-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
LdOC8pa+j9j7pswooPi201X2YiFHqOdv1RXDhV4hUUkBQjGOq6sc7uqjBc2CWm/C
rMDy78c+BOQ/aZdL2rSvqQ==
UNITED STATES FORM 10-Q (Mark One) S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR £ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 33-92990; 333-158136 TIAA REAL ESTATE ACCOUNT NEW YORK NOT APPLICABLE C/O TEACHERS INSURANCE AND Registrants telephone number, including area code: (212) 490-9000 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 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):
Large accelerated filer £
Accelerated filer £
Non-accelerated filer S
Smaller Reporting Company £
(Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES £ NO S
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended June 30, 2009
FOR THE TRANSITION PERIOD FROM TO
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
ANNUITY ASSOCIATION OF AMERICA
730 THIRD AVENUE
NEW YORK, NEW YORK 10017-3206
(Address of principal executive offices, including zip code)
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. INDEX TO UNAUDITED FINANCIAL STATEMENTS
Page
3
4
5
6
7
22 2
TIAA REAL ESTATE ACCOUNT
JUNE 30, 2009
TIAA REAL ESTATE ACCOUNT
June 30,
December 31,
(Unaudited) ASSETS Investments, at value: Real estate properties
$
8,779,353
$
10,305,040 Real estate joint ventures and limited partnerships
1,762,729
2,463,196 Marketable securities: Other
490,095
511,711 Mortgage loan receivable
68,279
71,767 Total investments
11,100,456
13,351,714 Cash and cash equivalents
18,270
22,127 Due from investment advisor
1,716
Other
184,258
203,113 TOTAL ASSETS
11,304,700
13,576,954 LIABILITIES Mortgage loans payableNote 7
1,843,707
1,830,040 Payable for securities transactions
23
108 Due to investment advisor
9,892 Accrued real estate property level expenses
133,727
203,874 Security deposits held
24,794
24,116 TOTAL LIABILITIES
2,002,251
2,068,030 NET ASSETS Accumulation Fund
9,000,544
11,106,246 Annuity Fund
301,905
402,678 TOTAL NET ASSETS
$
9,302,449
$
11,508,924 NUMBER OF ACCUMULATION UNITS OUTSTANDING
40,801
41,542 NET ASSET VALUE, PER ACCUMULATION UNITNote 8
$
220.60
$
267.35 See notes to the financial statements. 3
STATEMENTS OF ASSETS AND LIABILITIES
(In thousands, except per accumulation unit amounts)
2009
2008
(cost: $10,007,894 and $10,031,744)
(cost: $2,350,351 and $2,329,850)
(cost: $490,067 and $511,703)
(cost: $75,000 and $75,000)
(cost: $12,923,312 and $12,948,297)
(principal outstanding: $1,936,540 and $1,910,121)
Notes 8 and 9
TIAA REAL ESTATE ACCOUNT
For the Three Months
For the Six Months
2009
2008
2009
2008 INVESTMENT INCOME Real estate income, net: Rental income
$
238,699
$
250,966
$
480,489
$
493,807 Real estate property level expenses and taxes: Operating expenses
55,283
64,381
121,379
127,937 Real estate taxes
32,776
33,423
67,953
66,751 Interest expense
26,624
20,942
51,668
41,787 Total real estate property level expenses and taxes
114,683
118,746
241,000
236,475 Real estate income, net
124,016
132,220
239,489
257,332 Income from real estate joint ventures and limited partnerships
30,438
37,733
60,245
68,624 Interest
483
19,728
995
54,179 Dividends
1,238
5,079 TOTAL INVESTMENT INCOME
154,937
190,919
300,729
385,214 ExpensesNote 2: Investment advisory charges
11,153
14,170
21,021
26,602 Administrative and distribution charges
8,851
21,866
21,213
43,927 Mortality and expense risk charges
1,232
2,153
2,606
4,347 Liquidity guarantee charges
3,272
5,166
6,020
12,187 TOTAL EXPENSES
24,508
43,355
50,860
87,063 INVESTMENT INCOME, NET
130,429
147,564
249,869
298,151 REALIZED AND UNREALIZED (LOSS) GAIN ON Net realized (loss) gain on investments: Real estate properties
(8
)
4,480
(16,886
)
4,628 Real estate joint ventures and limited partnerships
(17
) Marketable securities
1
(12,405
)
1
(11,211
) Total realized loss on investments
(7
)
(7,925
)
(16,885
)
(6,600
) Net change in unrealized (depreciation) appreciation on: Real estate properties
(609,089
)
(91,679
)
(1,501,837
)
(48,878
) Real estate joint ventures and limited partnerships
(469,617
)
(49,557
)
(703,083
)
(93,260
) Marketable securities
(10
)
10,413
18
15,202 Mortgage loan receivable
(1,426
)
(1,385
)
(3,488
)
(799
) Mortgage loans payable
(86,010
)
39,064
(15,322
)
4,354 Net change in unrealized depreciation on
(1,166,152
)
(93,144
)
(2,223,712
)
(123,381
) NET REALIZED AND UNREALIZED
(1,166,159
)
(101,069
)
(2,240,597
)
(129,981
) NET (DECREASE) INCREASE IN NET ASSETS
$
(1,035,730
)
$
46,495
$
(1,990,728
)
$
168,170 See notes to the financial statements. 4
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Ended June 30,
Ended June 30,
INVESTMENTS AND MORTGAGE LOANS PAYABLE
investments and mortgage loans payable
LOSS ON INVESTMENTS AND
MORTGAGE LOANS PAYABLE
RESULTING FROM OPERATIONS
TIAA REAL ESTATE ACCOUNT
For the Three Months
For the Six Months
2009
2008
2009
2008 FROM OPERATIONS Investment income, net
$
130,429
$
147,564
$
249,869
$
298,151 Net realized loss on investments
(7
)
(7,925
)
(16,885
)
(6,600
) Net change in unrealized depreciation on investments and mortgage loans payable
(1,166,152
)
(93,144
)
(2,223,712
)
(123,381
) NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
(1,035,730
)
46,495
(1,990,728
)
168,170 FROM PARTICIPANT TRANSACTIONS Premiums
180,227
265,096
369,865
550,135 Purchase of Liquidity Units by TIAA
271,700
1,058,700
Net transfers to TIAA
(102,740
)
(252,196
)
(453,190
)
(376,642
) Net transfers to CREF Accounts
(305,272
)
(233,174
)
(885,626
)
(521,480
) Net transfers to TIAA-CREF Institutional Mutual Funds
(43,236
)
(50,498
)
(96,379
)
(81,349
) Annuity and other periodic payments
(10,429
)
(21,979
)
(25,313
)
(46,929
) Withdrawals and death benefits
(79,325
)
(143,482
)
(183,804
)
(290,845
) NET DECREASE IN NET
(89,075
)
(436,233
)
(215,747
)
(767,110
) NET DECREASE IN NET ASSETS
(1,124,805
)
(389,738
)
(2,206,475
)
(598,940
) NET ASSETS Beginning of period
10,427,254
17,451,335
11,508,924
17,660,537 End of period
$
9,302,449
$
17,061,597
$
9,302,449
$
17,061,597 See notes to the financial statements. 5
STATEMENTS OF CHANGES IN NET ASSETS
(In thousands)
(Unaudited)
Ended June 30,
Ended June 30,
ASSETS RESULTING FROM
PARTICIPANT TRANSACTIONS
TIAA REAL ESTATE ACCOUNT
For the Six Months
2009
2008 CASH FLOWS FROM OPERATING ACTIVITIES Net (decrease) increase in net assets resulting from operations
$
(1,990,728
)
$
168,170 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Purchase of real estate properties
(164,087
) Capital improvements on real estate properties
(69,547
)
(62,165
) Proceeds from sale of real estate properties
28,880
23,421 Purchases of long term investments
(12,012
)
(53,280
) Proceeds from sale of long term investments
480,832 Decrease in other investments
31,032
221,858 Decrease in payable for securities transactions
(85
)
(745
) Change in due (from) to investment advisor
(11,608
)
18,831 Decrease in other assets
18,855
24,445 Decrease in accrued real estate property level expenses
(22,517
)
(12,991
) Increase (decrease) in security deposits held
678
(39
) Net realized loss on total investments
16,885
6,600 Unrealized depreciation on investments and mortgage loans payable
2,223,712
123,381 NET CASH PROVIDED BY OPERATING ACTIVITIES
213,545
774,231 CASH FLOWS FROM FINANCING ACTIVITIES Principal payments of mortgage loans payable
(1,655
)
(363
) Premiums
369,865
550,135 Purchase of Liquidity Units by TIAA
1,058,700
Net transfers (to) from TIAA
(453,190
)
(376,642
) Net transfers (to) from CREF Accounts
(885,626
)
(521,480
) Net transfers to TIAA-CREF Institutional Mutual Funds
(96,379
)
(81,349
) Annuity and other periodic payments
(25,313
)
(46,929
) Withdrawals and death benefits
(183,804
)
(290,845
) NET CASH USED IN FINANCING ACTIVITIES
(217,402
)
(767,473
) NET (DECREASE) INCREASE IN CASH
(3,857
)
6,758 CASH Beginning of period
22,127
6,144 End of period
$
18,270
$
12,902 SUPPLEMENTAL DISCLOSURES: Cash paid for interest
$
51,161
$
41,752 See notes to the financial statements. 6
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Ended June 30,
TIAA REAL ESTATE ACCOUNT Note 1Organization 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 TIAAs 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
Accounts 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 wholly-owned subsidiaries. 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. 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: In September 2006, FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the United States, and requires additional disclosures
about fair value measurements. This Statement does not require any new fair value measurements. This Statement was effective as of January 1, 2008 for the Account. The adoption of Statement No. 157 did not have a material impact on the Accounts financial position or results of operations. In February 2007, FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure financial instruments and certain other items at fair value and expanded the use of fair value measurements when warranted. The Account
adopted Statement No. 159 on January 1, 2008 and reports all existing and plans to report all future mortgage loans payable at fair value. The adoption of Statement No. 159 did not have a material impact on the Accounts financial position or results of operations. Valuation Hierarchy: In accordance with FASB Statement No. 157, Fair Value Measurements, 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 1Valuations 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). 7
NOTES TO THE FINANCIAL STATEMENTS
Level 2Valuations 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 Certificates of Deposit, Commercial Paper, Government Agency Notes and Variable Notes. Level 3Valuations 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 loan receivable and mortgage loans payable. An investments categorization within the valuation hierarchy described above is based upon the lowest level of input that is significant to the fair value measurement. The Accounts 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, a counterpartys creditworthiness, the Accounts creditworthiness, liquidity, and other observable and unobservable data 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 Accounts daily net asset value calculation or in the Accounts 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 Accounts real estate properties are generally classified within Level 3 of the valuation hierarchy. Fair value for real estate properties is defined as the most probable price for which a 8
property will sell in a competitive market under all conditions requisite to a fair sale. 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 Accounts 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 Accounts 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. 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 investments 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 for each real estate property throughout the quarter, which is intended to result in appraisal adjustments (to the extent such adjustments are made) that happen regularly
throughout each quarter and not on one specific day in each period. TIAAs internal appraisal staff oversees the entire appraisal process, in conjunction with the Accounts independent fiduciary (the independent fiduciary is more fully described in the paragraph below). 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. Any differences in the conclusions of TIAAs 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). 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 tenants ability to pay amounts
due to the Account under a lease (including bankruptcy filing of that tenant). 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 professionals 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 propertys 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 propertys 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 9
subject to a mortgage, the mortgage is valued independently of the property and its fair value is 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 Accounts daily net asset value until the next valuation review or appraisal. Valuation of Real Estate Joint Ventures and Limited Partnerships: Real estate joint ventures and certain limited partnerships are stated at the fair value of the Accounts ownership interests of the underlying entities. The Accounts 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 Accounts real estate joint ventures and certain limited partnerships are generally classified within level 3 of the valuation hierarchy. Certain limited partnership interests for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of the Investment Committee of the 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. Valuation of Mortgage Loan Receivable: The mortgage loan receivable is stated at fair value. The mortgage loan receivable is valued at least quarterly based on market factors, such as market interest rates and spreads for comparable loans, the performance of the underlying collateral, and the credit quality of the
counterparty. The Accounts 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 maturity date of the loan, the return demands of the market, and the credit quality of the Account. The
Accounts 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. 10
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 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 Accounts
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 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 Accounts 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 Accounts assets as of the close of each valuation day are valued by taking the sum of:
the value of the Accounts cash, cash equivalents, and short-term and other debt instruments;
11
the value of the Accounts other securities and other 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 Accounts 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 Accounts 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 Accounts 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 managements projections and the Accounts actual assets or expenses. Cash: The Account maintains cash in bank deposit accounts which, at times, exceeds federally insured limits. The Accounts 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. 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 2Management 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. TIAAs investment management decisions for the Account are subject to review by
the Accounts independent fiduciary. TIAA also provides all portfolio accounting and related services for the Account. 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. Also effective January 1, 2008, TIAA performs administrative functions for the Account, which include, among
other things, (i) computing the Accounts 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 Accounts records of contract ownership and (viii) otherwise assisting generally in all aspects of the 12
Accounts operations. Both distribution services (pursuant to the Distribution Agreement) and administrative services are provided to the Account by Services and TIAA, as applicable, on an at cost basis. The Distribution Agreement is terminable by either party upon 60 days written notice and terminates automatically upon any assignment thereof. 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 Accounts 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 Accounts 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 3Related 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, TIAAs 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 8Condensed Financial Information. Note 3Related Party Transactions Pursuant to its existing liquidity guarantee obligation, as of June 30, 2009, the TIAA General Account owned 4.7 million accumulation units (which are generally referred to as Liquidity Units) issued by the Account. TIAA has paid an aggregate of $1.2 billion to purchase these Liquidity Units through June 30,
2009 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 Accounts participants. Management believes that TIAA has the ability to meet its obligations under the liquidity guarantee. As discussed in the Accounts prospectus and in accordance with a prohibited transaction exemption from the U.S. Department of Labor (PTE 96-76), the Accounts 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 TIAAs 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 fiduciarys responsibilities include:
establishing the percentage of total accumulation units that TIAAs ownership should not exceed (the trigger point) and creating a method for changing the trigger point; approving any adjustment of TIAAs ownership interest in the Account and, in its discretion, requiring an adjustment if TIAAs ownership of Liquidity Units reaches the trigger point; and once the trigger point has been reached, participating in any program to reduce TIAAs ownership in the Account by utilizing cash flow or liquid investments in the Account, or by utilizing the proceeds from asset sales. The independent fiduciarys 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 fiduciarys opinion, such sales are desirable to reduce TIAAs 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 TIAAs ownership interest in the 13
Account and provide further recommendations as necessary. As of June 30, 2009, TIAA owned approximately 11.6% of the outstanding accumulation units of the Account. Subsequent to June 30, 2009, as of August 12, 2009, pursuant to this liquidity guarantee obligation, TIAA has not made any additional purchases of Liquidity Units. As of such date, TIAA owned approximately 11.7% of the outstanding accumulation units of the Account. As discussed in more detail in Note 2Management Agreements and Arrangements, TIAA and Services provide services to the Account on an at cost basis. See Note 8Condensed Financial Information for details of the expense charge and expense ratio. Note 4Credit 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 majority of the Accounts wholly-owned real estate investments and investments in joint ventures are located in the United States. The following table represents the diversification of the Accounts portfolio by region and property type: Diversification by Fair Value(1)
East
West
South
Midwest
Foreign(2)
Total Office
22.4
%
19.4
%
12.7
%
1.2
%
2.2
%
57.9
% Apartment
2.2
%
5.9
%
4.9
%
0.0
%
0.0
%
13.0
% Industrial
1.5
%
6.2
%
4.0
%
1.4
%
0.0
%
13.1
% Retail
3.5
%
1.0
%
8.4
%
0.5
%
2.1
%
15.5
% Storage(3)
0.2
%
0.1
%
0.1
%
0.1
%
0.0
%
0.5
% Total
29.8
%
32.6
%
30.1
%
3.2
%
4.3
%
100.0
%
(1)
Fair values for wholly-owned properties are reflected gross of any debt, while fair values for joint venture investments are reflected net of any debt. (2) Represents real estate investments in the United Kingdom and France. (3) Represents a portfolio of storage facilities. 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 Note 5Assets 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 June 30, 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): 14
Description
Level 1:
Level 2:
Level 3:
Total at Real estate properties
$
$
$
8,779,353
$
8,779,353 Real Estate joint ventures and limited partnerships
1,762,729
1,762,729 Marketable securitiesother
490,095
490,095 Mortgage loan receivable
68,279
68,279 Total Investments at June 30, 2009
$
$
490,095
$
10,610,361
$
11,100,456 Mortgage loans payable
$
$
$
(1,843,707
)
$
(1,843,707
) 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 securitiesother
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
) 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 the three and six months ended June 30, 2009 and June 30, 2008 (in thousands):
Real Estate
Real Estate
Mortgage
Total
Mortgage For the three months ended Beginning balance April 1, 2009
$
9,365,810
$
2,221,681
$
69,705
$
11,657,196
$
(1,758,488
) Total realized and unrealized gains (losses) included in changes in net assets
(609,097
)
(469,617
)
(1,426
)
(1,080,140
)
(86,010
) Purchases, issuances, and settlements(1)
22,640
10,665
33,305
791 Ending balance June 30, 2009
$
8,779,353
$
1,762,729
$
68,279
$
10,610,361
$
(1,843,707
) For the six months 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
(1,518,723
)
(703,083
)
(3,488
)
(2,225,294
)
(15,322
) Purchases, issuances, and settlements(1)
(6,964
)
2,616
(4,348
)
1,655 Ending balance June 30, 2009
$
8,779,353
$
1,762,729
$
68,279
$
10,610,361
$
(1,843,707
) 15
Quoted
Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
June 30,
2009
Quoted
Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
December 31,
2008
Properties
Joint Ventures
and Limited
Partnerships
Loan
Receivable
Level 3
Investments
Loans
Payable
June 30, 2009:
June 30, 2009:
Real Estate
Real Estate
Mortgage
Total
Mortgage For the three months ended Beginning balance April 1, 2008
$
12,110,602
$
3,115,908
$
73,106
$
15,299,616
$
(1,426,620
) Total realized and unrealized gains (losses) included in changes in net assets
(87,199
)
(49,557
)
(1,385
)
(138,141
)
39,064 Purchases, issuances, and settlements(1)
135,856
(1,665
)
134,191
180 Ending balance June 30, 2008
$
12,159,259
$
3,064,686
$
71,721
$
15,295,666
$
(1,387,376
) For the six months 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
(44,250
)
(93,277
)
(799
)
(138,326
)
4,354 Purchases, issuances, and settlements(1)
219,794
(907
)
218,887
363 Ending balance June 30, 2008
$
12,159,259
$
3,064,686
$
71,721
$
15,295,666
$
(1,387,376
)
(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 three months ended
$
(609,089
)
$
(469,617
)
$
(1,426
)
$
(1,080,132
)
$
(86,010
) For the six months ended
$
(1,518,464
)
$
(703,083
)
$
(3,488
)
$
(2,225,035
)
$
(15,322
)
Real Estate
Real Estate
Mortgage
Total
Mortgage For the three months ended
$
(86,024
)
$
(49,557
)
$
(1,385
)
$
(136,966
)
$
39,064 For the six months ended
$
(43,223
)
$
(93,260
)
$
(799
)
$
(137,282
)
$
4,354 Note 6Investments 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 Accounts ownership interest percentages. Several of these joint ventures have mortgage loans payable on the properties owned. At
June 30, 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
Accounts equity in the joint ventures at June 30, 2009 and December 31, 2008 was $1.6 billion and $2.2 billion, respectively. 16
Properties
Joint Ventures
and Limited
Partnerships
Loans
Receivable
Level 3
Investments
Loans
Payable
June 30, 2008:
June 30, 2008:
Properties
Joint Ventures
and Limited
Partnerships
Loan
Receivable
Level 3
Investments
Loans
Payable
June 30, 2009
June 30, 2009
Properties
Joint Ventures
and Limited
Partnerships
Loans
Receivable
Level 3
Investments
Loans
Payable
June 30, 2008
June 30, 2008
The Accounts allocated
portion of the mortgage loans payable at fair value was approximately $1.9
billion at June 30, 2009 and December 31, 2008. The Accounts interest
in the outstanding principal of the mortgage loans payable on joint ventures
was approximately $2.0 billion at June 30, 2009 and December 31, 2008, respectively.
