvard University Distinguished Service Professor and Austin Wakeman Scott Professor of Law, Harvard Law School, Harvard University; Formerly Dean and Royall Professor of Law, Harvard Law School from 1989 to 2003. Director, of the Hodson Trust, Time Warner, Inc. and Omnicom Group.
Former Chief Investment Officer of Loews Corporation. Founding partner of Zesiger Capital Group. Trustee of the WT Grant Foundation, the Chapin School, and the Pomfret School.
Senior lecturer in Medical Ethics, Harvard Medical School. President, Case Western Reserve University from 2002 to 2006. Formerly, Dean, 2000-2002, University of Rochester School of Medicine and Dentistry, Professor of Medical Humanities and Psychiatry, 1997-2002. Board Member, Rock and Roll
Hall of Fame.
Retired Managing Director and former General Partner at Goldman Sachs, retiring in 2008. After joining Goldman Sachs in 1992, served at various times the Head of Technology, Head of Operations, and Co-Chairman of the Global Control and Compliance Committee. Founding Trustee of the Linden
Trust for Conservation, Chairman of the Board of Trustees of Resources for the Future, Co-Chairman of the Board of Directors of the World Wildlife Fund and co-founder of, and senior advisor to, the Redstone Strategy Group.
R.W. Purcell Professor of Finance at Johnson Graduate School of Management, Cornell University, where she has taught since 1979. Former chair of the board of Investment Technology Group, Inc. since 2007, and member of the board since 2003. Director of New Star Financial, Inc. and Chair of the
FINRA Economic Advisory Board.
Former Chairman and Chief Executive Officer, Avaya Inc. from 2002 to 2006 and President and Chief Executive Officer from 2000-01 Formerly, Executive Vice President and Chief Financial Officer, Lucent Technologies from 1996 to 2000. Chairman, Board of Trustees, Worcester Polytechnic Institute
and overseer of the Tuck School of Business Administration at Dartmouth College. Director, Sanford C. Bernstein Fund Inc. Knewco, Inc. and Emerj Inc.
President, Howard University since 2008. Formerly, President, Bowling Green State University, 1995-2008. Director, The Andersons, Inc., Convergys and Worthington Industries.
Vice President and General Counsel, Yale University since 2000. Trustee, Newark Public Radio Inc., Youth
Rights Media, Inc. Yale Southern Observatory, Inc., Fourth Century and Friends of New Haven Legal Assistance. David L. Shedlarz, 4/17/48 David F. Swensen, 1/26/54 Marta Tienda, 8/10/50 Rosalie J. Wolf, 5/8/41 Officer—Trustees Roger W. Ferguson, Jr., 10/28/51 Other TIAA Executive Officers Georganne C. Proctor, 10/25/56 Scott C. Evans, 5/11/59 Mary (Maliz) E. Beams, 3/29/56 Jorge Gutierrez, 11/26/61 89
Retired Vice Chairman of Pfizer Inc. from 2006 to 2007, Executive Vice President from 1999 to 2005 and Chief Financial Officer of Pfizer from 1995 to 2005. Director, Pitney Bowes Inc., and the Hershey Corporation. Director, Multiple Sclerosis Society of New York City Chapter.
Chief Investment Officer, Yale University since 1985, and adjunct professor of investment strategy at Yale School of Management and lecturer in Yale’s Department of Economics. Member. Brookings Institution and President Obama’s Economic Recovery Advisory Board. Trustee of Yale New Haven
Hospital and Director of the Courtauld Institute, Hopkins School and the Carnegie Institution.
Maurice P. During ‘22 Professor of Demographic Studies and Professor of Sociology in Public Affairs, Princeton University, since 1997. Director, Office of Population Research, Princeton University, 1998-2002. Director, Corporation of Brown University, Sloan Foundation, and Jacobs Foundation.
Managing Partner, Botanica Capital Partners LLC. Formerly, Senior Advisor and Managing Director, Offit Hall Capital Management LLC and its predecessor company, Laurel Management Company LLC from 2001 to 2003; formerly, Treasurer and Chief Investment Officer, The Rockefeller Foundation.
