Exhibit 10.3

 

CHANGE IN CONTROL AGREEMENT

 

THIS AGREEMENT dated as of October 25, 2004 (“Agreement Date”) is made by and
between Cornerstone Realty Income Trust, Inc. (“Cornerstone” or the “Company”),
a Virginia corporation, and Gustav G. Remppies (the “Executive”).

 

ARTICLE I

PURPOSES

 

The Board of Directors of Cornerstone (the “Board”) has determined that it is in
the best interests of the Company and its shareholders to assure that the
Company will have the continued services of certain executives, in the event of
the possibility or occurrence of a Change in Control of the Company. The Board
believes that this objective may be achieved by giving key executives assurances
of financial security in case of a pending or threatened Change in Control, so
that they will not be distracted by personal risks and will continue to devote
their full time and best efforts to the performance of their duties.

 

ARTICLE II

CERTAIN DEFINITIONS

 

When used in this Agreement, the terms specified below shall have the following
meanings:

 

2.1 “Annual Base Salary” means an amount equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company in respect of the 12-month
period immediately preceding the month which contains the Effective Date.

 

2.2 “Annual Bonus” means an amount equal to the lesser of (a) the annual bonus
paid to the Executive by the Company during the calendar year immediately
preceding the year which contains the Effective Date, or (b) 50% of the
Executive’s Annual Base Salary.

 

2.3 “Cause” means (a) the Executive’s continued or deliberate neglect of his or
her duties, (b) willful misconduct by the Executive injurious to the Company,
whether monetary or otherwise, (c) the Executive’s violation of any code or
standard of ethics generally applicable to employees of the Company, (d) the
Executive’s active disloyalty to the Company, (e) the Executive’s conviction of
a felony, (f) the Executive’s habitual drunkeness or drug abuse, or (g) the
Executive’s excessive absenteeism unrelated to a disability (as defined in the
Company’s long-term disability plan).

 

2.4 “Change in Control” means:

 

(a) any person, including a “group” as defined in Section 13(d) (3) of the
Securities and Exchange Act of 1934, as amended (the “Act”) becomes the owner or
beneficial owner of Cornerstone securities having 20% or more of the combined
voting power of the then outstanding Cornerstone securities that may be cast for
the election of Cornerstone’s directors (other than as a result of an issuance
of securities initiated by Cornerstone, or open market

 

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purchases approved by the Cornerstone Board, as long as the majority of the
Cornerstone Board approving the purchases is also the majority at the time the
purchases are made); or

 

(b) as the direct or indirect result of, or in connection with, a cash tender or
exchange offer, a merger or other business combination, a sale of assets, a
contested election, or any combination of these transactions, the persons who
were directors of Cornerstone before such transactions cease to constitute a
majority of the Cornerstone Board, or any successor’s board, within two years of
the last of such transactions.

 

2.5 “Code” means the Internal Revenue Code of 1986, as amended.

 

2.6 “Company” means the Cornerstone Realty Income Trust, Inc. or any successor
thereto.

 

2.7 “Effective Date” means the first date during the term of the Agreement (as
defined in Article III) on which a Change in Control occurs. Notwithstanding
anything in this Agreement to the contrary, if a Change in Control occurs and
the Executive’s employment with the Company is terminated by the Company without
Cause prior to the date on which a Change in Control occurs, and if it is
reasonably demonstrated by the Executive that such termination of employment (a)
was at the request of a third party who had taken steps reasonably calculated to
effect a Change in Control, or (b) otherwise arose in connection with or in
anticipation of a Change in Control, then for all purposes of the Agreement
“Effective Date” shall be deemed to have occurred on the date immediately prior
to the Termination Date.

 

2.8 “Employment Period” means the period commencing on the Effective Date and
ending on the first anniversary of such date.

 

2.9 “Excise Taxes” See Section 5.1(a).