A condensed summary of the financial position and results of operations of
the joint ventures is shown below (in thousands).
June 30, 2009
June 30, 2008
December 31, 2008
(Unaudited)
(Unaudited) Assets Real estate properties, at value
$
5,041,195
$
6,897,469
$
5,947,028 Other assets
94,336
90,141
95,411 Total assets
$
5,135,531
$
6,987,610
$
6,042,439 Liabilities and Equity Mortgage loans payable, at value
$
2,565,310
$
2,670,061
$
2,571,843 Other liabilities
63,061
71,167
58,378 Total liabilities
2,628,371
2,741,228
2,630,221 Equity
2,507,160
4,246,382
3,412,218 Total liabilities and equity
$
5,135,531
$
6,987,610
$
6,042,439
For the Six
For the Six
Year Ended
(Unaudited)
(Unaudited) Operating Revenues and Expenses Revenues
$
265,050
$
279,442
$
562,031 Expenses
158,650
169,083
333,700 Excess of revenues over expenses
$
106,400
$
110,359
$
228,331 Management of the Account monitors the financial position of the Accounts 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 Accounts ownership interest percentages. At June 30, 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 Accounts ownership interest in limited partnerships was $205.0 million and $286.5 million at June 30, 2009 and December 31, 2008, respectively. 17
Months Ended
June 30, 2009
Months Ended
June 30, 2008
December 31, 2008
Note 7Mortgage Loans Payable At June 30, 2009, the Account had outstanding mortgage loans payable secured by the following properties (in thousands):
Property
Interest Rate and
Principal
Maturity
(Unaudited) 701 Brickell(a)
2.32% paid monthly(f)
$
126,000
October 1, 2010 Four Oaks Place(b)
2.32% paid monthly(f)
200,000
October 1, 2010 Ontario Industrial Portfolio(c)
7.42% paid monthly
8,587
May 1, 2011 1 & 7 Westferry Circus(d)
5.40% paid quarterly
221,048
November 15, 2012 Reserve at Sugarloaf(c)
5.49% paid monthly
25,338
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(c)
5.55% paid monthly
8,665
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 Preston Sherry Plaza
5.85% paid monthly
23,500
September 1, 2015 The Colorado(c)
5.65% paid monthly
87,264
November 1, 2015 99 High Street
5.52% paid monthly
185,000
November 11, 2015 The Legacy at Westwood(c)
5.95% paid monthly
41,758
December 1, 2015 Regents Court(c)
5.76% paid monthly
35,684
December 1, 2015 The Caruth(c)
5.71% paid monthly
41,745
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
1,936,540 Fair Value Adjustment
(92,833
) Total mortgage loans payable
$
1,843,707
(a)
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%. (b) 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%. (c) The mortgage is adjusted monthly for principal payments. (d) The mortgage is denominated in British pounds and the principal payment had been converted to U.S. dollars using the exchange rate as of June 30, 2009. The quarterly payments are interest only, with a balloon payment at maturity. The interest rate is fixed. The cumulative (since inception) foreign currency
translation adjustment was an unrealized gain of $12 million. (e) Interest rates are fixed, unless stated otherwise. (f) 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. 18
Payment Frequency(e)
Amounts as of
June 30, 2009
Note 8Condensed Financial Information Selected condensed financial information for an Accumulation Unit of the Account is presented below.
For the
Years Ended December 31,
2008
2007
2006
2005
(Unaudited) Per Accumulation Unit data: Rental income
$
11.279
$
18.794
$
17.975
$
16.717
$
15.604 Real estate property level expenses and taxes
5.657
9.190
8.338
7.807
7.026 Real estate income, net
5.622
9.604
9.637
8.910
8.578 Other income
1.437
3.808
4.289
3.931
3.602 Total income
7.059
13.412
13.926
12.841
12.180 Expense charges(1)
1.194
2.937
2.554
1.671
1.415 Investment income, net
5.865
10.475
11.372
11.170
10.765 Net realized and unrealized (loss) gain on investments and mortgage loans payable
(52.615
)
(54.541
)
26.389
22.530
18.744 Net (decrease) increase in Accumulation Unit Value
(46.750
)
(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
$
220.598
$
267.348
$
311.414
$
273.653
$
239.953 Total return
(17.49
)%
(14.15
)%
13.80%
14.04%
14.02% Ratios to Average net Assets: Expenses(1)
0.48%
0.95%
0.87%
0.67%
0.63% Investment income, net
2.38%
3.38%
3.88%
4.49%
4.82% Portfolio turnover rate: Real estate properties
0.09%
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)
40,801
41,542
55,106
50,146
42,623 Net assets end of period (in thousands)
$
9,302,449
$
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 excludes real estate property level expenses which are included in net real estate income. If the real estate property level expenses were included, the expense charge per Accumulation
Unit for the six months ended June 30, 2009 would be $6.851 ($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 six months ended June 30, 2009 would be 2.78% (3.91%, 3.71%, 3.81% and
3.78% for the years ended December 31, 2008, 2007, 2006, and 2005, respectively).
19
Six Months
Ended
June 30,
2009
Note 9Accumulation Units Changes in the number of Accumulation Units outstanding were as follows (in thousands):
For the
For The Year Ended
(Unaudited) Outstanding: Beginning of period
41,542
55,106 Credited for premiums
1,510
3,271 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
(6,390
)
(17,412
) End of period
40,801
41,542 Note 10Commitments and Subsequent Events The Account has evaluated subsequent events through August 13, 2009, the date these financial statements were filed. During
the normal course of business, the Account enters into discussions and agreements
to purchase or sell real estate properties. On August 11, 2009, the Account
sold a retail complex in Littleton, Colorado for sales proceeds of $22.0
million and realized a loss of approximately $12.7 million. As of June 30, 2009, the Account had outstanding commitments to purchase interests in five limited partnerships and shares in a private real estate equity investment trust. As of June 30, 2009, approximately $68.5 million remains to be funded under these commitments. 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 Accounts business, financial position, or results of
operations. Pursuant to the liquidity guarantee obligation, TIAA has made no additional purchases of Liquidity Units subsequent to June 30, 2009. See Note 3Related Party Transactions for further discussion of these transactions. Note 11New Accounting Pronouncements In June 2007, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 07-1, Clarification of the Scope of the Audit and Accounting Guide, Investment Companies, and Accounting by Parent Companies
and Equity Method Investors for Investments in Investment Companies. The SOP 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 issued Staff Position (FSP) SOP 07-1-1 indefinitely delaying the effective date of SOP 07-1 to allow FASB time to consider significant issues related to the implementation of SOP 07-1. In February 2009 the Emerging Issues Task Force (EITF) added the
Application of the AICPA Audit and Accounting Guide, Investment Companies, by Real Estate Investment Companies to the EITF agenda which will be discussed at a future meeting. The FASB staff anticipates the creation of 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 December 2007, FASB issued Statement No. 141(R), Business Combinations, which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill
acquired in a business combination or a gain from a bargain purchase. It is expected that more transactions 20
Six Months
Ended
June 30, 2009
December 31, 2008
will constitute a business under FASB Statement No. 141(R). This Statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Account reports all investments in real estate at fair value
and therefore does not account for the acquisition of real estate investments as a business combination under this statement. In December 2007, FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statementsan Amendment of ARB No. 51, which establishes and expands accounting and reporting standards for minority interests, which will be recharacterized as noncontrolling interests, in a subsidiary and
the deconsolidation of a subsidiary. This Statement is effective for fiscal years beginning on or after December 15, 2008. The adoption of Statement No. 160 did not impact the financial position or results of operations of the Account. In April 2009, FASB issued FASB Staff Position FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value in accordance
with FASB Statement No. 157, Fair Value Measurements, when the volume of activity for an asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP is effective for periods ending after June 15, 2009 with early
adoption permitted. The adoption of this FSP did not have a material impact to the financial position or results of operations of the Account. In May 2009, the Financial Accounting Standards Board issued Statement No. 165, Subsequent Events which establishes standards under generally accepted accounting principles (GAAP) required for the accounting and disclosure of subsequent events. This statement requires the disclosure of the date through
which an entity has evaluated subsequent events and the basis for that date and is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the financial statements or results of operations of the Account. The required disclosure of
the date through which subsequent events has been evaluated is provided in Note 10 of the Notes to the Financial Statements. In June 2009, the Financial Accounting Standards Board issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. Statement No. 168 establishes FASB Accounting Standards Codification
(Codification) as the source of authoritative accounting principles to be applied with equal authority by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. This Statement is effective for financial statements issued for reporting periods ending after September 15,
2009 and will impact the way the Account references U.S. GAAP accounting standards in the financial statements. 21
TIAA REAL ESTATE ACCOUNT REAL ESTATE PROPERTIES79.08% and 77.18%
Location/Description
Type
Value
2009
2008
(Unaudited) Alabama: Inverness Center
Office
$
95,105
$
102,891 Arizona: Camelback Center
Office
53,000
58,000 Kierland Apartment Portfolio
Apartments
112,598
146,830 Phoenix Apartment Portfolio
Apartments
89,082
129,244 California: 3 Hutton Centre Drive
Office
34,952
45,710 50 Fremont
Office
323,100
(1)
386,600
(1) 88 Kearny Street
Office
75,150
99,815 275 Battery
Office
193,119
220,025 980 9th Street and 1010 8th Street
Office
142,829
151,600 Rancho Cucamonga Industrial Portfolio
Industrial
66,000
102,300 Capitol Place
Office
47,510
50,000 Centerside I
Office
36,800
46,400 Centre Pointe and Valley View
Industrial
24,403
29,000 Great West Industrial Portfolio
Industrial
75,000
93,600 Larkspur Courts
Apartments
60,900
71,500 Northern CA RA Industrial Portfolio
Industrial
47,583
63,456 Ontario Industrial Portfolio
Industrial
190,000
(1)
278,000
(1) Pacific Plaza
Office
89,150
(1)
104,970
(1) Regents Court
Apartments
53,806
(1)
59,000
(1) Southern CA RA Industrial Portfolio
Industrial
90,004
107,218 The Legacy at Westwood
Apartments
79,092
(1)
89,224
(1) Wellpoint
Office
40,000
46,000 Westcreek
Apartments
27,016
31,500 West Lake North Business Park
Office
40,361
54,425 Westwood Marketplace
Retail
82,000
95,100 Wilshire Rodeo Plaza
Office
168,943
(1)
213,783
(1) Colorado: Palomino Park
Apartments
147,000
173,000 The Lodge at Willow Creek
Apartments
35,100
40,000 The Market at Southpark
Retail
22,000
29,000 Connecticut: Ten & Twenty Westport Road
Office
144,300
174,400 Florida: 701 Brickell
Office
235,682
(1)
255,000
(1) 4200 West Cypress Street
Office
37,383
41,568 Plantation Grove
Retail
10,500
11,950 Pointe on Tampa Bay
Office
46,608
49,700 Publix at Weston Commons
Retail
46,750
(1)
50,987
(1) Quiet Waters at Coquina Lakes
Apartments
21,117
21,810 Seneca Industrial Park
Industrial
66,395
101,296 See notes to the financial statements. 22
STATEMENT OF INVESTMENTS
June 30, 2009 and December 31, 2008
(Dollar values shown in thousands)
TIAA REAL ESTATE ACCOUNT
Location/Description
Type
Value
2009
2008
(Unaudited) Florida: (continued) South Florida Apartment Portfolio
Apartments
$
57,346
$
62,155 Suncrest Village
Retail
14,653
15,800 The Fairways of Carolina
Apartments
19,805
20,942 The North 40 Office Complex
Office
49,489
64,398 Urban Centre
Office
103,169
113,274 France: Printemps de LHomme
Retail
212,868
247,621 Georgia: 1050 Lenox Park
Apartments
49,200
57,550 Atlanta Industrial Portfolio
Industrial
48,999
54,001 Glenridge Walk
Apartments
30,300
37,575 Reserve at Sugarloaf
Apartments
35,675
(1)
44,900
(1) Shawnee Ridge Industrial Portfolio
Industrial
62,301
69,000 Illinois: Chicago Caleast Industrial Portfolio
Industrial
57,593
63,932 Chicago Industrial Portfolio
Industrial
69,857
78,022 Oak Brook Regency Towers
Office
67,202
75,937 Parkview Plaza
Office
60,609
65,846 Maryland: Broadlands Business Park
Industrial
28,000
27,520 GE Appliance East Coast Distribution Facility
Industrial
35,400
40,500 Massachusetts: 99 High Street
Office
276,393
(1)
320,107
(1) Needham Corporate Center
Office
19,504
32,494 Northeast RA Industrial Portfolio
Industrial
29,400
30,794 The Newbry
Office
268,214
315,600 Minnesota: Champlin Marketplace
Retail
14,333
17,101 Nevada: UPS Distribution Facility
Industrial
10,200
12,100 New Jersey: Konica Photo Imaging Headquarters
Industrial
16,800
18,300 Marketfair
Retail
75,528
90,759 Morris Corporate Center III
Office
77,268
94,955 NJ Caleast Industrial Portfolio
Industrial
28,000
49,000 Plainsboro Plaza
Retail
26,600
33,500 South River Road Industrial
Industrial
27,000
43,872 New York: 780 Third Avenue
Office
270,000
341,000 The Colorado
Apartments
121,457
(1)
153,006
(1) Pennsylvania: Lincoln Woods
Apartments
30,393
32,025 See notes to the financial statements. 23
STATEMENT OF INVESTMENTS
June 30, 2009 and December 31, 2008
(Dollar values shown in thousands)