Director, North European Oil Royalty Trust, Director and former Chairman of The Sanford C. Bernstein Fund, Inc. Member of the Brock Capital Group, LLC.
President and Chief Executive Officer of TIAA and CREF since April 2008. Formerly, Chairman of Swiss Re America Holding Corporation and Head of Financial Services and Member of the Executive Committee, Swiss Re from 2006 to 2008; Vice Chairman and member of the Board of the U.S.
Federal Reserve from 1999 to 2006 and a member of its Board of Governors from 1997 to 1999; and Partner and Associate, McKinsey & Company from 1984 to 1997. Currently a member of the Board of Trustees of the Institute for Advance Study, a member of the Council on Foreign Relations, a member of the
Group of Thirty and a member of President Obama’s Economic Recovery Advisory Board.
Executive Vice President and Chief Financial Officer, TIAA and CREF since 2006. Chief Integration Officer, TIAA and CREF since January 2010. Executive Vice President of Finance for Golden West Financial Corporation, the holding company of World Savings Bank, from 2003 through 2005. From
1994 through 2002, served as Senior Vice President, Chief Financial Officer and a member of the board of directors of Bechtel Group, Inc. Director of Redwood Trust, Inc. and Kaiser Aluminum Corporation.
Executive Vice President of TIAA since 1999 and Head of Asset Management since 2006 of TIAA and CREF, the TIAA-CREF Mutual Funds, the TIAA-CREF Institutional Mutual Funds, the TIAA-CREF Life Funds and TIAA Separate Account VA-1 (collectively, the “TIAA-CREF Funds”). Also
served as Chief Investment Officer of TIAA between 2004 and 2006 and the TIAA-CREF Funds between 2003 and 2006.
Executive Vice President of TIAA and the TIAA-CREF Funds since 2007. President and Chief Executive Officer, TIAA-CREF Individual & Institutional Services, LLC since 2007. Senior Managing Director and Head of Wealth Management Group of TIAA since 2004. Partner, Spyglass Investments from
2002 to 2003.
Treasurer, TIAA, since September 2008. Assistant Treasurer, TIAA from 2004 to 2008.
William J. Mostyn III, 1/18/48 Portfolio Management Team Margaret A. Brandwein, 11/26/46 Thomas C. Garbutt, 10/12/58 Philip J. McAndrews, 12/15/58 Audit Committee Financial Expert On August 20, 2003, the Board of Trustees of TIAA determined that Rosalie J. Wolf was qualified and would serve as the audit committee financial expert on TIAA’s audit committee. Ms. Wolf is independent (as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934) and
has not accepted, directly or indirectly, any consulting, advisory or other compensatory fee from TIAA, other than in her capacity as Trustee. Code of Ethics The Board of Trustees of TIAA has a code of ethics for senior financial officers, including its principal executive officer, principal financial officer, principal accounting officer, or controller, and persons performing similar functions, in conformity with rules promulgated under the Sarbanes-Oxley Act of 2002. The
code of ethics is filed as an exhibit to this annual report. During the reporting period, there were no implicit or explicit waivers granted by the Registrant from any provision of the code of ethics. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Not applicable. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The TIAA general account plays a significant role in operating the Real Estate Account, including providing a liquidity guarantee, and investment advisory and other services. In addition, Services, a wholly-owned subsidiary of TIAA, provides administration and distribution services for the Account. Liquidity Guarantee. If the Account’s liquid assets and its cash flow from operating activities and participant transactions are insufficient to fund redemption requests, the TIAA general account has agreed to purchase liquidity units. TIAA thereby guarantees that a participant can redeem accumulation
units at their net asset value next determined. For the year ended December 31, 2009, the Account expensed $12.4 million for this liquidity guarantee from TIAA through a daily deduction from the net assets of the Account. During 2009 and through the date of this annual report, the TIAA general account has
purchased liquidity units in an aggregate amount equal to $1.1 billion in a number of separate transactions. These liquidity units are valued in the same manner as are accumulation units held by the Account’s participants. For more 90
Vice President and Corporate Secretary of TIAA and the TIAA-CREF Funds since April 2008; Deputy General Counsel and Corporate Secretary of Bank of America Corporation from 2005 to 2007; Deputy General Counsel, Secretary and Corporate Governance Officer of The Gillette Company from
1974 to 2005.