 

2.10 “Good Reason” means any of the following: (a) a reduction of the
Executive’s annual salary to an amount which is less than the amount of the
Executive’s Annual Base Salary; (b) a material reduction in the Executive’s
duties with the Company, provided that a change in title or position shall not
be “Good Reason” absent a material reduction in duties; or (c) a relocation of
more than 50 miles from the Executive’s workplace of 306 East Main Street,
Richmond, Virginia 23219, without the consent of the Executive.

 

An act or omission shall not constitute Good Reason under this Section 2.10
unless (a) the Executive gives written notice to the Company indicating that the
Executive intends to terminate employment under this Section 2.10, (b) the
Executive’s termination occurs within 60 days after the Executive knows or
reasonably should know of an event described in this section, or within 60 days
after the last in a series of such events, and (c) the Company has failed to
remedy the event described in this section as the case may be, within 30 days
after receiving the Executive’s written notice. If the Company remedies the
event described in this section, within 30 days after receiving the Executive’s
written notice, the Executive may not terminate employment under this Section
2.10 on account of the event specified in the Executive’s notice.

 

2.11 “Gross-up Payment” See Section 5.1(a).

 

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2.12 “Performance Period” means each period of time designated in accordance
with any annual bonus which is based upon performance.

 

2.13 “Potential Parachute Payments” See Section 5.1(a).

 

2.14 “Termination Date” means the date of termination of the Executive’s
employment with the Company as a common law employee.

 

ARTICLE III

AGREEMENT TERM

 

The term of the Agreement shall begin on the Agreement Date and end on the third
anniversary of the Agreement Date. However, if a Change of Control occurs before
the third anniversary of the Agreement Date, the term of the Agreement shall end
on the first anniversary of the Effective Date. Subject to Section 2.7, if the
Executive’s Termination Date is prior to a Change in Control, this Agreement
shall terminate without further obligation to the Executive or his legal
representatives.

 

ARTICLE IV

OBLIGATIONS OF THE COMPANY UPON TERMINATION

 

4.1 If by the Company other than for Cause or by the Executive for Good Reason.
If during the Employment Period, the Company shall terminate the Executive’s
employment other than for Cause, or if the Executive shall terminate employment
for Good Reason, the Company’s obligations to the Executive shall be as follows:

 

(a) The Company shall, within thirty business days of the Termination Date, pay
to the Executive a single lump sum cash payment equal to the sum of the
following amounts:

 

(i) to the extent not previously paid, the salary and any accrued paid time off
through the date of the Change in Control;

 

(ii) an amount equal to the product of (i) the annual bonus for the calendar
year immediately preceding the calendar year in which the Change in Control
occurs multiplied by (ii) a fraction, the numerator of which is the number of
days employed by the Company during the calendar year in which the Change in
Control occurs, and the denominator of which is 365;

 

(iii) all amounts previously deferred by the Executive under any nonqualified
deferred compensation plan sponsored by the Company, together with any accrued
earnings thereon, and not yet paid by the Company;

 

(iv) an amount equal to three (3) times the sum of the Executive’s Annual Base
Salary and the Annual Bonus.

 

(b) The Executive shall become fully vested in any and all stock incentive
awards granted to the Executive under any plan or otherwise which have not
become exercisable as of the date of the Change in Control and all stock options
(including options vested as of the

 

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Change in Control) shall remain exercisable until the applicable option
expiration date. All forfeiture conditions that as of a Change in Control are
applicable to any stock option, deferred stock unit, restricted stock or
restricted share units awarded to the Executive by the Company shall lapse
immediately.

 

(c) Except as provided in subsections (d) and (e), for a one year period
following the Executive’s termination of employment, the Company shall arrange
to provide the Executive and his family welfare benefits (including, without
limitation, medical, dental, health, disability, individual life and group life
insurance benefits) which are at least as favorable as those provided under the
most favorable welfare plans of the Company applicable with respect to the
Executive and his family during either the (i) 90-day period immediately
preceding the Change in Control, or (ii) the 90-day period immediately preceding
the Executive’s Termination Date. Notwithstanding the foregoing, if the
Executive obtains comparable coverage under any welfare benefits provided by
another employer, then the amount of coverage required to be provided by the
Company hereunder shall be reduced by the amount of coverage provided by such
other employer’s welfare benefit plans.