TIAA REAL ESTATE ACCOUNT
Location/Description
Type
Value
2009
2008
(Unaudited) Tennessee: Airways Distribution Center
Industrial
$
15,600
$
17,400 Summit Distribution Center
Industrial
16,000
22,700 Texas: Dallas Industrial Portfolio
Industrial
130,305
141,328 Four Oaks Place
Office
432,393
(1)
438,000
(1) Houston Apartment Portfolio
Apartments
212,214
267,468 Lincoln Centre
Office
210,000
(1)
269,000
(1) Park Place on Turtle Creek
Office
29,999
40,094 Pinnacle Industrial/DFW Trade Center
Industrial
34,700
38,733 Preston Sherry Plaza
Office
33,900
(1)
38,400
(1) South Frisco Village
Retail
27,700
(1)
36,300
(1) The Caruth
Apartments
54,087
(1)
61,349
(1) The Maroneal
Apartments
30,950
38,456 United Kingdom: 1 & 7 Westferry Circus
Office
231,437
(1)
232,802
(1) Virginia: 8270 Greensboro Drive
Office
46,000
57,000 Ashford Meadows
Apartments
76,751
79,319 One Virginia Square
Office
46,398
51,797 The Ellipse at Ballston
Office
72,800
84,018 Washington: Creeksides at Centerpoint
Office
25,915
27,200 Fourth & Madison
Office
340,000
(1)
407,500
(1) Millennium Corporate Park
Office
144,000
162,193 Northwest RA Industrial Portfolio
Industrial
18,496
24,100 Rainier Corporate Park
Industrial
68,969
81,035 Regal Logistics Campus
Industrial
51,600
67,000 Washington DC: 1001 Pennsylvania Avenue
Office
501,281
(1)
550,757
(1) 1401 H Street, NW
Office
168,821
(1)
194,600
(1) 1900 K Street
Office
237,400
245,000 Mazza Gallerie
Retail
77,743
83,003 TOTAL REAL ESTATE PROPERTIES (Cost $10,007,894 and $10,031,744)
8,779,353
10,305,040 See notes to the financial statements. 24
STATEMENT OF INVESTMENTS
June 30, 2009 and December 31, 2008
(Dollar values shown in thousands)
TIAA REAL ESTATE ACCOUNT OTHER REAL ESTATE-RELATED INVESTMENTS15.88% and 18.45%
Location/Description
Value
2009
2008
(Unaudited) California: CAColorado Center LP Yahoo Center (50% Account Interest)
$
168,066
(2)
$
239,748
(2) CATreat Towers LP Treat Towers (75% Account Interest)
78,769
105,074 Florida: Florida Mall Associates, Ltd The Florida Mall (50% Account Interest)
258,160
(2)
281,941
(2) TREA Florida Retail, LLC Florida Retail Portfolio (80% Account Interest)
191,510
196,202 West Dade Associates Miami International Mall (50% Account Interest)
89,818
(2)
105,312
(2) Georgia: GABuckhead LLC Prominence in Buckhead (75% Account Interest)
37,457
78,209 Massachusetts: MAOne Boston Place REIT One Boston Place (50.25% Account Interest)
154,934
212,083 Tennessee: West Town Mall, LLC West Town Mall (50% Account Interest)
48,472
(2)
73,969
(2) Virginia: Teachers REA IV, LLC Tysons Executive Plaza II (50% Account Interest)
36,097
36,048 Various: DDR TC LLC DDR Joint Venture (85% Account Interest)
393,062
(2,3)
712,773
(2,3) Storage Portfolio I, LLC Storage Portfolio (75% Account Interest)
50,235
(2,3)
67,621
(2,3) Strategic Ind Portfolio I, LLC IDI Nationwide Industrial Portfolio (60% Account Interest)
51,120
(2,3)
67,731
(2,3) TOTAL REAL ESTATE JOINT VENTURES (Cost $2,078,480 and $2,068,714)
1,557,700
2,176,711 LIMITED PARTNERSHIPS1.85% and 2.15% Cobalt Industrial REIT (10.998% Account Interest)
24,760
31,784 Colony Realty Partners LP (5.27% Account Interest)
17,925
29,000 Heitman Value Partners Fund (8.43% Account Interest)
14,141
16,334 Lion Gables Apartment Fund (18.46% Account Interest)
129,216
186,471 MONY/Transwestern Mezz RP II (16.67% Account Interest)
16,195
17,710 Transwestern Mezz Realty Partners III, LLC (11.708% Account Interest)
2,792
5,186 TOTAL LIMITED PARTNERSHIPS (Cost $271,871 and $261,136)
205,029
286,485 TOTAL REAL ESTATE JOINT VENTURES AND LIMITED PARTNERSHIPS (Cost $2,350,351 and $2,329,850)
1,762,729
2,463,196 See notes to the financial statements. 25
STATEMENT OF INVESTMENTS
June 30, 2009 and December 31, 2008
(Dollar values shown in thousands)
REAL ESTATE JOINT VENTURES14.03% and 16.30%
TIAA REAL ESTATE ACCOUNT MARKETABLE SECURITIES4.42% and 3.83%
Principal Issuer
Yield(4)
Maturity
Value
2009
2008
2009
2008
(Unaudited)
$
$
50,000 Abbey National North America LLC
0.071%
1/5/09
$
$
49,998
40,000 Bank of Nova Scotia
0.193%
1/2/09
39,999
50,000 HSBC Finance Corporation
0.304%
1/7/09
49,997
50,000 Rabobank USA Financial Corp
0.122%
1/5/09
49,999
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 NOTES2.55% 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
45,910
Fannie Mae Discount Notes
0.152%-0.162%
7/13/09
45,909
100
Fannie Mae Discount Notes
0.161%
7/20/09
100
9,200
Fannie Mae Discount Notes
0.132%
7/29/09
9,199
29,110
Fannie Mae Discount Notes
0.203%
8/24/09
29,105
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
34,500
Federal Home Loan Bank Discount Notes
0.020%-0.132%
7/1/09
34,500
24,105
Federal Home Loan Bank Discount Notes
0.112%
7/2/09
24,105
40,000
Federal Home Loan Bank Discount Notes
0.162%
7/27/09
39,997
15,905
Federal Home Loan Bank Discount Notes
0.213%
9/29/09
15,899
14,100 Freddie Mac Discount Notes
0.203%
1/5/09
14,100
50,000
Freddie Mac Discount Notes
0.122%
7/14/09
49,998
16,000
Freddie Mac Discount Notes
0.132%
7/21/09
15,999
18,000
Freddie Mac Discount Notes
0.142%
8/18/09
17,997
TOTAL GOVERNMENT AGENCY NOTES
282,808
266,130 See notes to the financial statements. 26
STATEMENT OF INVESTMENTS
June 30, 2009 and December 31, 2008
(Dollar values shown in thousands)
COMMERCIAL PAPER0.00% and 1.84%
Date
(Cost $282,798 and $266,118)
TIAA REAL ESTATE ACCOUNT Principal Issuer
Yield(4)
Maturity
Value 2009 2008
2009
2008
(Unaudited) UNITED STATES TREASURY BILLS1.87% and 0.00% 71,300 United States Treasury Bills
0.138%-0.152%
7/23/09
71,295
83,340 United States Treasury Bills
0.223%-0.269%
10/8/09
83,298
16,000 United States Treasury Bills
0.183%
10/15/09
15,991
36,725 United States Treasury Bills
0.223%
10/22/09
36,703
TOTAL UNITED STATES TREASURY BILLS
$
207,287
$
TOTAL MARKETABLE SECURITIES
490,095
511,711 MORTGAGE LOAN RECEIVABLE0.62% and 0.54% Borrower
Current
Maturity
$
75,000
$
75,000 Klingle Corporation
0.800
%
7/10/11
68,279
71,767 TOTAL MORTGAGE LOAN RECEIVABLE
68,279
71,767 TOTAL INVESTMENTS
$
11,100,456
$
13,351,714
(1)
The investment has a mortgage loan payable outstanding, as indicated in Note 7. (2) The market value reflects the Accounts 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 June 30, 2009. At December 31, 2008, the interest rate on this investment was 2.57%. See notes to the financial statements. 27
STATEMENT OF INVESTMENTS
June 30, 2009 and December 31, 2008
(Dollar values shown in thousands)
Date
(Cost $207,269 and $0)
(Cost $490,067 and $511,703)
Rate(5)
Date
(Cost $75,000 and $75,000)
(Cost $12,923,312 and $12,948,297)
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and notes contained in this report and with consideration to the sub-section entitled Forward-Looking Statements, which begins below, the section of the Accounts Annual
Report on Form 10-K for the year ended December 31, 2008 (the Form 10-K) entitled Item 1A. Risk Factors and the section of the Accounts Form 10-Q for the quarter ended March 31, 2009 entitled Item 1A. Risk Factors in Part II thereof. The past performance of the Account is not indicative of future results. Forward-Looking Statements Some statements in this Form 10-Q 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 managements 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, markets in which the Account operates, general
economic conditions and the strength of the capital and credit markets, managements beliefs, assumptions made by management and the transactions described in this Form 10-Q. 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 managements 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 Accounts properties), disruptions in the credit and capital markets, competition for real
estate properties, leasing risk (including tenant defaults), 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 Accounts appraisals are generally obtained on a quarterly basis and there may be circumstances in between appraisals in which the realizable value of a property may
not always be reflected in the Accounts daily accumulation unit value calculation; Risks associated with borrowing activity by the Account, including 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; The risks associated with joint venture partnerships, including the risks that a co-venturer may have interests or goals inconsistent with the Accounts and the risk that the Account has limited rights with respect to operation of the property and transfer of the Accounts interest; Uncertainties associated with environmental and other regulatory matters; and Other factors, including the risk factors discussed in Item 1A. Risk Factors in the Form 10-K. More detailed discussions of certain of those risk factors are contained in the section of the Form 10-K entitled Item 1A. Risk Factors and elsewhere in this Form 10-Q including in the section entitled Item 3. Quantitative and Qualitative Disclosures About Market Risk and the section of the Accounts
Form 10-Q for the quarter ended March 31, 2009 entitled Item 1A. Risk Factors in Part II thereof. Caution should be taken not to place undue reliance on managements forward-looking statements, which represent managements 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. 28
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 is preliminary for the quarter ended June 30, 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. SECOND QUARTER 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 The deterioration of the U.S. economy showed signs of moderating during the second quarter of 2009. Economic conditions remain extremely challenging and available data suggest that early signs of stabilization may be tenuous. Despite a discouraging employment report for June, in which 467,000 jobs were
lost, job losses appear to be moderating. During the second quarter of 2009, 1.3 million jobs were lost as compared to 2.1 million during the first quarter and the pace of job losses slowed during the quarter, averaging 436,000 versus an average of 670,000 during the November 2008-March 2009 period. Financial
market conditions reflect the uncertainty surrounding the economic outlook as major indices such as the Dow Jones Industrial Average and the S&P 500 gained 11% and 15%, respectively, in the second quarter and continued to improve during the early part of the third quarter. While credit availability remains
constrained, credit is now flowing more freely for the highest rated companies as is indicated by the pickup in corporate bond issuance. Credit spreads have narrowed as indicated by the decline in the U.S. Treasury Euro Dollar spread (which measures the difference between U.S. government yields and yields on
dollar-denominated deposits held outside the U.S.) to levels last seen prior to the Lehman Brothers failure which occurred in September of 2008. Similarly, yields on 10-Year U.S. Treasuries peaked in June at almost 4.0%, but have since fallen to 3.5% as of the end of July. The market for structured financial
products, such as commercial mortgage backed securities (CMBS) and residential mortgage backed securities (RMBS), remained quiet during the second quarter, but CMBS offerings have begun to tick up in the early part of the third quarter. Of particular note is Developers Diversified Realtys plan to sell
$600 million in bonds securitized by roughly 60 shopping centers located across the country. If successful, it would be the first major offering of CMBS to take advantage of the Federal Reserves Term-Asset Backed Securities Loan Facility, or TALF, program. Access to credit through the TALF program could
provide much needed liquidity to the commercial real estate industry. During the second quarter, the nations largest nineteen banks underwent extensive stress tests conducted by the federal government and many were deemed to have sufficient capital to withstand conditions that might be expected during an extended or more extreme downturn in the U.S. economy. Others
raised funds to meet more stringent capital requirements. Subsequently, ten of the banks were approved to exit the Troubled Asset Relief Program (TARP) and several began returning the funds that were advanced by the U.S. government at the height of the financial markets crisis. In addition, the U.S. Treasury
Department announced that the Public-Private Investment Partnership (PPIP), which was designed to help remove legacy assets from bank balance sheets, would be scaled back in response to signs of stabilization in the economy and financial markets. Additionally, the Federal Reserve announced plans to reduce
the size of some of its other lending programs, particularly those that were generating limited demand. Nonetheless, access to credit remained tight, especially for small businesses and consumers, which prompted the Federal Reserve to extend the lending programs targeting these groups into early-2010. Other
sectors that have come under extreme stress during the economic downturn include the auto, airline, and retail industries. In the auto sector, both General Motors and Chrysler filed for bankruptcy protection during the second quarter; however, both have since emerged from bankruptcy protection with effectively
new owners, the U.S. government in the case of GM and Fiat in the case of Chrysler. In the retail sector, bankruptcy filings during the quarter included Eddie Bauer and Crabtree & Evelyn, which are indicative of the slowdown in consumer spending. 29
The table below summarizes headline economic indicators. Based on preliminary estimates from the Bureau of Economic Analysis, GDP declined by 1.0% in the second quarter of 2009. This better than expected report, while subject to revision, suggests that the recession may be close to ending. Weak export
activity, business investment and consumer spending contributed to the decline, but were partially offset by an increase in government spending and a drop in imports. However, the first quarter decline in GDP, which was revised downward to -6.4% from -5.5% previously, underscored the severity of the recession.