Managing Director and Portfolio Manager, TIAA Real Estate Account since 2004. From 2001 to 2004, Head of Commercial Mortgages—West Coast for TIAA.
Managing Director and Head of Global Real Estate Equity Division, TIAA.
Managing Director and Head of Real Estate Portfolio Management, TIAA-CREF Global Real Estate since 2005. Between 2003 and 2005, portfolio manager for the Real Estate Account. Between 1997 and 2003, Head of the Real Estate Acquisitions and Joint Ventures group for TIAA.
information with respect to the significant features of this liquidity guarantee, including the oversight of the independent fiduciary, please see “Liquidity Guarantee” in Item 1 of this annual report. Investment Advisory and Administrative Services/Certain Risks Borne by TIAA. Deductions are made each valuation day from the net assets of the Account for various services required to manage investments, administer the Account and distribute the contracts. These services are performed at cost by
TIAA and Services. Deductions are also made each valuation day to cover mortality and expense risks borne by TIAA. For the year ended December 31, 2009, the Account expensed $42.5 million for investment advisory services and $4.7 million for mortality and expense risks provided/borne by TIAA. For the same period, the Account expensed $35.8 million for administrative and distribution services provided by TIAA and
Services, respectively. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. PricewaterhouseCoopers LLP (“PwC”) performs independent audits of the registrant’s financial statements. To maintain auditor independence and avoid even the appearance of conflicts of interest, the registrant, as a policy, does not engage PwC for management advisory or consulting services. Audit Fees. PwC’s fees for professional services rendered for the audits of the Registrant’s annual financial statements for the years ended December 31, 2009 and 2008 and review of financial statements included in the registrant’s quarterly reports were $862,650 and $849,024, respectively. Audit-Related Fees. PwC audit-related fees for the year ended December 31, 2009 were $72,543. There were no audit-related fees for the year ended December 31,2008. Tax Fees. PwC had no tax fees for the years ended December 31, 2009 and 2008. All Other Fees. Other than as set forth above, there were no additional fees with respect to registrant. Preapproval Policy. In June of 2003, the audit committee of TIAA’s Board of Trustees (“Audit Committee”) adopted a Preapproval Policy for External Audit Firm Services (the “Policy”), which applies to the registrant. The Policy describes the types of services that may be provided by the independent
auditor to the registrant without impairing the auditor’s independence. Under the Policy, the Audit Committee is required to preapprove services to be performed by the registrant’s independent auditor in order to ensure that such services do not impair the auditor’s independence. The Policy requires the Audit Committee to: (i) appoint the independent auditor to perform the financial statement audit for the registrant and certain of its affiliates, including approving the terms of the engagement and (ii) preapprove the audit, audit-related and tax services to be provided by the
independent auditor and the fees to be charged for provision of such services from year to year. 91
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(1)
(A)
Distribution Agreement for the Contracts Funded by the TIAA Real Estate Account, dated as of January 1, 2008, by and among Teachers Insurance and Annuity Association of America, for itself and on behalf of the Account, and TIAA-CREF Individual & Institutional Services, LLC.(5)
(3)
(A)
Charter of TIAA.(8)
(B)
Restated Bylaws of TIAA (as amended).(9)
(4)
(A)
Forms of RA, GRA, GSRA, SRA, IRA Real Estate Account Endorsements(2), Keogh Contract,(3) Retirement Select and Retirement Select Plus Contracts and Endorsements(1) and Retirement Choice and Retirement Choice Plus Contracts.(3)
(B)
Forms of Income-Paying Contracts(2)