 

(d) The Executive’s rights under this Section shall be in addition to and not in
lieu of any post-termination continuation coverage or conversion rights the
Executive may have pursuant to applicable law, including, without limitation,
continuation coverage required by Section 4980B of the Code (“COBRA Continuation
Coverage”). If the Executive elects to receive COBRA Continuation Coverage, the
Company shall pay all of the required premiums for the Executive and/or the
Executive’s family for the 12 months following the Executive’s Termination Date.

 

(e) If the Executive elects to convert any group term life insurance to an
individual policy, the Company shall pay all premiums for 12 months and the
Executive shall cease to participate in the Company’s group term life insurance.

 

(f) The Company shall, at its sole expense, as incurred, pay on behalf of
Executive up to $25,000 in fees and costs charged by a nationally recognized
outplacement firm selected by the Executive to provide outplacement service for
one year after the Termination Date.

 

(g) To the extent that immediately prior to the Change in Control, the Executive
has been on the payroll of, and participated in the incentive or employee
benefit plans of, a subsidiary of Cornerstone, the references to the Company
contained in this Agreement referring to benefits to which the Executive may be
entitled shall be read to refer to such subsidiary.

 

(h) If the Executive’s employment with the Company as a common law employee is
terminated by the Company other than for Cause or by the Executive for Good
Reason, the Company’s re-engagement of the Executive as a consultant, an advisor
or otherwise as an independent contractor to the Company shall not prohibit the
Executive from receiving the payments and benefits provided in this Section 4.1.

 

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4.2 If by the Company for Cause or by the Executive other than for Good Reason.
If, during the Employment Period, the Company terminates the Executive’s
employment for Cause or if the Executive terminates employment other than for
Good Reason (including death or disability), this Agreement shall terminate
without further obligation by the Company, other than the obligation to pay to
the Executive in cash the Executive’s unpaid salary through the Termination
Date, plus any accrued paid time off, in each case to the extent not previously
paid.

 

ARTICLE V

CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY

 

5.1 Gross-up for Certain Taxes.

 

(a) If the Company determines that any benefit received or deemed received by
the Executive from the Company pursuant to this Agreement or otherwise, whether
or not in connection with a Change in Control (such monetary or other benefits
collectively, the “Potential Parachute Payments”) is or will become subject to
any excise tax under Section 4999 of the Code or any similar tax payable under
any United States federal, state, local or other law (such excise tax and all
such similar taxes collectively, “Excise Taxes”), then the Company shall, within
30 business days after such determination, pay the Executive an amount (the
“Gross-up Payment”) equal to the product of:

 

(i) the amount of such Excise Taxes multiplied by

 

(ii) the Gross-up Multiple (as defined in Section 5.3).

 

The Gross-up Payment is intended to compensate the Executive for all Excise
Taxes payable by the Executive with respect to the Potential Parachute Payments
and any federal, state, local or other income or other taxes or Excise Taxes
payable by the Executive with respect to the Gross-up Payment.

 

(b) The determination of the Company described in Section 5.1(a), including the
detailed calculations of the amounts of the Potential Parachute Payments, Excise
Taxes and Gross-Up Payment and the assumptions relating thereto, shall be set
forth in a written certificate of the Company’s independent auditors (the
“Company Certificate”) delivered to the Executive. The Executive may at any time
request the preparation and delivery to the Executive of a Company Certificate.
The Company shall cause the Company Certificate to be delivered to the Executive
as soon as reasonably possible after such request.

 

5.2 Additional Gross-up Amounts. If for any reason it is later determined
pursuant to a final judgment of a court of competent jurisdiction or a
determination by the Company that the amount of Excise Taxes payable by the
Executive is greater than the amount determined by the Company pursuant to
Section 5.1, then the Company shall pay the Executive an amount (which shall
also be deemed a Gross-up Payment) equal to the product of:

 

(a) the sum of (i) such additional Excise Taxes and (ii) any interest, fines,
penalties, expenses or other costs incurred by the Executive as a result of
having taken a position in accordance with a determination made pursuant to
Section 5.1 multiplied by

 

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(b) the Gross-up Multiple.

 

5.3 Gross-up Multiple. The Gross-up Multiple shall equal a fraction, the
numerator of which is one (1.0), and the denominator of which is one (1.0) minus
the sum, expressed as a decimal fraction, of the effective after-tax marginal
rates of all federal, state, local and other income and other taxes and any
Excise Taxes applicable to the Gross-up Payment. If different rates of tax are
applicable to various portions of a Gross-up Payment, the weighted average of
such rates shall be used.

 

5.4 Amount Increased or Contested.

 

(a) The Executive shall notify the Company in writing (an “Executive’s Notice”)
of any claim by the IRS or other taxing authority (an “IRS Claim”) that, if
successful, would require the payment by the Executive of Excise Taxes in
respect of Potential Parachute Payments in an amount in excess of the amount of
such Excise Taxes determined in accordance with Section 5.1. Such Executive’s
Notice shall include a copy of all notices and other documents or correspondence
received by the Executive in respect of such IRS Claim. The Executive shall give
the Executive’s Notice as soon as practicable. If before the deadline for a
response to the IRS (“IRS Claim Deadline”), the Company shall:

 

(i) deliver to the Executive a Company Certificate to the effect that the IRS
Claim has been reviewed by the Company and, notwithstanding the IRS Claim, the
amount of Excise Taxes, interest and penalties payable by the Executive is
either zero or an amount less than the amount specified in the IRS Claim,

 

(ii) pay to the Executive an amount (which shall also be deemed a Gross-Up
Payment) equal to the positive difference between (A) the product of the amount
of Excise Taxes, interest and penalties specified in the Company Certificate, if
any, multiplied by the Gross-Up Multiple, and (B) the portion of such product,
if any, previously paid to Executive by the Company, and

 

(iii) direct the Executive pursuant to Section 5.4(d) to contest the balance of
the IRS Claim, then the Executive shall pay only the amount, if any, of Excise
Taxes, interest and penalties specified in the Company Certificate. In no event
shall the Executive pay an IRS Claim earlier than 30 days after having given an
Executive’s Notice to the Company (or, if sooner, the IRS Claim Deadline)

 

(b) At any time after the payment by the Executive of any amount of Excise Taxes
or related interest or penalties in respect of Potential Parachute Payments, the
Company may in its discretion require the Executive to pursue a claim for a
refund (a “Refund Claim”) of all or any portion of such Excise Taxes, interest
or penalties as the Company may specify by written notice to the Executive.

 

(c) If the Company notifies the Executive in writing that the Company desires
the Executive to contest an IRS Claim or to pursue a Refund Claim, the Executive
shall:

 

(i) give the Company all information that it reasonably requests in writing from
time to time relating to such IRS Claim or Refund Claim, as applicable,

 

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(ii) take such action in connection with such IRS Claim or Refund Claim (as
applicable) as the Company reasonably requests in writing from time to time,
including accepting legal representation with respect thereto by an attorney
selected by the Company, subject to the approval of the Executive (which
approval shall not be unreasonably withheld or delayed),

 

(iii) cooperate with the Company in good faith to contest such IRS Claim or
pursue such Refund Claim, as applicable,

 

(iv) permit the Company to participate in any proceedings relating to such IRS
Claim or Refund Claim, as applicable, and

 

(v) contest such IRS Claim or prosecute such Refund Claim (as applicable) to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company may from time
to time determine in its discretion.

 

The Company shall control all proceedings in connection with such IRS Claim or
Refund Claim (as applicable) and in its discretion may cause the Executive to
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the IRS or other taxing authority in respect of such IRS Claim
or Refund Claim (as applicable); provided that (i) any extension of the statute
of limitations relating to payment of taxes for the taxable year of the
Executive relating to the IRS Claim is limited solely to such IRS Claim, (ii)
the Company’s control of the IRS Claim or Refund Claim (as applicable) shall be
limited to issues with respect to which a Gross-Up Payment would be payable, and
(iii) the Executive shall be entitled to settle or contest, as the case may be,
any other issue raised by the IRS or other taxing authority.

 

(d) The Company may at any time in its discretion direct the Executive to (i)
contest the IRS Claim in any lawful manner or (ii) pay the amount specified in
an IRS Claim and pursue a Refund Claim; provided, however, that if the Company
directs the Executive to pay an IRS Claim and pursue a Refund Claim, the Company
shall advance the amount of such payment to the Executive on an interest-free
basis and shall indemnify the Executive, on an after-tax basis, for any income
or other applicable taxes or Excise Tax, and any related interest or penalties
imposed with respect to such advance.

 

(e) The Company shall pay directly all legal, accounting and other costs and
expenses (including additional interest and penalties) incurred by the Company
or the Executive in connection with any IRS Claim or Refund Claim, as
applicable, and shall indemnify the Executive, on an after-tax basis, for any
income or other applicable taxes, Excise Tax and related interest and penalties
imposed on the Executive as a result of such payment of costs and expenses.

 

5.5 Refunds. If, after the receipt by the Executive of any payment or advance of
Excise Taxes advanced by the Company pursuant to Section 5.4, the Executive
receives any refund with respect to such claim, the Executive shall (subject to
the Company’s complying with the requirements of Section 5.4) promptly pay the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by

 

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the Executive of an amount advanced by the Company pursuant to Section 5.4, a
determination is made that the Executive shall not be entitled to any refund
with respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such determination within 30 days after the
Company receives written notice of such determination, then such advance shall
be forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-up Payment
required to be paid. Any contest of a denial of refund shall be controlled by
Section 5.4.

 

ARTICLE VI

EXPENSES AND INTEREST

 

6.1 Legal Fees and Other Expenses. The Company will pay all reasonable fees and
expenses, if any, (including, without limitation, legal fees and expenses) that
are incurred by the Executive to enforce this Agreement and that result from a
breach of this Agreement by the Company.

 

6.2 Interest. If the Company does not pay any amount due to the Executive under
this Agreement within three days after such amount became due and owing,
interest shall accrue on such amount from the date it became due and owing until
the date of payment at a annual rate equal to 200 basis points above the base
commercial lending rate published in The Wall Street Journal in effect from time
to time during the period of such nonpayment.

 

ARTICLE VII

NO SET-OFF OR MITIGATION

 

7.1 No Set-off by Company. The Executive’s right to receive when due the
payments and other benefits provided for under this Agreement is absolute,
unconditional and subject to no set-off, counterclaim or legal or equitable
defense. Any claim which the Company may have against the Executive, whether for
a breach of this Agreement or otherwise, shall be brought in a separate action
or proceeding and not as part of any action or proceeding brought by the
Executive to enforce any rights against the Company under this Agreement.

 

7.2 No Mitigation. The Executive shall not have any duty to mitigate the amounts
payable by the Company under this Agreement by seeking new employment following
termination. Except as specifically otherwise provided in this Agreement, all
amounts payable pursuant to this Agreement shall be paid without reduction
regardless of any amounts of salary, compensation or other amounts which may be
paid or payable to the Executive as the result of the Executive’s employment by
another employer.

 

ARTICLE VIII

NON-EXCLUSIVITY OF RIGHTS

 

8.1 Waiver of Other Severance Rights. To the extent that payments are made to
the Executive pursuant to Section 4.1 of this Agreement, the Executive hereby
waives the right to receive benefits under any plan or agreement of the Company
or its subsidiaries which provides for severance benefits, including any
severance benefits that may be provided for under any employment agreement or
payable due to the termination of any employment agreement.

 

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8.2 Other Rights. Except as provided in Section 8.1, this Agreement shall not
prevent or limit the Executive’s continuing or future participation in any
benefit, bonus, incentive or other plans provided by the Company or any of its
subsidiaries and for which the Executive may qualify, nor shall this Agreement
limit or otherwise affect such rights as the Executive may have under any other
agreements with the Company or any of its subsidiaries. Amounts which are vested
benefits or which the Executive is otherwise entitled to receive under any plan
of the Company or any of its subsidiaries and any other payment or benefit
required by law hall be payable in accordance with such plan or applicable law
except as expressly modified by this Agreement.

 

ARTICLE IX

MISCELLANEOUS

 

9.1 No Assignment. The Executive’s rights under this Agreement may not be
assigned or transferred in whole or in part, except that the personal
representative of the Executive’s estate will receive any amounts payable under
this Agreement after the death of the Executive. This Agreement shall inure to
the benefit of and be enforceable by the Executive’s legal representatives.

 

9.2 Successors. The rights and obligations of the Company under this Agreement
will inure to the benefit of and will be binding upon the successors and assigns
of the Company. Before or upon a Change in Control, the Company shall obtain the
agreement of the surviving or acquiring corporation that it will succeed to the
Company’s rights and obligations under this Agreement.

 

9.3 Rights Under the Agreement. The right to receive benefits under the
Agreement will not give the Executive any proprietary interest in the Company or
any of its assets. Benefits under the Agreement will be payable from the general
assets of the Company, and there will be no required funding of amounts that may
become payable under the Agreement. The Executive will for all purposes be a
general creditor of the Company. The interest of the Executive under the
Agreement cannot be assigned, anticipated, sold, encumbered or pledged and will
not be subject to the claims of the Executive’s creditors.

 

9.4 Release. Notwithstanding anything in this Agreement to the contrary, in
consideration for and as a condition to receiving any payments under this
Agreement, the Executive must execute a written release in a form provided by
the Company. In addition to any other provisions determined by the Company, the
release may provide that the Executive agrees, for himself or herself and his or
her heirs, representatives, successors and assigns, that the Executive has
finally and permanently separated from employment with the Company, and that he
or she waives, releases and forever discharges the Company from any and all
claims, known or unknown, that he or she has or may have, including but not
limited to those relating to or arising out of his or her employment with the
Company and the termination thereof, including but not limited to any claims of
wrongful discharge, breach of express or implied contract, fraud,
misrepresentation, defamation, liability in tort, any claims under Title VII of
the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment
Act, the Employee Retirement Income Security Act, the Fair Labor Standards Act,
or any other federal, state or local law

 

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relating to employment, employee benefits or the termination of employment,
excepting only any claims to vested retirement benefits.

 

9.5 Notice. For purposes of this Agreement, notices and all other communications
must be in writing and are effective when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
Executive or his personal representative at his last known address. All notices
to the Company must be directed to the attention of the Corporate Secretary.
Such other addresses may be used as either party may have furnished to the other
in writing. Notices of change of address are effective only upon receipt.

 

9.6 Miscellaneous. The Executive and the Company agree that, effective as of the
execution of this Agreement, any prior Change in Control Agreement between the
Executive and the Company is null and void. This instrument contains the entire
agreement of the parties. To the extent not governed by federal law, this
Agreement will be construed in accordance with the laws of the Commonwealth of
Virginia, without reference to its conflict of laws rules. No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing and the writing is signed by the Executive
and the Company. A waiver of any breach of or compliance with any provision or
condition of this Agreement is not a waiver of similar or dissimilar provisions
or conditions. The invalidity or unenforceability of any provision of this
Agreement will not affect the validity or enforceability of any other provision
of this Agreement, which will remain in full force and effect. This Agreement
may be executed in one or more counterparts, all of which will be considered one
and the same agreement.

 

9.7 Tax Withholding. The Company may withhold from any amounts payable under
this Agreement any federal, state or local taxes that are required to be
withheld pursuant to any applicable law or regulation.

 

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IN WITNESS WHEREOF, the Executive and the Company have executed this Agreement
as of the date first above written.

 

/s/ Gustav G. Remppies

GUSTAV G. REMPPIES

 

CORNERSTONE REALTY INCOME TRUST, INC.

        By:  

/s/ Glade M. Knight

      Title:  

Chief Executive Officer

                 

 

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