Inflation remains in check, but household budgets, which benefited from a decline in energy prices during the second half of 2008, were once again forced to contend with rising gasoline prices during the second quarter of 2009. While the burgeoning federal budget deficit has some economists concerned about the
prospects for inflation over the long term, core inflation (excluding energy and food) remains tame and the significant gap between the U.S. economys potential and current output suggests that prospects for inflation over the near term are negligible. Economic Indicators*
2008
2008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
2009F
2010F Economy (% Growth)(1) Gross Domestic Product (GDP)
0.4
%
-0.7
%
1.5
%
-2.7
%
-5.4
%
-6.4
%
-1.0
%
-2.6
%
2.0
% Inflation (Consumer Price Index)
0.1
%
3.7
%
6.5
%
3.1
%
-12.4
%
2.2
%
3.3
%
-0.6
%
1.8
% Employment Growth (Thousands)
-3,078
-338
-458
-624
-1,658
-2,074
-1,308
N/A
N/A Interest Rates(2) 10 Year Treasury
3.66
%
3.66
%
3.89
%
3.86
%
3.25
%
2.74
%
3.31
%
3.40
%
4.10
% Federal Funds Rate
0.0-0.25
%
2.25
%
2.00
%
2.00
%
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; inflation rates are annualized 3 month rates; employment growth rates 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. The data in the table below show that broad indicators of economic performance remain depressed relative to 2008. The data also suggests that, notwithstanding recent signs of stabilization, the economy still has considerable ground to regain before it is healthy enough to expand in a meaningful way. For
example, consumer confidence, which had begun to trend upwards, dropped again in June and remains near historic lows. Retail sales were primarily down during the quarter, although gasoline and auto sales, which are excluded in the retail sales figures shown below, both posted sizable monthly gains in June. In
the housing market, existing home sales rose for the second straight month in May, due largely to sales of foreclosed homes and homes at the low end of the price spectrum. Mortgage interest rates increased slightly in the second quarter, but they remain relatively low and discounted prices and tax credits for first-
time buyers have fueled sales in a number of markets. New home sales remain subdued however, as the move-up market remains lackluster. As of June 30, 2009, single-family housing starts are now at the highest rate this year, but are still 70-75% below levels at the 2006-2007 market peak. While some
economists expect growth in the U.S. economy in the third quarter of 2009, any growth in GDP over the balance of 2009 is likely to be negligible given ongoing job losses, rising unemployment, weak consumer confidence, and the depressed housing market. 30
Broad Economic Indicators*
Index 1985=100
2008
Apr-09
May-09
Jun-09 Consumer Confidence
58.0
40.8
54.8
49.3 % Change(1) Retail Sales (excl. auto, parts & gas)
1.6
%
-0.3
%
-0.1
%
-0.2
% Existing Home Sales
-13
%
2.4
%
1.3
%
3.6
% New Home Sales
-38
%
-37
%
-32
%
-21
% Single-family Housing Starts
-41
%
-43
%
-40
%
-28
% Unemployment Rate
5.8
%
8.9
%
9.4
%
9.5
%
*
Data subject to revision (1) Retail sales and existing home sales monthly figures represent change from the preceding month or year; new home sales and housing starts monthly figures represent changes from the same month last year. Sources: Conference Board, Census Bureau, Bureau of Labor Statistics The Federal Reserves July 2009 Beige Book, which reported on regional economic conditions in the twelve Federal Reserve Districts (Districts) through mid-July, characterized economic activity as weak across the Districts since its last report in June. However, most Districts noted a moderating rate of
decline, with a few even suggesting some signs of stabilization. While layoffs continued, several Districts reported selective increases in hiring as some firms seek to take advantage of unemployed talent. Generally though, employers were reported to be cutting hours, freezing wages and/or downsizing employee
benefits packages to save money and avoid cutting payrolls further. Consumer spending generally remained soft with households forgoing spending on luxury items in favor of less expensive items or necessities. Auto sales picked up in some Districts, but remained weak in others. With respect to inflation, overall
price levels exhibited little upward momentum since the last Beige Book report. While the residential market was characterized as weak, many Districts reported increased home sale activity, particularly among lower-priced homes as sales were boosted by first-time home buyer tax credits. Foreclosures placed additional downward pressure on home prices in some Districts, while others
reported moderating price declines. Commercial real estate market conditions weakened further or remained weak in all Districts. Rising vacancies placed significant downward pressure on rental rates. Lending activity was generally characterized as flat to down across most Districts and many banks continued to
tighten lending standards. Consequently, lack of available credit was blamed for stalled or delayed construction projects and for limited sales activity. Prospects for the second half of 2009 and throughout 2010 are highly dependent on the success of policy actions taken by the U.S. government and the Federal Reserve, and the full impacts of recent actions are likely to show over the next few quarters. In particular, the Obama administration is hopeful that the
$787 billion stimulus package passed in February of 2009 will boost economic activity in the second half of the year. Because the stimulus funds have been introduced into the economy very slowly, some economists believe that a second stimulus package will be needed to generate a sustained economic recovery.
Only negligible growth is expected in the third quarter of 2009, while many economists believe that the third quarter of 2009 will ultimately prove to be the trough of the recession. Since the peak of economic activity in December of 2007, U.S. employment has declined by 6.5 million jobs. Job losses are expected to
continue through the rest of 2009 and possibly into 2010, and the unemployment rate is expected to reach 10% for the first time since the early 1980s. Economists surveyed as part of the July 2009 Blue Chip Financial Forecasts publication expect U.S. GDP to decline 2.6% for 2009 as the modest growth expected in the second half of the year will be too small to offset the sizeable declines of the first half. While past recessions were often followed by
recoveries led by a rebound in consumer spending, construction spending, and home sales, many economists are expecting a tepid recovery with GDP growth of 2.0% in 2010 as the weights of financial market excesses, a housing bubble and a consumer spending bubble slowly dissipate. Members of the Federal
Open Market Committee (FOMC) have similar expectations. As part of the June 23-24, 2009 FOMC meeting, FOMC members boosted their forecasts for economic growth in the second half of 2009 and in 2010, citing evidence that the economic contraction in the U.S. and global economies was moderating.
Nonetheless, they cautioned that 31
given economic conditions, their forecasts continued to be subject to greater-than-average uncertainty. Still, the revised forecast now calls for modest growth in the second half of 2009 followed by GDP growth of 2.1% 3.3% in 2010, and above-trend growth in 2011. Real Estate Market Conditions and Outlook Liquidity constraints and concerns about economic and real estate market conditions kept investors on the sidelines during the first half of 2009. Preliminary data from Real Capital Analytics (RCA), a frequently cited industry source of commercial real estate transactions data, indicate that sales of
commercial real estate properties remained depressed during the second quarter. In the second quarter 2009, $8.6 billion of properties were sold, which is 4% below first quarter 2009 volume, but 77% below the same period in 2008, when sales totaled $37.8 billion. Sales of apartment and industrial properties were
up 40% and 50%, respectively, compared to first quarter though first quarter totals were especially weak. Overall, the number of properties being offered for sale increased in the second quarter and while only a limited number of distressed sales have occurred, their numbers are expected to increase which will
likely add to the downward pressure on prices. RCA estimates that some 3,500 office, industrial, retail, and apartment properties with a collective value of $70 billion are currently in distress. Mortgage defaults have also increased, and given the difficulties in refinancing maturing loans, a surge in mortgage defaults
is expected over the 2010-2012 period. While the sales environment is likely to remain challenging, Management believes that prospective investors are starting to view asset prices as attractive and that the lack of institutional quality property being offered for sale may provide a window for the Account to dispose
of some of its non-core properties in selected markets in the coming months. While sales activity has been limited (particularly for larger assets), available data indicate that commercial property prices declined further in the second quarter of 2009. In May of 2009, the Moodys/REAL Commercial Property Price Index fell 29% as compared to May of 2008. (Additional data for second
quarter 2009 are not yet available.) In general, properties in metro areas with the greatest transactional volume have seen prices hold up relatively better, with the exception of apartment properties, where declines were in-line with the rest of the nation. Data released by the National Council of Real Estate Investment Fiduciaries (NCREIF) also showed continued declines in property values. The NCREIF Property Index (NPI) declined 5.20% during the second quarter of 2009. The property value component fell 6.70% which was partially offset by an
income return of 1.50%. While second quarter total return was better, i.e. less negative, than that of the first quarter, the one-year total return for the period ending second quarter 2009 was a negative 19.6%. The ongoing deterioration in economic conditions continued to affect commercial real estate market
conditions during the second quarter of 2009. Vacancy rates rose for all property types and in virtually all markets. Commercial real estate market conditions generally lag changes in economic conditions and the length and severity of the current recession make it likely that vacancies will continue to rise through
the rest of 2009 and possibly into 2010. Even as the economy recovers, it will take time for business confidence and profitability to improve to the point that new space and new employees are warranted. The table below summarizes the top five markets in which the Account had exposure as of June 30, 2009. The top five markets account for more than one-third of the Accounts total real estate portfolio in terms of value and, despite rising vacancy rates nationally, occupancy in each of the top five markets has
held up comparatively well. Metro Area
Percentage
# of Property
Metro Area as a
Metro Area as a Washington-Arlington-
94.2%
9
12.2%
11.4% Boston-Quincy MA
91.4%
5
7.2%
6.7% Los Angeles-Long Beach-Glendale CA
92.6%
8
6.7%
6.2% Houston-Bay Town-Sugar Land TX
95.0%
3
6.5%
6.1% San Francisco-San Mateo-Redwood City CA
95.8%
4
6.3%
5.9% 32
Leased
(weighted)
Investments
% of Total Real
Estate Portfolio
% of Total
Investments
Alexandria DC-VA-MD-WV
Office Demand for office space is particularly dependent upon employment levels and growth in the finance and professional and business services sectors, although typically with a lag due to the longer-term nature of the leasing cycle. Job losses in both sectors moderated during the second quarter but continued at
significant levels. The financial services sector lost approximately 103,000 jobs during the three-month period, while professional and business services shed approximately 293,000 jobs. As businesses vacated unneeded space, the national office vacancy rate continued to climb, rising to an average of 15.5% in the
second quarter of 2009 as compared to 14.7% during the first quarter. The vacancy rate of the Accounts office portfolio stood at a much lower 7.8% as of the second quarter. With the exception of the Boston-Quincy MA metro area and the San Francisco-San Mateo-Redwood City CA metro areas, vacancy rates in
each of the Accounts other top metropolitan office markets rose in the quarter but still remained below the national average. Of the Accounts top office markets, the Seattle-Bellevue-Everett WA metro area saw the largest increase in vacancies as two million square feet of new space was added to the market
during 2009 in addition to space that was recently vacated. The table below compares the average vacancy rate of properties in the Accounts top office markets with their respective metropolitan area averages.
Account
Metro Area
Sector Metro Area
Total Sector
% of Total
2009Q1
2009Q2
2009Q1
2009Q2
Office National
6.8%
7.8%
14.7%
15.5%
1 Washington-Arlington-
$
1,108.8
10.0%
1.4%
6.1%
12.8%
13.8%
2 Boston-Quincy MA
$
719.0
6.5%
8.2%
7.9%
12.3%
12.3%
3 San Francisco-San Mateo-
$
591.4
5.3%
5.3%
4.3%
12.0%
12.6%
4 Seattle-Bellevue-Everett WA
$
509.9
4.6%
3.9%
5.0%
12.7%
14.7%
5 Houston-Bay Town-
$
432.4
3.9%
4.0%
5.0%
13.8%
15.3%
*
Source: Torto Wheaton Research
Industrial Industrial market conditions weakened further due to the falloff in consumer demand and industrial production that has occurred during the recession. Industrial space demand is heavily influenced by macroeconomic factors such as industrial production, international trade flows, and employment growth in the
manufacturing, wholesale trade, and warehousing industries. Not only did U.S. industrial production decline at an 11.6% annual rate in the second quarter of 2009, but import and export activity has also fallen off dramatically. As a result, the national vacancy rate for industrial properties rose for the seventh
consecutive quarter to an average of 13.0% during the second quarter of 2009, up from 12.2% in the first quarter of 2009. In comparison, the vacancy rate for the Accounts industrial portfolio declined slightly to 11.3% as a result of a proactive effort to maintain portfolio occupancy by attracting and/or retaining
tenants with market-adjusted rental rates if necessary. Metropolitan area vacancy rates in each of the Accounts top industrial markets increased during the second quarter. The Los Angeles-Long Beach-Glendale CA metro area was able to maintain its position as the industrial market with the lowest vacancy rate
in the U.S., despite the increase in its vacancy rate to 7.5%. The Accounts above average vacancy rate in the Los Angeles-Long Beach-Glendale CA and Riverside-San Bernardino-Ontario CA metro areas is reflective of the significant falloff in leasing activity in those markets due to the 15% and 27% decline,
respectively, in the volume of goods being shipped through The Port of Los Angeles and The Port of Long Beach The table below compares the average vacancy rate of properties in the Accounts top industrial markets to their respective metropolitan area averages. 33
Weighted
Average
Vacancy
Vacancy*
by Metro Area
($M)
Investments
Alexandria DC-VA-MD-WV
Redwood City CA
Sugar Land TX
Account
Metro Ares
Sector Metro Area
Total Sector
% of Total
2009Q1
2009Q2
2009Q1
2009Q2
Industrial National
12.3%
11.3%
12.2%
13.0%
1 Riverside-San Bernardino-Ontario CA
$
331.0
3.0%
20.5%
20.2%
14.8%
15.5%
2 Dallas-Plano-Irving TX
$
165.0
1.5%
7.9%
4.7%
14.4%
15.3%
3 Chicago-Naperville-Joliet IL
$
127.4
1.1%
0.6%
0.9%
13.6%
14.1%
4 Los Angeles-Long Beach-
$
114.4
1.0%
12.1%
15.9%
6.5%
7.5%
5 Atlanta-Sandy Springs-
$
111.3
1.0%
1.3%
0.0%
15.8%
17.1%
*
Source: Torto Wheaton Research
Multi-Family Apartment market conditions were stable during the second quarter of 2009, as compared to the first quarter of 2009, with the national vacancy rate holding steady at 7.3%. A year-over-year comparison, which is necessary to reflect the seasonality inherent in apartment leasing, show the deterioration in the
market as vacancies in the second quarter of 2008 were 5.6%. The increase in vacancies since 2008 is due to a fall-off in demand and an increase in the supply of rentable space. On the demand side, mounting job losses have caused an increasing number of tenants to find roommates or move back home in the case
of younger renters. On the supply side, prospective renters have an increased variety of options including single-family homes and vacant condominium units being offered for rent. The average vacancy rate for the Accounts apartment portfolio, 4.4% during the second quarter of 2009, was below the national
average. With the exception of the New York metropolitan area, vacancy rates in the Accounts top metropolitan markets are above the national average; however, the table below shows that the average vacancy rate for the Accounts properties in each of its top metropolitan areas is lower than both the national
average and the average for the respective metropolitan area.
Account
Metro Ares
Sector Metro Area
Total Sector
% of Total
2009Q1
2009Q2
2009Q1
2009Q2
Apartment National
5.8%
4.4%
7.3%
7.3%
1 Houston-Bay Town-
$
243.2
2.2%
6.3%
5.0%
8.1%
9.1%
2 Phoenix-Mesa-Scottsdale AZ
$
201.7
1.8%
6.0%
5.6%
11.5%
11.6%
3 Denver-Aurora CO
$
182.1
1.6%
8.0%
6.0%
7.6%
7.9%
4 New York-Wayne-
$
121.5
1.1%
7.0%
5.0%
6.0%
6.7%
5 Atlanta-Sandy Springs-
$
115.2
1.0%
3.6%
1.3%
10.6%
10.7%
*
Source: Torto Wheaton Research
Retail Vacancies in U.S. neighborhood and community centers rose to an average of 12.0% in the second quarter of 2009, up from 11.5% in the first quarter. While the Accounts retail portfolio is well leased with an average vacancy rate of 7.1% as of June 30, 2009, the portfolios physical occupancy rate as of second
quarter 34
Weighted
Average
Vacancy
Vacancy*
by Metro Area
($M)
Investments
Glendale CA
Marietta GA
Weighted
Average
Vacancy
Vacancy*
by Metro Area
($M)
Investments
Sugar Land TX
White Plains NY-NJ
Marietta GA
is in-line with the 12.0% national vacancy rate as tenants such as Circuit City and Linens N Things have closed stores as a result of going out of business or filing for bankruptcy protection. A number of other retailers (large and small) have also closed stores due to the falloff in consumer spending. If the number of
dark stores increases, shopper traffic could decline at weaker centers to the point that other stores close and possibly trigger the co-tenancy clauses, that some retailers have, with provisions for rent relief or which allow a store to close. Retail market conditions are dependent to a large degree on consumer
spending, which remained weak during the three-month period despite small monthly gains in some categories. In fact, much of the June 2009 gain in retail sales can be attributed to higher gas prices and an incentive-driven increase in auto sales during the month rather than sales of apparel and other goods.
Retailer bankruptcy filings continued during the second quarter, with Eddie Bauer and Crabtree & Evelyn the most recent failures. As consumers continue to spend less, additional store closings and bankruptcy filings are likely, which would likely cause vacancy rates to rise further. Commercial Real Estate Outlook Commercial real estate market conditions have been adversely affected by both the severity and length of the current recession, as space demand has been extremely weak or declining across all property types. It is unlikely that commercial real estate market conditions will improve significantly in the near term
as economic and capital markets conditions remain unsettled, and monetary and fiscal policy actions implemented in the early part of the year have yet to show a significant impact. Though an improvement in economic activity is expected during the second half of 2009, it is unlikely to be of sufficient strength to
induce businesses to expand into new space or hire in meaningful numbers. One potentially positive development has been the dramatic fall-off in construction. As the table below indicates, the level of construction has been especially modest in comparison to prior economic and commercial real estate market
cycles. Looking ahead, Torto Wheaton Researchs forecast for 21 million square feet of office construction in 2010 and 10 million square feet in 2011 (not shown) is on par with construction in 1993-1996 after the real estate downturn of the late-1980s and early-1990s. Minimal construction coupled with several
years of healthy economic growth in those years ultimately led to a strong recovery in market conditions starting in the mid-1990s. While management remains concerned about the economic outlook, management believes that there will not be a significant amount of new space to absorb when economic conditions
improve, which could in theory enable markets to recover. Historic and Projected Construction*
Average
Forecast
Average
2006-2008
2009
2010
1989-1991
1999-2001 Office
66
59
21
85
91 Industrial
182
81
69
184
257 Apartment
225
178
79
257
212 Retail
30
12
10
45
32
*
in millions of sq. ft. except apartments, which are in thousands of units.
Source: Torto Wheaton Research Given economic and credit market conditions, returns for many types of assets have been dismal as the recession lengthened and intensified. However, there are indications that asset prices in general have bottomed out. In the stock market, for example, the Dow Jones Industrial Average (DJIA) has
declined nearly 50% since the start of the when it hit its low point in first quarter of 2009. The DJIA subsequently gained almost 30% from its low point at the end of the quarter and added another 10% as of early third quarter 2009. By comparison, the one year NPI return for the period ending June 30, 2009 was a
negative 19.6%. Further declines in the NPI in the upcoming quarters appear likely, though they may not be as large, as market conditions remain challenging, rental rates decline, and vacant space is re-leased at lower rental rates. Investors have also raised their return requirements, which management believes are
likely to continue to push property prices lower. 35
Despite significant economic headwinds, the Accounts properties are still well-leased at over 92% occupancy, and management believes the long-term nature of the properties leases should generate cash flow to both service existing debt and generate an attractive income return. As shown below, the income
return has historically been a major component of the Accounts total return, and management believes that income returns should offset a portion of the fluctuations in capital returns that are expected as the market continues to adjust. Market conditions remain challenging with much of the current leasing activity consisting of tenants renewing leases that are expiring or renegotiating leases to reduce the amount of space being leased and/or current rental rates. Given current market conditions, the Account has renewed or renegotiated
certain existing leases at lower effective rental rates, as necessary or appropriate in order to maintain a high level of portfolio occupancy. Managements focus on leasing and tenant retention is designed to preserve the Accounts income stream and to minimize the capital expenditures that are typically needed to
lease vacant space. Rents have declined across most property types and markets which has thereby reduced the Accounts overall level of rental income collected in the second quarter; however, Management has undertaken an extensive effort to reduce property level expenses and costs. This effort has generated
reductions in operating expenses that to a large degree have offset the decline in rental income at a number of the Accounts properties. Management believes that the Accounts property portfolio, which consists largely of high quality assets in major metropolitan areas, should be able to withstand current market stresses relatively better than properties in secondary markets or of lesser quality. As economic and capital market conditions
stabilize, management intends to continue to resize and rebalance its entire portfolio in target markets and in sectors which management believes are expected to outperform. Such a program is intended to position the Account to benefit from an anticipated improvement in economic and market conditions over the
coming years. Once economic and capital market conditions stabilize, management believes the Accounts portfolio of high quality assets should be well positioned to generate a more normalized level of returns. In addition to improved economic and capital markets conditions, management believes the Accounts
returns should benefit in the future from its conservative core investment strategy, focus on institutional quality properties, markets and locations, and stabilized assets with strong historical occupancy and staggered lease expirations. Investments as of June 30, 2009 As of June 30, 2009, the Account had total net assets in the amount of $9.3 billion, a 19.2% decrease from December 31, 2008, and a 45.5% decrease from June 30, 2008. The decrease in the Accounts net assets from June 30, 2008 to June 30, 2009 was primarily caused by the depreciation in value of the
Accounts wholly-owned real estate properties and those owned in joint venture investments (approximately 53% of the decrease) and net participant transfers out of the Account (approximately 47% of the decrease). 36
As of June 30, 2009, the Account owned a total of 108 real estate property investments (96 of which were wholly-owned, 12 of which were held in joint ventures). The real estate portfolio included 45 office property investments (five of which were held in joint ventures and one located in London, England), 26
industrial property investments (including one held in a joint venture), 20 apartment complexes, 16 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 108 real estate property investments, 27 are
subject to debt (including seven joint venture property investments). Total debt on the Accounts wholly-owned real estate portfolio as of June 30, 2009 was $1.8 billion, representing 19.8% of Total Net Assets. The Accounts share of joint venture debt ($1.9 billion) is netted against the underlying properties when determining the joint venture values shown on the Statement of
Investments. When the joint venture debt is also considered, total debt on the Accounts portfolio as of June 30, 2009 was $3.7 billion, representing 40.1% of Total Net Assets. The Account currently has no Account-level debt. Management believes that the Accounts real estate portfolio is diversified by location and property type. The largest investment, 1001 Pennsylvania Avenue, located in Washington, DC represented 4.52% of Total Investments and 4.85% of Total Real Estate Investments. As discussed in the Accounts
prospectus, the Account does not intend to buy and sell its real estate investments simply to make short-term profits. Rather, the Accounts general strategy in selling real estate investments is to dispose of those assets that have either maximized in value, have underperformed or face deteriorating property-specific
or market conditions, represent properties needing significant capital infusions in the future, or which management deems are appropriate to dispose of in order to remain consistent with its intent to diversify the Account by property type and geographic location. The Account will reinvest any sale proceeds that it
does not need to pay operating expenses or to meet redemption requests (e.g., cash withdrawals or transfers). The following charts reflect the diversification of the Accounts real estate assets by region and property type and list its ten largest investments. All information is based on the fair values of the investments at June 30, 2009. Diversification by Fair Value(1)
East
West
South
Midwest
Foreign(2)
Total Office
22.4
%
19.4
%
12.7
%
1.2
%
2.2
%
57.9
% Apartment
2.2
%
5.9
%
4.9
%
0.0
%
0.0
%
13.0
% Industrial
1.5
%
6.2
%
4.0
%
1.4
%
0.0
%
13.1
% Retail
3.5
%
1.0
%
8.4
%
0.5
%
2.1
%
15.5
% Storage(3)
0.2
%
0.1
%
0.1
%
0.1
%
0.0
%
0.5
% Total
29.8
%
32.6
%
30.1
%
3.2
%
4.3
%
100.0
%
(1)
Fair values for wholly-owned properties are reflected gross of any debt, while fair values for joint venture investments are reflected net of any debt. (2) Represents real estate investments in the United Kingdom and France. (3) Represents a portfolio of storage facilities. 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 37
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
501.3
(c)
4.85
4.52
Four Oaks Place
Houston
TX
Office
432.4
(d)
4.18
3.90
DDR Joint Venture
Various
USA
Retail
393.1
(e)
3.80
3.54
Fourth and Madison
Seattle
WA
Office
340.0
(f)
3.29
3.06
50 Fremont
San Francisco
CA
Office
323.1
(g)
3.13
2.91
99 High Street
Boston
MA
Office
276.4
(h)
2.67
2.49
780 Third Avenue
New York City
NY
Office
270.0
2.61
2.43
The Newbry
Boston
MA
Office
268.2
2.59
2.42
The Florida Mall
Orlando
FL
Retail
258.2
2.50
2.33
1900 K Street
Washington
DC
Office
237.4
2.30
2.14
(a)
Value as reported in the June 30, 2009 Statement of Investments. Investments
owned 100% by TIAA are reported based on fair value. Investments
in joint ventures are reported at fair value and are presented at
the Accounts ownership interest. (b) Total Real Estate Portfolio excludes the mortgage loan receivable. (c) This property is shown gross of debt. The value of the Accounts interest less leverage is $293.6 M. (d) This property is shown gross of debt. The value of the Accounts interest less leverage is $254.9M. (e) This property is held in a 85%/15% joint venture with Developers Diversified Realty Corporation (DDR), and consists of 65 retail properties located in 13 states and is shown net of debt. (f) This property is shown gross of debt. The value of the Accounts interest less leverage is $197.8 M. (g) This property is shown gross of debt. The value of the Accounts interest less leverage is $190.1 M. (h) This property is shown gross of debt. The value of the Accounts interest less leverage is $96.0 M. As of June 30, 2009, the Account also held investments in government agency notes representing 2.55% of Total Investments, U.S. Treasury Bills representing 1.87% of Total Investments, real estate limited partnerships representing 1.85% of Total Investments, and a mortgage loan receivable representing
0.62% of Total Investments. Results of Operations Six months ended June 30, 2009 compared to six months ended June 30, 2008 Performance The Accounts total return was -17.49% for the six months ended June 30, 2009 as compared to the positive return of 0.97% for the six months ended June 30, 2008. The Accounts performance in the second quarter of 2009 reflects a continued decline in the aggregate net asset value of the Accounts 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 first half of 2009 saw continued valuation declines resulting from the weakened economy and faltering financial and
credit markets. Transaction activity continues to remain at historically low levels and capital depreciation has occurred in most markets. The Accounts annualized total returns (after expenses) over the past one, three, five, and ten year periods ended June 30, 2009 were -29.84%, -5.24%, 2.52%, and 4.83%, respectively. As of June 30, 2009, the Accounts annualized total return since inception was 5.83%. The Accounts total net assets decreased from $17.1 billion at June 30, 2008 to $9.3 billion at June 30, 2009. The primary drivers of this 45.5% decrease were depreciation in value of the Accounts wholly owned, joint venture, and limited partnership real estate investments (approximately 53% of the decrease)
and net participant transfers out of the Account (approximately 47% of the decrease). 38
% of Total
Real Estate
Portfolio(b)
% of Total
Investments
Income and Expenses The Accounts net investment income, after deduction of all expenses, was 16.2% lower for the six months ended June 30, 2009, as compared to the same period in 2008. This decline is due to declines in Net real estate income, Income from real estate joint ventures and limited partnerships, and Interest and
Dividend income, offset somewhat by decreases in Account level expenses. The Accounts real estate holdings, including real estate joint ventures and limited partnerships, generated approximately 99.7% and 84.6% of the Accounts Total investment income (before deducting Account level expenses) during the six months ended June 30, 2009 and 2008, respectively. The 21.9%
decrease in the Accounts Total investment income was due to a 98.3% decrease in the Accounts interest and dividend income and a 6.9% decrease in Net real estate income. Net real estate Income decreased approximately 6.9% in the six months ended June 30, 2009, as compared to the same period in 2008. This decrease is primarily due to less rental income ($13.3 million when compared to the same period in 2008), an increase in interest expense ($9.9 million) offset by reductions
in property operating expenses of approximately $6.6 million. The decline in rental income in the six months ended June 30, 2009 is due primarily to lower income from properties that were sold since June of 2008 and lease termination income that was earned in the second quarter of 2008. Interest expense
increased due to the $557 million of additional debt that was incurred during the second half of 2008. Property operating expense reductions are the result of lower insurance costs (approximately $1.0 million), lower utility costs (approximately $2.0 million), and reductions in various other property operating
expenses. Income from real estate joint ventures and limited partnerships was $60.2 million for the six months ended June 30, 2009, as compared to $68.6 million for the six months ended June 30, 2008. This 12.2% decrease is due to a decrease in income earned and distributed by the joint ventures (primarily the DDR
joint venture). The DDR Joint Venture is highly concentrated in the retail sector and experienced tenant bankruptcies including Circuit City, Goodys and Linens and Things in the late part of 2008 that have reduced the income of the venture available to distribute during the six months ended June 30, 2009. The decrease in interest income is due to a lower marketable security balance in the first six months of 2009 compared to the same period in 2008, along with a decrease in yields earned on those securities. Also, during the second quarter of 2008, the Account sold the real estate equity securities and did not
hold any of those securities in 2009, which resulted in no dividend income for the first six months of 2009, compared with dividend income of $5.1 million in the same period during 2008. The Account incurred overall Account level expenses of $50.9 million for the six months ended June 30, 2009, which represents a 41.6% decrease from $87.1 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, there were increased costs allocated to the Account associated with new technology investments that have been reduced significantly in the first half of 2009. The other factor is the general decline in the costs allocated to manage and distribute the Account and is consistent with the
reduction in the average net assets of the Account. Investment advisory charges will not decline at the same rate as net assets as certain of these costs are not directly associated to the net asset value of the Account. Mortality and expense risk expenses and Liquidity guarantee expenses declined during the six
months ended June 30, 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 effective 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 $2.2 billion for the six months ended June 30, 2009, a significant increase in loss when compared to a net realized and unrealized loss of $130.0 million for the six months ended June 30, 2008. 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 Accounts wholly-owned real estate property investments of $1.5 billion for the six months ended June 30, 2009 compared to a loss of $44.3 million during the same
period in 2008. Additionally, the Accounts interests in joint ventures and limited partnerships posted a Net realized and unrealized loss of $703.1 million for the six months ended June 30, 2009 as compared to a Net realized and unrealized loss of $93.3 million for the six months ended June 30, 2008. 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 39
decline in value of the Accounts 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 in the first half of 2009. Mortgage
loans payable experienced an unrealized loss of approximately $15.3 million
during the six months ended June 30, 2009 compared to an unrealized gain
of $4.4 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 $15.3 million
unrealized loss, foreign exchange fluctuations (due to a weakening U.S. dollar
during the first half of 2009) accounted for an approximately $28.1 million
loss which was offset by a gain of approximately $12.8 million for the six
month period. This $12.8 million gain resulted from the higher loan to value
ratios on the Accounts underlying properties (as a result of the significant
declines in property values). Three months ended June 30, 2009 compared to three months ended June 30, 2008 Performance The Accounts total return was -9.96% for the three months ended June 30, 2009. This was a significant decline compared to the positive return of 0.27% for the three months ended June 30, 2008. The Accounts performance in the second quarter of 2009 reflects a decline in the aggregate net asset value of the
Accounts real estate property investments, including investments owned in joint ventures and limited partnerships, as well as lower income from marketable securities and unrealized losses from the mortgage loans payable. Income and Expenses The Accounts net investment income, after deduction of all expenses, was 11.6% lower for the three months ended June 30, 2009, as compared to the same period in 2008. The Accounts real estate holdings, including real estate joint ventures and limited partnerships, generated approximately 99.7% and 89.0% of the Accounts total investment income (before deducting Account level expenses) during the three months ended June 30, 2009 and 2008, respectively. The 18.8%
decrease in the Accounts total investment income (before Account level expenses) was due to a 97.6% decrease in the Accounts interest income, a 19.3% decline in Income from real estate joint ventures and limited partnerships and a 6.2% decrease in Net real estate income. The decrease in interest income is due to a lower marketable security balance in the second quarter of 2009 compared to the same period in 2008, along with a decrease in yields earned on those securities. Net real estate income decreased approximately 6.2% in the three months ended June 30, 2009, as compared to the same period in 2008. This decrease is primarily due to lower rental revenues ($12.3 million) and an increase in interest expense ($5.7 million) resulting from the additional debt that was incurred
during the second half of 2008, offset by a reduction in Operating expenses of $9.1 million. The decline in rental income in the three months ended June 30, 2009 is due primarily to lower income from properties that were sold since June 2008 and lease termination income that was earned in the second quarter of
2008. Property operating expense reductions are the result of lower insurance costs (approximately $4.2 million), lower utility costs (approximately $1.3 million), and reductions in various other property operating expenses. Income from real estate joint ventures and limited partnerships was $30.4 million for the three months ended June 30, 2009, as compared to $37.7 million for the three months ended June 30, 2008. This 19.3% decrease is due to a decrease in income earned and distributed by the joint ventures. In particular, the
DDR Joint Venture is highly concentrated in the retail sector and experienced tenant bankruptcies in the late part of 2008 that have reduced the income of the venture available to distribute during the three months ended June 30, 2009. The Account incurred overall Account level expenses of $24.5 million for the three months ended June 30, 2009, which represents a 43.5% decrease from $43.4 million for the same period in 2008. The decreases in Investment advisory and Administrative and distribution charges are due to the general decline in
the costs allocated to manage and distribute the Account, which is consistent with the reduction in the average net assets of the Account. Investment advisory charges will not decline at the same rate as net assets as certain of these costs are not directly associated to the net asset value of the Account. Mortality and
expense risk expenses and Liquidity guarantee expenses declined during the second quarter of 2009 primarily due to the lower net assets as compared to the same period in 2008. The decline of the liquidity guarantee expenses 40
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 effective 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 $1.2 billion for the three months ended June 30, 2009, a
significant increase in loss when compared to a Net realized and unrealized
loss of $101.1 million for the three months ended June 30, 2008. 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 Accounts wholly-owned real estate property investments of $609.1
million for the three months ended June 30, 2009 compared to a loss of $87.2
million during the same period in 2008. Additionally, the Accounts
interests in joint ventures and limited partnerships posted a net realized
and unrealized loss of $469.6 million for the three months ended June 30,
2009 as compared to a net realized and unrealized loss of $49.6 million for
the three months ended June 30, 2008. 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 Accounts
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 the three months ended June 30, 2009 compared to the
same period in 2008. Mortgage
loans payable experienced an unrealized loss of approximately $86.0 million
during the second quarter of 2009 compared to an unrealized gain of $39.1
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 $86.0 million unrealized loss,
foreign exchange fluctuations (due to a weakening U.S. dollar during the
second quarter of 2009) accounted for approximately $28.7 million of the
unrealized loss. The remaining $57.3 million of unrealized loss was primarily
due to changes in risk premiums and increased returns demanded by the market
associated with the higher loan to value ratios on the Accounts underlying
properties. Liquidity and Capital Resources As of June 30, 2009 and 2008, the Accounts liquid assets (i.e., cash, marketable securities, and receivables for short-term securities sold) had a value of $0.5 billion and $3.2 billion, respectively (approximately 4.6% and 17.2% of the Accounts total investments at such dates, respectively). The decrease in the
Accounts liquid assets as of June 30, 2009 compared to June 30, 2008 was due primarily to sustained significant net participant transfers out of the Account since early 2008 and in particular, during the six months ended December 31, 2008. When compared to December 31, 2008, the Accounts liquid assets have
remained relatively stable as a result of Liquidity Units (accumulation units purchased by TIAA are generally referred to as Liquidity Units) purchased by TIAA during the first half of 2009 to respond to net participant transfer activity out of the Account during this period. As of August 12, 2009, the Accounts
liquid assets had a value of approximately $450 million (approximately 4.2% of the Accounts total investments). During the six months ended June 30, 2009, the Account received $369.9 million in premiums and had an outflow of $1.4 billion in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds, while, during the six months ended June 30, 2008, the Account received $550.1
million in premiums and had an outflow of $979.5 million in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds. During the three months ended June 30, 2009, the Account received $180.2 million in premiums and had an outflow of $451.2 million in net participant
transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual funds, while, during the three months ended June 30, 2008, the Account received $265.1 million in premiums and had an outflow of $535.9 million in net participant transfers to TIAA, the CREF accounts, and TIAA-CREF affiliated mutual
funds. Primarily as a result of significant net participant transfers, on December 24, 2008, pursuant to TIAAs 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 August 12, 2009, the
TIAA general account has purchased an additional $1.059 billion in the aggregate of Liquidity Units in a number of separate transactions. During the quarter ended June 30, 2009, the TIAA general account purchased $271.7 million in the aggregate of Liquidity Units in a number of separate transactions. As
disclosed under Establishing and Managing the Accountthe Role of TIAALiquidity Guarantee in the Accounts 41
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. 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. TIAAs 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 TIAAs interest
through sales of assets from the Account if TIAAs interest exceeds the trigger point. Even if the independent fiduciary so requires, TIAAs obligation to provide liquidity under the guarantee, which is required by the New York State Insurance Department, will continue. While the independent fiduciary is vested
with oversight and approval over any redemption of TIAAs Liquidity Units, it is expected that, unless the trigger point has been reached, redemptions of TIAA owned Liquidity Units would occur once the Account has experienced net participant inflows for an extended period of time and maintains an adequate
level of cash or liquid investments. Whenever TIAA owns Liquidity Units, the Accounts independent fiduciary will monitor the Account, including reviewing the purchase and redemption of Liquidity Units by TIAA to ensure the Account uses the correct accumulation unit values. In addition, the independent fiduciarys responsibilities include:
establishing the percentage of total accumulation units that TIAAs ownership should not exceed (the trigger point) and creating a method for reviewing the trigger point; approving any adjustment of TIAAs ownership interest in the Account and, in its discretion, requiring an adjustment if TIAAs ownership of Liquidity Units reaches the trigger point; and once the trigger point has been reached, participating in a program, if any, to reduce TIAAs 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 TIAAs 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 fiduciarys opinion, such sales are desirable to reduce TIAAs
ownership of Liquidity Units. As of the date of this Form 10-Q, 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 TIAAs ownership interest in the Account and provide further recommendations as
necessary. As of August 12, 2009, TIAA owned approximately 11.7% 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 fiduciarys duties under ERISA, the risk that a conflict of interest could arise due to the level of TIAAs ownership
interest in the Account. The Accounts liquid assets continue to be available to purchase additional suitable real estate properties and to meet the Accounts expense needs and participant redemption requests (i.e., cash withdrawals, benefit payments, or transfers). While the Accounts liquid investments have dropped below 15% of its
total assets during this recent period of significant net participant outflows, the Accounts 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 Accounts cash and marketable securities will likely comprise less than 10% of the Accounts assets, but management intends to increase the Accounts holdings in cash and short-term marketable securities to the extent practicable, consistent with its investment strategy and
objective. Management continues to believe that the significant recent net negative outflow 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.
Management cannot predict whether the net outflows will continue at the same rate, a 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 42
the Accounts operations and returns. Additionally, continued net outflow activity could require TIAA to purchase additional Liquidity Units, perhaps to a significant degree. The Accounts net investment income continues to be an additional source of liquidity for the Account but it decreased from $298.2 million for the six months ended June 30, 2008 to $249.9 million for the six months ended June 30, 2009. The Account, under certain conditions more fully described on page 11 of the Accounts prospectus (as supplemented from time to time), dated May 1, 2009 under Borrowing, may borrow money and assume or obtain a mortgage on a property (i.e., to make leveraged real estate investments). Also, to meet
any short-term cash needs, the Account may obtain a line of credit that may be unsecured and/or contain terms that may require the Account to secure the loan with one or more of its properties. Under the Accounts current investment guidelines, the Accounts total borrowings may not exceed 30% of the
Accounts Total Net Assets at the time of incurrence. 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 the Accounts Total Net Assets fluctuate from time to time (whether due to valuation adjustments on the underlying assets or otherwise), the Accounts total borrowings may exceed 30% of Total Net Assets, even without the incurrence of additional leverage
at such time. Under these current guidelines, at any time when the Account has total borrowings in excess of 30% of Total Net Assets, it may not incur additional debt. In calculating this limit, only the Accounts actual percentage interest in any borrowings is included, and not that of 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 June 30, 2009 the Account did not have any construction loans. As
of June 30, 2009, the Accounts total borrowings, including debt on
the Accounts wholly owned investments and the Accounts share
of debt on investments in joint ventures (including the undrawn principal
portion of a line of credit), represented 40.1% of the Accounts Total
Net Assets. Total outstanding principal amount of indebtedness on the Accounts
wholly owned investments and the Accounts share of debt on the Accounts
joint venture investments (including the undrawn principal portion of a line
of credit) represented 30.3% of the Accounts total gross assets as
of June 30, 2009. As of August 12, 2009, these Accounts total borrowings
represented 42.8% of the Accounts Total Net Assets. Recent Transactions The following describes property transactions by the Account in the second 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 None. Financings None. Critical Accounting Policies The financial statements of the Account are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the Accounts 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 43
and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Accounting for Investments at Fair Value In September 2006, Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the United States, and requires additional
disclosures about fair value measurements. This Statement does not require any new fair value measurements. This statement was effective as of January 1, 2008 for the Account. The adoption of Statement No. 157 did not have a material impact on the Accounts financial position or results of operations. In February 2007, FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure financial instruments and certain other items at fair value and expanded the use of fair value measurements when warranted. The
Account effectively adopted Statement 159 on January 1, 2008 and reports all existing and plans to report all future mortgage loans payable at fair value using this Statement. The adoption of Statement No. 159 did not have a material impact on the Accounts financial position or results of operations. Valuation Hierarchy In accordance with FASB Statement No.157, Fair Value Measurements, 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 1Valuations 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 2Valuations 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 3Valuations 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 loan receivable and mortgage loans payable. An investments categorization within the valuation hierarchy described above is based upon the lowest level of input that is significant to the fair value measurement. 44
The Accounts investments and mortgage loans payable are stated at fair value. Effective January 1, 2008, in connection with the adoption of SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities, the Account reports all existing and plans to report all future mortgage loans payable 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, a counterpartys creditworthiness, the Accounts creditworthiness, liquidity, and other observable and unobservable data 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
Accounts real estate properties are generally classified within Level 3 of the valuation hierarchy. Fair value for real estate properties is defined as the most probable price for which a property will sell in a competitive market under all conditions requisite to a fair sale. Determination of fair value involves judgment
because the actual market value of real estate can be determined only by negotiation between the parties in a sales transaction. The Accounts 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 Accounts 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. 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 investments 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 for each real estate property throughout the quarter, which is intended to result in appraisal adjustments (to the extent such adjustments are made) that happen regularly
throughout each quarter and not on one specific day in each period. TIAAs internal appraisal staff oversees the entire appraisal process, in conjunction with the Accounts independent fiduciary (the independent fiduciary is more fully described in the paragraph below). Further, management reserves the right to order an appraisal and/or conduct another valuation outside of the
normal 45
quarterly process when facts or circumstances at a specific property change. Any differences in the conclusions of TIAAs 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). 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 tenants ability to pay amounts
due to the Account under a lease (including bankruptcy filing of that tenant). 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 professionals 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 propertys 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 propertys 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 Accounts daily net asset value until the next valuation review or appraisal. Valuation of Real Estate Joint Ventures and Limited Partnerships Real estate joint ventures and certain limited partnerships are stated at the fair value of the Accounts ownership interests of the underlying entities. The Accounts 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 Accounts real estate joint ventures and certain limited partnerships are generally classified within level 3 of the valuation hierarchy. Certain limited partnership interests for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of the Investment Committee of the 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. 46
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. Valuation of Mortgage Loan Receivable The mortgage loan receivable is stated at fair value. The mortgage loan receivable is valued based on market factors, such as market interest rates and spreads for comparable loans, and the performance of the underlying collateral. The Accounts 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 exclusive of transaction costs. Mortgage loans payable are valued based on market factors, such as market interest rates and spreads for
comparable loans, the performance of the underlying collateral, and the credit quality of the Account. The Accounts 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 Accounts 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. 47
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 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 and recorded when the financial statements of the limited partnerships are received by the Account. 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 Accounts 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 Statement of Position (SOP) 07-1, Clarification of the Scope of the Audit and Accounting Guide, Investment Companies, and Accounting by Parent
Companies and Equity Method Investors for Investments in Investment Companies. The SOP 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 issued Staff Position (FSP) SOP 07-1-1 indefinitely delaying the effective date of SOP 07-1 to allow FASB time to consider significant issues related to the implementation of SOP 07-1. In February 2009 the Emerging Issues Task Force (EITF)
added the Application of the AICPA Audit and Accounting Guide, Investment Companies, by Real Estate Investment Companies to the EITF agenda which will be discussed at a future meeting. The FASB staff anticipates the creation of 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 December 2007, FASB issued Statement No. 141(R), Business Combinations, which establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and
goodwill acquired in a business combination or a gain from a bargain purchase. It is expected that more transactions will constitute a business under FASB Statement No. 141(R). This Statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Account reports all investments in real estate at fair value and therefore does not account for the acquisition of real estate investments as a business combination under this statement. In December 2007, FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statementsan Amendment of ARB No. 51, which establishes and expands accounting and reporting 48
standards for minority interests, which will be recharacterized as noncontrolling interests, in a subsidiary and the deconsolidation of a subsidiary. This Statement is effective for fiscal years beginning on or after December 15, 2008. The adoption of Statement No. 160 did not impact the financial position or results of
operations of the Account. In April 2009, FASB issued FASB Staff Position FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value in accordance
with FASB Statement No. 157, Fair Value Measurements, when the volume of activity for an asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP is effective for periods ending after June 15, 2009 with early
adoption permitted. The adoption of this FSP did not have a material impact to the financial position or results of operations of the Account. In May 2009, the Financial Accounting Standards Board issued Statement No. 165 Subsequent Events which establishes standards under generally accepted accounting principles (GAAP) required for the accounting and disclosure of subsequent events. This statement requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that date and is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the financial statements or results of operations of the Account. The required
disclosure of the date through which subsequent events have been evaluated is provided in Note 10 to the notes to the financial statements. In June 2009, the Financial Accounting Standards Board issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. Statement No. 168 establishes FASB Accounting Standards
Codification (Codification) as the source of authoritative accounting principles to be applied with equal authority by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. This Statement is effective for financial statements issued for reporting periods ending after
September 15, 2009 and will impact the way the Account references U.S. GAAP accounting standards in the financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Accounts real estate holdings, including real estate joint ventures and limited partnerships, which, as of June 30, 2009, represented 95.0% of the Accounts total investments, expose the Account to a variety of risks. These risks include, but are not limited to:
General Real Estate RiskThe risk that the Accounts 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 RiskThe 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; Risk Relating to Property SalesThe 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 BorrowingThe 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 RiskThe risk that the value of the Accounts 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 (95% as of June 30, 2009) of the Accounts total investments being held in real estate and real estate related assets, the Accounts 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 between 75% and 85% of its investments in real estate and real estate related assets. The 49
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 June 30, 2009, 5.0% of the Accounts total investments were comprised of marketable securities and an adjustable rate mortgage loan receivable. As of June 30, 2009, 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 Accounts financial statements. The Accounts 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 7 to the Accounts financial statements contained herein. The Accounts investments in cash equivalents, marketable securities (whether debt or equity), and mortgage loans receivable are subject to the following general risks:
Financial/Credit RiskThe 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 issuers current earnings will fall or that its overall financial
soundness will decline, reducing the securitys value. Market Volatility RiskThe risk that the Accounts 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 VolatilityThe risk that interest rate volatility may affect the Accounts current income from an investment. Deposit/Money Market RiskThe risk that, to the extent the Accounts 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, these securities, to the extent the Account were to hold mortgage-backed securities (including commercial mortgage-backed securities (CMBS), 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 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. Other risks inherent to, and associated with, the acquisition, ownership and sale of real estate and real estate related investments and other investments the Account makes from time to time are detailed elsewhere in this Form 10-Q, including in Part I, Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations and the risk factors discussed in both Item 1A. Risk Factors in the Form 10-K and in Part II, Item 1A, in the Accounts Form 10-Q for its quarter ended March 31, 2009. ITEM 4. 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 registrants reports under the Securities 50
Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to management, including the registrants Chief Executive Officer and the Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and participation of the registrants management, including the registrants CEO and CFO, the registrant conducted an evaluation of the effectiveness of the registrants disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of June 30, 2009. Based
upon managements review, the CEO and the CFO concluded that the registrants disclosure controls and procedures were effective as of June 30, 2009. (b) Changes in internal control over financial reporting. There have been no changes in the registrants internal control over financial reporting that occurred during the registrants last fiscal quarter that materially affected, or are reasonably likely to materially affect, the registrants internal control over
financial reporting. 51
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. There are no material legal proceedings to which the Account is a party, or to which the Accounts assets are subject. ITEM 1A. RISK FACTORS. There have been no material changes from our risk factors as previously reported in the Accounts Annual Report on Form 10-K for the year ended December 31, 2008, as updated in the Accounts Quarterly Report on Form 10-Q for the three months ended March 31, 2009. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. The Code of Ethics for TIAAs senior financial officers, including its principal executive officer, principal financial officer, principal accounting officer, or controller, and persons performing similar functions, has been filed as an exhibit to the Form 10-K and can also be found on the following two web sites, http://www.tiaa-cref.org/prospectuses/index.html and http://www.tiaa-cref.org/about/governance/corporate/ 52
topics/annual_reports.html. Information included in such websites is expressly not incorporated by reference into this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS
(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)*
Restated Charter of TIAA
(B)*
Bylaws of TIAA (as amended)
(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(8)
(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 Accounts 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 Accounts 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 Accounts 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 Accounts 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 Accounts 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 herein by reference to Exhibit 14 to the Annual Report on Form 10-K of the Account for the year ended December 31, 2008 and filed with the Commission on March 20, 2009 (File No. 33-92990). 53
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant, TIAA Real Estate Account, has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York, on the 13th day of August, 2009.
TIAA REAL ESTATE ACCOUNT
By:
TEACHERS INSURANCE AND ANNUITY
August 13, 2009
By:
/s/ Roger W. Ferguson, Jr.
Roger W. Ferguson, Jr.
August 13, 2009
By:
/s/ Georganne C. Proctor
Georganne C. Proctor 54
ASSOCIATION OF AMERICA
President and
Chief Executive Officer
Executive Vice President and
Chief Financial Officer
Exhibit 3(a)
RESTATED CHARTER
OF
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
Originally Filed March 4, 1918
As Amended June 8, 2009
ARTICLE ONE
This corporation shall be named Teachers Insurance and Annuity Association of America.
ARTICLE TWO
The place where the corporation is to be located and have its principal office for the transaction of business is the City and County of New York, State of New York.
ARTICLE THREE
The corporation shall have power to do any and all kinds of life insurance, annuities and accident and health insurance business specified in paragraphs 1, 2 and 3 of Section 1113(a) of the Insurance Law of the State of New York, as follows:
(1) Life Insurance means every insurance upon the lives of human beings, and every insurance appertaining thereto, including the granting of endowment benefits, additional benefits in the event of death by accident, additional benefits to safeguard the contract from lapse, accelerated payments of part or all of the death benefit or a special surrender value upon (A) diagnosis of terminal illness defined as a life expectancy of twelve months or less, (B) diagnosis of a medical condition requiring extraordinary medical care or treatment regardless of life expectancy, (C) certification by a licensed health care practitioner of any condition which requires continuous care for the remainder of the insureds life in an eligible facility or at home when the insured is chronically ill as defined by Section 7702(B) of the Internal Revenue Code and regulations thereunder, provided the accelerated payments qualify under Section 101(g)(3) of the Internal Revenue Code and all other applicable sections of federal law in order to maintain favorable tax treatment, or (D) certification by a licensed health care practitioner that the insured is chronically ill as defined by Section 7702(B) of the Internal Revenue Code and regulations thereunder, provided the accelerated payments qualify under Section 101(g)(3) of the Internal Revenue Code and all other applicable sections of federal law in order to maintain favorable tax treatment and the insurer that issues such policy is a qualified long term care insurance carrier under Section 4980c of the Internal Revenue Code or provide a special surrender value, upon total and permanent disability of the insured, and optional modes of settlement of proceeds. Life insurance also includes additional benefits to safeguard the contract against lapse in the event of unemployment of the insured or in the event the insured is a resident of a nursing home. Amounts paid the insurer for life insurance and proceeds applied under optional modes of settlement or under dividend options may be allocated by the insurer to one or more separate accounts pursuant to section four thousand two hundred forty of this chapter.
(2) Annuities means all agreements to make periodical payments for a period certain or where the making or continuance of all or some of a series of such payments, or the amount of any such payment, depends upon the continuance of human life, except payments made under the authority of paragraph one hereof. Amounts paid the insurer to provide annuities and proceeds applied under optional modes of settlement or under dividend options may be allocated by the insurer to one or more separate accounts pursuant to section four thousand two hundred forty of this chapter.
(3) Accident and health insurance means (i) insurance against death or personal injury by accident or by any specified kind or kinds of accident and insurance against sickness, ailment or bodily injury, including insurance providing disability benefits pursuant to Article Nine of the workers compensation law, except as specified in item (ii) hereof; and (ii) non-cancellable disability insurance, meaning insurance against disability resulting from sickness, ailment or bodily injury (but excluding insurance solely against accidental injury) under any contract which does not give the insurer the option to cancel or otherwise terminate the contract at or after one year from its effective date or renewal date;
and any amendments to such paragraphs or provisions in substitution therefor which may be hereafter adopted, provided the corporation is qualified under such amendments to do such kinds of business, together with any other kind or kinds of business to the extent necessarily or properly incidental to the kinds of insurance business which the corporation is so authorized to do. The corporation shall also have the general rights, powers and privileges of a corporation, as the same now or hereafter are declared by the applicable laws of the State of New York and any and all other rights, powers and privileges now or hereafter granted by the Insurance Law of the State of New York or any other law or laws of the State of New York to life insurance companies having power to do the kinds of business hereinabove referred to. The corporation shall transact its business exclusively on a non-mutual basis and shall issue only nonparticipating policies.
ARTICLE FOUR
The corporate powers of the corporation shall be vested in and exercised by a board of trustees, and by such officers, agents or committees as the board of trustees may from time to time elect or appoint.
ARTICLE FIVE
Section 1. The board of trustees shall consist of no less than thirteen trustees or the minimum number of trustees required by law, whichever is less, and no more than twenty-four trustees, and all trustees shall be elected to a term of one year. The number of members of the board of trustees shall be determined from time to time by a resolution adopted by board of trustees. The term of office of each trustee so elected at the annual meeting of stockholders shall commence at the beginning of the annual meeting of the board of trustees next succeeding such election. The term of office of any trustee elected other than at the annual meeting of stockholders by the board of trustees will take effect immediately upon election or as otherwise designated by the board. The term of office of each trustee elected shall continue until the beginning of the next annual meeting of the board of trustees and a successor shall take office. All trustees shall be at least eighteen years of age, a majority of trustees shall be citizens and residents of the United States, and not less than two trustees shall be residents of the State of New York. A trustee need not be a stockholder.
Section 2. The annual meeting of stockholders for the election of trustees shall be held on the second Tuesday in July of each year, if not a legal holiday, or, if a legal holiday, then on the next preceding business day, and at an hour specified by notice mailed or transmitted electronically not fewer than ten days nor more than sixty days in advance. If the chairman, the chief executive officer or the Nominating and Governance Committee shall so determine, the annual meeting may be held at a different
-2-
date within sixty days following the second Tuesday of July, provided that prior notice of such different date shall be provided to the Superintendent of Insurance, and such different date shall be specified in the notice of meeting. Any vacancy on the board of trustees, or newly created trusteeship resulting from an increase in the number of trustees, occurring in an interval between the annual meetings of stockholders may be filled for the unexpired portion of the term of such trusteeship by the board of trustees in such manner as the bylaws of the corporation may provide.
Section 3. The board of trustees shall have power to adopt bylaws providing for the appointment of an executive committee, not less than four in number, to exercise, to the extent permitted by law, all the powers of the trustees in the intervals between meetings of the board of trustees, and prescribing such other rules and regulations, not inconsistent with law or this charter, for the conduct of the affairs of the corporation as may be deemed expedient, and such bylaws may be amended or repealed by them at pleasure. The board of trustees shall also have all other powers usually vested in boards of directors of life insurance companies not inconsistent with law or this charter, and may at any time accept or exercise any and all additional powers and privileges which may be conferred upon this corporation, or upon life insurance companies in general. One-third of the trustees shall constitute a quorum at all meetings of the board.
ARTICLE SIX
The board of trustees shall annually elect the executive officers of the corporation as provided in the bylaws. Other officers may be elected or appointed as provided in the bylaws. One person may hold more than one office, except that no person shall be both president and secretary. The chief executive officer shall be a member of the board of trustees, but no other officer need be a trustee.
ARTICLE SEVEN
The capital of the corporation shall be Two Million Five Hundred Thousand Dollars ($2,500,000) which shall be divided into two thousand five hundred (2,500) shares of One Thousand Dollars ($1,000) each.
ARTICLE EIGHT
The purpose of the corporation is to aid and strengthen nonprofit colleges, universities, institutions engaged primarily in education or research, governments and their agencies and instrumentalities, and other nonprofit institutions by providing annuities, life insurance, and accident and health insurance, suited to the needs of such entities, their employees and their families, on terms as advantageous to the holders and beneficiaries of such contracts and policies as shall be practicable, and by counseling such entities and individuals concerning pension plans or other measures of security, all without profit to the corporation or its stockholders. The corporation may receive gifts and bequests to aid it in performing such services.
ARTICLE NINE
The duration of the existence of the corporation shall be perpetual.
ARTICLE TEN
No trustee shall be personally liable to the corporation or any of its stockholders for damages for any breach of duty as a trustee; provided, however, that the forgoing provision shall not eliminate or limit (i) the liability of a trustee if a judgment or other final adjudication adverse to him or her establishes that
-3-
his or her acts or omissions were in bad faith or involved intentional misconduct or were acts or omissions (a) which he or she knew or reasonably should have known violated the New York Insurance Law or (b) which violated a specific standard of care imposed on trustees directly, and not by reference, by a provision of the New York Insurance Law (or any regulations promulgated thereunder) or (c) which constituted a knowing violation of any other law, or establishes that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled; or (ii) the liability of a trustee for any act or omission prior to the adoption of this amendment by the stockholders of the corporation.
ARTICLE ELEVEN
The fiscal year of the corporation shall commence on the first day of January and shall end on the thirty-first day of December.
ARTICLE TWELVE
This charter may be amended at any time in accordance with Section 1206 of the New York Insurance Law, as amended from time to time.
-4-
Exhibit 3(b)
BYLAWS
OF
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
As Amended June 8, 2009
ARTICLE ONE
Stockholders
Section 1. Annual Meeting. The annual meeting of stockholders for the election of trustees and for the transaction of such other business as may properly come before the meeting shall be held on the second Tuesday in July of each year, if not a legal holiday, or, if a legal holiday, then on the next preceding business day, at the office of the Association in the City of New York, and at an hour specified by notice mailed not less than ten nor more than sixty days in advance. If the chief executive officer or the nominating and governance committee shall so determine, the annual meeting may be held at a different date, time and place, as shall be specified in the notice of meeting. The notice shall be in writing and shall be signed by the chairman, or the president, or a vice president, or the secretary. Special meetings of the stockholders may be held at the said office of the Association whenever called by the chairman, the president or the chief executive officer, or by order of the board of trustees, or by the holders of at least one third of the outstanding shares of stock of the Association, or may be held subject to the provisions of the emergency bylaws of the Association.
Section 2. Notice. It shall be the duty of the secretary not less than ten nor more than sixty days prior to the date of each meeting of the stockholders to cause a notice of the meeting to be mailed by first class mail or by electronic transmission. If transmitted electronically, such notice is given when directed to the stockholders electronic mail address as supplied by the stockholder to the secretary of the Association or as otherwise directed pursuant to the stockholders authorization or instructions.
Section 3. Voting. At all meetings of stockholders each stockholder shall be entitled to one vote upon each share of stock owned by him/her of record on the books of the Association ten days before the meeting. Stockholders may vote in person or by proxy appointed in writing.
Section 4. Quorum. The presence in person or by proxy of the holders of a majority of the shares in the Association shall be necessary to constitute a quorum at any meeting of stockholders.
Section 5. Telephonic Participation. At all meetings of stockholders, stockholders may participate by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting.
ARTICLE TWO
Trustees
Section 1. General Management. The general management of the property, business and affairs of the Association shall be vested in the board of trustees provided by the charter. The board of trustees shall have full power and authority to take any action relating to the management of the Association, except for actions required to be taken by committees consisting entirely of trustees satisfying the independence requirements of Section 1202(b)(2) of the New York Insurance Law.
The board of trustees shall consist of no less than thirteen trustees or the minimum number of trustees required by law, whichever is less, and no more than twenty-four trustees. The number of trustees shall be fixed by a vote of the board of trustees. An increase or decrease in the number of trustees on the board of trustees shall require the affirmative vote of the majority of the entire board. No decrease in the number of trustees shall shorten the term of an incumbent trustee. All trustees shall be elected to a term of one year.
The term of office of each trustee so elected at the annual meeting of stockholders shall commence at the beginning of the annual meeting of the board of trustees next succeeding such election. The term of office of any trustee elected other than at the annual meeting of stockholders will take effect immediately upon election or as otherwise designated by the board. The term of office of each trustee shall continue until the beginning of the next annual meeting of the board of trustees and a successor shall take office. A trustee need not be a stockholder. At least one third of such trustees must satisfy the independence requirements of Section 1202(b)(1) of the New York Insurance Law or any successor provision. At least one such person must be included in the quorum for the transaction of business at any meeting of the trustees.
Section 2. Quorum; Action. One third of the trustees shall constitute a quorum at all meetings of the board. If less than a quorum shall be present at any meeting, a majority of those present may adjourn the meeting from time to time until a quorum shall attend. The vote of a majority of the trustees present at the time of the vote, if a quorum is present at such time, shall be the act of the board.
Section 3. New Directorships; Vacancies. In case of an increase in the number of trustees comprising the board of trustees, the newly created trusteeship may be filled by an affirmative vote of a majority of the trustees present at the time of the vote at any meeting of the board at which a quorum shall be present. In case of a vacancy among the trustees through death, resignation or any other reason except a removal without cause, a successor to hold office for the unexpired portion of the term may be elected by a majority of the trustees present at the time of the vote at any meeting of the board at which a quorum shall be present. Such successors shall not take office nor exercise the duties thereof until ten days after written notice of their election shall have been filed in the office of the Superintendent of Insurance of the State of New York.
Section 4. Removal of Trustees. Any trustee may be removed for cause by vote of the stockholders or by the action of the board of trustees. Any trustee may be removed without cause by vote of the stockholders.
Section 5. Annual Meeting. There shall be a meeting of the board of trustees on the third Thursday in July each year, if not a legal holiday, or, if a legal holiday, then on the next preceding business day, at a time and place specified in a notice mailed by first class mail, or delivered by a private courier, by facsimile or by other electronic transmission, at least ten days and not more than twenty days in advance. This shall be known as the annual meeting of the board of trustees. At this meeting the board
- 2 -
shall elect officers, appoint committees and transact such other business as shall properly come before the meeting. If the chairman, chief executive officer or the nominating and governance committee shall so determine, the annual meeting may be held at a different date, time and place, as shall be specified in the notice of meeting. If transmitted by facsimile or electronically, such notice is given when directed to the trustees facsimile number or electronic mail address as supplied by the trustee to the secretary of the Association or as otherwise directed pursuant to the trustees authorization or instructions.
Section 6. Other Meetings. Stated meetings of the board of trustees shall be held on such dates as the board by standing resolution may fix. No notice of such stated meetings need be given.
Special meetings of the board may be called by order of the chairman or if the chairman is not available, then the chair of the Nominating and Governance Committee, by notice mailed by first class mail or delivered by a private courier or sent by facsimile or by other electronic transmission at least three days prior to the date of such meeting, and any business may be transacted at the meeting.
Notice of an annual or special meeting need not be given to any trustee who submits a signed waiver of notice whether before or after the meeting or who attends the meeting without protesting prior thereto or at its commencement, the lack of notice to him or her.
Section 7. Telephonic Participation. At all meetings of the board of trustees or any committee thereof, trustees may participate by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting.
Section 8. Action Without a Meeting. Occasionally, but not in lieu of a regularly scheduled meeting of the board of trustees or a committee thereof, any action required or permitted to be taken by the board, or any committee thereof, may be taken without a meeting if all members of the board or the committee consent in writing, or by electronic transmission, to the adoption of a resolution authorizing the action. The resolution and the writings or electronic transmissions consenting thereto by the members of the board or committee shall be filed with the minutes of the proceedings of the board or committee.
Section 9. Trustees Compensation and Expenses. A trustee may be paid an annual stipend and fees and such other compensation or emolument in any amount authorized by the board in accordance with Section 1 of Article Five hereof, including, but not limited to, a deferred compensation benefit, for meetings of the board that he or she attends and for services that he or she renders on or for committees or subcommittees of the board; and each trustee shall be reimbursed for transportation and other expenses incurred by him or her in serving the Association.
Section 10. Chairman. The chairman shall preside at all meetings of the board. The chairman shall have such other duties and authority as may be prescribed by the board of trustees from time to time. He or she shall serve as ex officio chairman of the executive committee.
ARTICLE THREE
Officers
Section 1. Election. The board of trustees shall annually elect the executive and principal officers of the corporation. Each such executive and principal officer shall hold office until the next annual election or, if earlier, until retirement, death, resignation or removal or until such officers successor is elected and qualified. The board may elect other officers and agents of the Association and assign titles to them. Such officers and agents shall hold office until retirement, death, resignation or
- 3 -
removal or until such officers successor is elected and qualified. The board may determine the duties of officers. The board may elect persons to act temporarily in place of any officers of the Association who may be absent, incapacitated, or for any other reason unable to act or may delegate such authority to the chief executive officer.
Section 2. Removal of Officers. Any executive or principal officer may be removed by the affirmative votes of a majority of all the trustees holding office. Any other officer may be removed by the
affirmative votes of a majority of all of the trustees holding office, or by a majority of all of the members of the executive committee or other trustee committee designated by the board of trustees or by the chief executive officer.
Section 3. Qualifications. The chief executive officer shall be a member of the board of trustees, but none of the other officers need be a trustee. One person may hold more than one office, except that no person shall be both president and secretary.
Section 4. Chief Executive Officer. The board of trustees shall designate the chief executive officer. Subject to the control of the board of trustees and the provisions of these bylaws, the chief executive officer shall be charged with the management of the affairs of the Association, and shall perform all duties incident to the position of chief executive officer. The chief executive officer shall report from time to time to the board of trustees on the affairs of the Association. The chief executive officer shall preside over the meetings of the stockholders.
Section 5. President. If the president is not the chief executive officer, he or she shall assist the chief executive officer in his or her duties and shall perform such functions as are delegated by the chief executive officer.
Section 6. Absence or Disability of Chief Executive Officer. In the absence or disability of the chief executive officer, the president, if he or she is not the chief executive officer, or the chairman, if he or she is not the chief executive officer, or if neither is available, a vice president so designated by the executive committee or so designated by the chief executive officer shall perform the duties of the chief executive officer, unless the board of trustees otherwise provides and subject to the provisions of the emergency bylaws of the Association.
Section 7. Secretary. The secretary shall give all required notices of meetings of the board of trustees, and shall attend and act as secretary at all meetings of the board and of the executive committee and keep the records thereof. The secretary shall keep the seal of the corporation, and shall perform all duties incident to the office of secretary and such other duties as from time to time may be assigned by the board of trustees, the executive committee, or the chief executive officer.
Section 8. Other Officers. To the extent not determined by the board of trustees, the chief executive officer shall determine the duties of all officers other than the chairman, chief executive officer and secretary and may assign titles to and determine the duties of employees and agents.
ARTICLE FOUR
Committees
Section 1. Appointment. At each annual meeting of the board of trustees, the board shall appoint an executive committee, an investment committee, a nominating and governance committee, a human resources committee, an audit committee, a customers and products committee, a corporate governance and social responsibility committee, and a finance and risk management committee, each
- 4 -
member of which shall hold such position until the beginning of the next annual meeting of the board and until a successor shall be appointed or until the member shall cease to be a trustee. The board of trustees may appoint such other trustee committees and subcommittees as may from time to time be found necessary or convenient for the proper conduct of the business of the Association, and designate their duties. The board of trustees shall determine the number of trustees to serve on each trustee committee.
Not less than one third of the members of each trustee committee shall satisfy the independence requirements of Section 1202(b)(1) of the New York Insurance Law or any successor provision, except for the nominating and governance committee, the human resources committee, the audit committee, and the corporate governance and social responsibility committee, each of which will be comprised solely of such persons. Further, at least one such person must be included in the quorum for the transaction of business at any meeting of any of the committees. The affirmative vote of a majority of the trustees who are members of a committee and present at the time of the vote, if a quorum is present at such time, shall be the act of such committee. The board may appoint trustees to fill vacancies in or change the membership of, or, to the extent permitted under applicable laws, dissolve, any such trustee committee.
Section 2. Executive Committee. The executive committee shall consist of at least four trustees including the chairman. A majority shall constitute a quorum. The executive committee shall meet in regular meeting as it may from time to time determine, and in special meeting whenever called by the chairman or chief executive officer, and, to the maximum extent permitted by law, shall be vested with full powers of the board of trustees during intervals between the meetings of the board in all cases in which specific instructions shall not have been given by the board of trustees; provided, however, that the executive committee shall not have authority to (i) submit to the stockholders any action that requires the stockholders approval under the New York Business Corporation Law, (ii) fill vacancies in the board of trustees or in any trustee committee, (iii) fix compensation of the directors for serving on the board of trustees or any trustee committee, (iv) amend or repeal the bylaws, or adopt new bylaws, or (v) amend or repeal any resolution of the board which by its terms is not amendable or repealable.
Section 3. Investment Committee. The investment committee shall consist of at least four trustees, including the chief executive officer. A majority of its members shall constitute a quorum. The committee has the following responsibilities:
(a) Subject to review by the board of trustees the investment committee shall determine the investment policies of the Association.
(b) The investment committee shall supervise the investment of the funds of the Association. No loan or investment other than policy loans shall be made or disposed of without authorization or approval by the investment committee.
The committee shall have such other responsibilities as are specified in resolutions or a charter for the committee adopted by the Board.
Section 4. Nominating and Governance Committee. The nominating and governance committee shall consist of at least four trustees, each of whom satisfies the independence requirements of Section 1202(b)(2) of the New York Insurance Law or any successor provision. A majority of its members shall constitute a quorum.
The committee shall nominate trustees to fill interim vacancies and shall nominate trustee candidates for election at the annual meeting of stockholders; provided that prior to nominating or making any recommendations with respect to trustee candidates for election at the annual meeting of stockholders,
- 5 -
the committee shall consult with the board of trustees of TIAA Board of Overseers regarding each such trustee.
The committee shall have such other responsibilities as are specified in resolutions or a charter for the committee adopted by the Board.
Section 5. Audit Committee. The audit committee shall consist of at least four trustees, each of whom satisfies the independence requirements of Section 1202(b)(2) of the New York Insurance Law or any successor provision. A majority of the members shall constitute a quorum. The committee shall recommend the selection of the independent certified public accountants of the Association, review the Associations financial condition, review the scope and results of the independent audit and review any internal audits.
The committee shall have such other responsibilities as are specified in resolutions or a charter for the committee adopted by the Board.
Section 6. Human Resources Committee. The human resources committee shall consist of at least four trustees, each of whom satisfies the independence requirements of Section 1202(b)(2) of the New York Insurance Law or any successor provision. A majority of the members shall constitute a quorum. The committee shall designate the principal officers and any executive officers not designated as principal officers of the Association, shall evaluate the performance of such principal officers and any executive officers not designated as principal officers, and shall recommend to the board of trustees the selection and the annual compensation of such principal officers and any executive officers not designated as principal officers and of any salaried employee if the level of compensation to be paid to such employee is equal to, or greater than, the compensation received or to be received by any principal officer.
The committee shall have such other responsibilities as are specified in resolutions or a charter for the committee adopted by the Board.
Section 7. Customers and Products Committee. The customers and product committee shall consist of at least four trustees. A majority of members shall constitute a quorum. The committee shall monitor the companys products, services, marketing, technology and such other relevant matters that may directly affect customers and products.
The committee shall have such other responsibilities as are specified in resolutions or a charter for the committee adopted by the Board.
Section 8. Corporate Governance and Social Responsibility Committee. The corporate governance and social responsibility committee shall consist of at least four trustees, each of whom satisfies the independence requirements of Section 1202(b)(2) of the New York Insurance Law or any successor provision. A majority of its members shall constitute a quorum. The committee is responsible for addressing all corporate social responsibility and corporate governance issues, including the voting of the Associations shares and the initiation of appropriate shareholder resolutions.
The committee shall have such other responsibilities as are specified in resolutions or a charter for the committee adopted by the Board.
Section 9. Finance and Risk Management Committee. The finance and risk management committee shall consist of at least four trustees. A majority of its members shall constitute a quorum. The committee is responsible for overseeing the management of the Associations surplus and major capital expenditures and enterprise-wide risk management function.
- 6 -
The committee shall have such other responsibilities as are specified in resolutions or a charter for the committee adopted by the Board.
Section 10. Reports. Within a reasonable time after their meetings, all such committees and subcommittees shall report their actions to each trustee.
ARTICLE FIVE
Salaries, Compensation and Pensions
to Trustees, Officers and Employees
Section 1. Salaries and Pensions. The Association shall not pay any salary, compensation or emolument in any amount to any officer, deemed by a committee or committees of the board to be a principal officer pursuant to Section 1202(b)(2) of the New York Insurance Law, or to any salaried employee of the Association if the level of compensation to be paid to such employee is equal to, or greater than, the compensation received by any of its principal officers, or to any trustee thereof, unless such payment be first authorized by a vote of the board of trustees of the Association.
The Association shall not make any agreement with any of its officers or salaried employees whereby it agrees that for any services rendered or to be rendered he or she shall receive any salary, compensation or emolument that will extend beyond a period of sixty months from the date of such agreement, except as specifically permitted by New York Insurance Law. No principal officer or employee of the class described in the first sentence of this section, who is paid a salary for his or her services, shall receive any other compensation, bonus or emolument from the Association, directly or indirectly, except in accordance with a plan recommended by a committee of the board pursuant to Section 1202(b)(2) of the New York Insurance Law and approved by the board of trustees. The Association shall not grant any pension to any officer or trustee, or to any member of his or her family after his or her death, except that the Association may pursuant to the terms of a retirement plan and other appropriate staff benefit plans adopted by the board provide for any person who is or has been a salaried officer or employee, a pension payable at the time of retirement by reason of age or disability and also life insurance, health insurance and disability benefits.
Section 2. Prohibitions. No trustee or officer of the Association shall receive, in addition to fixed salary or compensation, any money or valuable thing, either directly or indirectly, or through any substantial interest in any other corporation or business unit, for negotiating, procuring, recommending or aiding in any purchase or sale of property, or loan, made by the Association or any affiliate or subsidiary thereof, nor be pecuniarily interested either as principal, coprincipal, agent or beneficiary, either directly or indirectly, or through any substantial interest in any other corporation or business unit, in any such purchase, sale or loan; provided that nothing herein contained shall prevent the Association from making a loan upon a policy held therein by the borrower not in excess of the net reserve value thereof.
ARTICLE SIX
Indemnification of Trustees, Officers and Employees
The Association shall indemnify, in the manner and to the full extent permitted by law, each person made or threatened to be made a party to any action, suit or proceeding, whether or not by or in the right of the Association, and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that he or she or his or her testator or intestate is or was a trustee, officer or employee of the Association or, while a trustee, officer or employee of the Association, served any other corporation or organization of any type or kind, domestic or foreign, in any capacity
- 7 -
at the written request of the Association or in any capacity in limited instances in which participation is not at the written request of the Association, but a designated officer or committee of the board, pursuant to written policy of the Association, decided that the Association will indemnify the person for his/her service. To the full extent permitted by law such indemnification shall include judgments, fines, amounts paid in settlement, and expenses, including attorneys fees. The payment of any amounts to any person pursuant to this Article Six shall subrogate the Association to any right such person may have against any other corporation or organization. No payment of indemnification, advance or allowance under the foregoing provisions shall be made unless a notice shall have been filed with the Superintendent of Insurance of the State of New York not less than thirty days prior to such payment specifying the person s to be paid, the amounts to be paid, the manner in which payment is authorized and the nature and status, at the time of such notice, of the litigation or threatened litigation.
Any liabilities or expenses may be paid in advance of the final disposition of the claim, suit or proceeding, as authorized by the board of trustees, subject to the first paragraph of this Article Six in the specific case, (a) upon receipt of an undertaking by or on behalf of the person to whom the advance is made to repay the advance unless it shall be ultimately determined that such person is entitled to indemnification by a court of competent jurisdiction; and (b) provided that (i) the corporation shall be insured against losses arising by reason of any lawful advances, or (ii) a majority of a quorum of disinterested, non-party trustees or an independent legal counsel in a written opinion, shall determine, based on a review of readily available facts, that there is reason to believe that the indemnitee ultimately will be found entitled to indemnification.
A determination made in accordance with the preceding paragraph shall not prevent the recovery from any person of any amount advanced to such person as indemnification if such person is subsequently determined not to be entitled to indemnification by a court of competent jurisdiction. Nor shall a determination pursuant to this paragraph prevent the payment of indemnification if such person is subsequently found to be entitled to indemnification by a court of competent jurisdiction. The indemnification provided by this Article shall not be deemed exclusive of any rights to which those seeking indemnification may be entitled under any law, agreement or otherwise.
Any indemnification provided by this Article shall continue as to a person who has ceased to be a member, trustee, officer or employee of the Association.
The foregoing indemnification provisions shall be deemed to be a contract between the Association and each person who serves in such capacity at any time while these provisions are in effect, and any repeal or modification of the New York Business Corporation Law or the New York Insurance Law shall not offset any right or obligation then existing with respect to any state of facts then or previously existing or any action or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts, except as provided by law. Such contract right may not be modified retroactively without the consent of such person, except as provided by law.
ARTICLE SEVEN
Execution of Instruments
All agreements, indentures, mortgages, deeds, conveyances, transfers, contracts, checks, notes, drafts, loan documents, letters of credit, master agreements, swap agreements, guarantees, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, powers of attorney, and other instruments or documents may be signed, executed, acknowledged, verified, attested, delivered or accepted on behalf of the Association by the chairman of the board, the chief executive officer, the president, any executive management officer, any
- 8 -
managing director, any director, any vice president, any assistant vice president, corporate secretary or any assistant corporate secretary, or such other officers, employees or agents as the board of trustees or any of such designated officers may direct, subject to such limitations and conditions as are established by the chief executive officer or under authority delegated by the chief executive officer to other officers of the Association.
ARTICLE EIGHT
Disbursements
No disbursements of $100 or more shall be made unless the same be evidenced by a voucher signed by or on behalf of the person, firm or corporation receiving the money and correctly describing the consideration for the payment, and if the same be for services and disbursements, setting forth the services rendered and an itemized statement of the disbursements made, and if it be in connection with any matter pending before any legislative or public body, or before any department or officer of any government, correctly describing in addition the nature of the matter and the interest of such corporation therein, or if such voucher cannot be obtained, by an affidavit stating the reasons therefore and setting forth the particulars above mentioned.
ARTICLE NINE
Corporate Seal
The seal of the Association shall be circular in form and shall contain the words Teachers Insurance and Annuity Association of America, New York, Corporate Seal, 1918, which seal shall be kept in the custody of the secretary of the Association and be affixed to all instruments requiring such corporate seal.
ARTICLE TEN
Amendments
Article One of these bylaws can be amended or repealed only by the affirmative vote of the holders of a majority of the outstanding shares of the capital stock of the Association, such vote being cast at a meeting held upon notice stating that such meeting is to vote upon a proposed amendment or repeal of such bylaw.
Any other bylaw may be amended or repealed at any meeting of the board of trustees provided notice of the proposed amendment or repeal shall have been mailed to each trustee at least one week and not more than two weeks prior to the date of such meeting.
- 9 -
EXHIBIT 31
CERTIFICATIONS
I, Roger W. Ferguson, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of the TIAA Real Estate Account;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
|
|
|
August 13, 2009 |
/s/ Roger W. Ferguson, Jr. |
|
|
Roger W. Ferguson, Jr. |
55
I, Georganne C. Proctor, certify that: 1. I have reviewed this quarterly report on Form 10-Q of the TIAA Real Estate Account; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and 5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
August 13, 2009
/s/ Georganne C. Proctor
Georganne C. Proctor 56
Executive Vice President and Chief Financial Officer,
Teachers Insurance and Annuity
Association of America
EXHIBIT 32
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Teachers Insurance and Annuity Association of America, do hereby certify, to such officers knowledge, that:
The quarterly report on Form 10-Q of the TIAA Real Estate Account (the Account) for the quarter ended June 30, 2009 (the Form 10-Q) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Account.
|
|
|
August 13, 2009 |
/s/ Roger W. Ferguson, Jr. |
|
|
Roger W. Ferguson, Jr. |
|
|
|
|
August 13, 2009 |
/s/ Georganne C. Proctor |
|
|
Georganne C. Proctor |
A signed original of this written statement required by Section 906 has been provided to the TIAA Real Estate Account and will be retained by the Account and furnished to the Securities and Exchange Commission or its staff upon request.
57