(10)
(A)
Independent Fiduciary Agreement, dated February 22, 2006, by and among TIAA, the Registrant, and Real Estate Research Corporation(4)
(B)
Amendment to Independent Fiduciary Agreement, dated December 17, 2008, between TIAA, on behalf of the Registrant, and Real Estate Research Corporation(6)
(C)
Custodian Agreement, dated as of March 3, 2008, by and between TIAA, on behalf of the Registrant, and State Street Bank and Trust Company, N.A.(7)
(14)*
Code of Ethics of TIAA
(31)*
Rule 13a-15(e)/15d-15(e) Certifications
(32)*
Section 1350 Certifications
*
Filed herewith. (1) Previously filed and incorporated herein by reference to the Account’s Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed April 29, 2004 (File No. 333-113602). (2) Previously filed and incorporated herein by reference to the Account’s Post-Effective Amendment No. 2 to the Registration Statement on Form S-1 filed April 30, 1996 (File No. 33-92990). (3) Previously filed and incorporated herein by reference to the Account’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed May 2, 2005 (File No. 333-121493). (4) Previously filed and incorporated herein by reference to Exhibit 10.(a) to the Annual Report on Form 10-K of the Account for the period ended December 31, 2005, filed with the Commission on March 15, 2006 (File No. 33-92990). (5) Previously filed and incorporated herein by reference to the Account’s Current Report on Form 8-K, filed with the Commission on January 7, 2008 (File No. 33-92990). (6) Previously filed and incorporated herein by reference to the Account’s Current Report on Form 8-K, filed with the Commission on December 22, 2008 (File No. 33-92990). (7) Previously filed and incorporated herein by reference to Exhibit 10.(b) to the Annual Report on Form 10-K of the Account for the fiscal year ended December 31, 2007 and filed with the Commission on March 20, 2008 (File No. 33-92990). (8) Previously filed and incorporated by reference to Exhibit 3(A) to the Account’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and filed with the Commission on August 13, 2009 (File No. 33-92990). (9) Previously filed and incorporated by reference to Exhibit 3(B) to the Account’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and filed with the Commission on August 13, 2009 (File No. 33-92990). 92
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant, TIAA Real Estate Account, has duly caused this Annual Report on form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York, on the 18 day of March, 2010.
TIAA REAL ESTATE ACCOUNT
By:
TEACHERS INSURANCE AND
March 18, 2010
By:
/s/ Roger W. Ferguson, Jr.
Roger W. Ferguson, Jr.
President and Chief Executive
Officer and Trustee Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed by the following trustees and officers of Teachers Insurance and Annuity Association of America, in the capacities and on the dates indicated.
Signature
Title
Date
/s/ ROGER W. FERGUSON, JR. President and Chief Executive Officer 3/18/10 /S/ GEORGANNE C. PROCTOR Executive Vice President and Chief Financial 3/18/10 /S/ RONALD L. THOMPSON Chairman of the Board of Trustees 3/18/10 /S/ JEFFREY R. BROWN Trustee 3/18/10 /S/ ROBERT C. CLARK Trustee 3/18/10 /S/ LISA W. HESS Trustee 3/18/10 /S/ EDWARD M. HUNDERT, M.D. Trustee 3/18/10 /S/ LAWRENCE H. LINDEN Trustee 3/18/10 /S/ MAUREEN O’HARA Trustee 3/18/10 /S/ DONALD K. PETERSON Trustee 3/18/10 /S/ SIDNEY A. RIBEAU Trustee 3/18/10 /S/ DOROTHY K. ROBINSON Trustee 3/18/10 /S/ DAVID L. SHEDLARZ Trustee 3/18/10 /S/ DAVID F. SWENSEN Trustee 3/18/10 /S/ MARTA
TIENDA Trustee 3/18/10 /S/ ROSALIE J. WOLF Trustee 3/18/10 93
ANNUITY ASSOCIATION OF AMERICA
(Principal Executive Officer) and Trustee
Officer (Principal Financial and Accounting Officer)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO Because the Registrant has no voting securities, nor its own management or board of directors, no annual report or proxy materials will be sent to contract owners holding interests in the Account. 94
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT