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<SEC-DOCUMENT>0000950117-02-000245.txt : 20020414
<SEC-HEADER>0000950117-02-000245.hdr.sgml : 20020414
ACCESSION NUMBER:		0000950117-02-000245
CONFORMED SUBMISSION TYPE:	N-2
PUBLIC DOCUMENT COUNT:		1
FILED AS OF DATE:		20020208

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			COHEN & STEERS QUALITY INCOME REALTY FUND INC
		CENTRAL INDEX KEY:			0001157842

	FILING VALUES:
		FORM TYPE:		N-2
		SEC ACT:		1933 Act
		SEC FILE NUMBER:	333-82436
		FILM NUMBER:		02532392

	BUSINESS ADDRESS:	
		STREET 1:		757 THIRD AVENUE 20TH FLOOR
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10017
		BUSINESS PHONE:		2124469155

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	COHEN & STEERS INCOME REALTY FUND INC
		DATE OF NAME CHANGE:	20010821

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			COHEN & STEERS QUALITY INCOME REALTY FUND INC
		CENTRAL INDEX KEY:			0001157842

	FILING VALUES:
		FORM TYPE:		N-2
		SEC ACT:		1940 Act
		SEC FILE NUMBER:	811-10481
		FILM NUMBER:		02532394

	BUSINESS ADDRESS:	
		STREET 1:		757 THIRD AVENUE 20TH FLOOR
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10017
		BUSINESS PHONE:		2124469155

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	COHEN & STEERS INCOME REALTY FUND INC
		DATE OF NAME CHANGE:	20010821
</SEC-HEADER>
<DOCUMENT>
<TYPE>N-2
<SEQUENCE>1
<FILENAME>a31981.txt
<DESCRIPTION>COHEN & STEERS QUALITY INCOME REALTY FUND INC.
<TEXT>

<PAGE>

   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 8, 2002

                                               SECURITIES ACT FILE NO. 333-_____
                                       INVESTMENT COMPANY ACT FILE NO. 811-10481
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              -------------------

                                    FORM N-2

(CHECK APPROPRIATE BOX OR BOXES)

[x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO.
[ ] POST-EFFECTIVE AMENDMENT NO.

                                     AND/OR

[x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[ ] AMENDMENT NO.
                              -------------------

                                 COHEN & STEERS
                        QUALITY INCOME REALTY FUND, INC.
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
                              -------------------

                                757 THIRD AVENUE
                            NEW YORK, NEW YORK 10017
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 832-3232

                                ROBERT H. STEERS
                    COHEN & STEERS CAPITAL MANAGEMENT, INC.
                                757 THIRD AVENUE
                            NEW YORK, NEW YORK 10017
                                 (212) 832-3232
                    (NAME AND ADDRESS OF AGENT FOR SERVICE)
                              -------------------

                                WITH COPIES TO:

                              SARAH E. COGAN, ESQ.
                           SIMPSON THACHER & BARTLETT
                              425 LEXINGTON AVENUE
                            NEW YORK, NEW YORK 10017
                              -------------------

    APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.

    If any of the securities being registered on this form are to be offered on
a delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [ ]
                              -------------------

<Table>
<Caption>
        CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
==============================================================================================================
                                                           PROPOSED         PROPOSED
                                                           MAXIMUM           MAXIMUM
          TITLE OF SECURITIES             AMOUNT BEING  OFFERING PRICE      AGGREGATE           AMOUNT OF
            BEING REGISTERED               REGISTERED    PER UNIT(1)    OFFERING PRICE(1)  REGISTRATION FEE(1)
- --------------------------------------------------------------------------------------------------------------
<S>                                       <C>           <C>             <C>                <C>
Series [  ] Auction Rate Preferred
  Shares, par value $0.001..............      200          $12,500         $5,000,000             $460
- --------------------------------------------------------------------------------------------------------------
Series [  ] Auction Rate Preferred
  Shares, par value $0.001..............      200          $12,500         $5,000,000             $460
==============================================================================================================
</Table>

(1) Estimated solely for the purpose of computing the registration fee pursuant
    to Rule 457.
                              -------------------

    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

================================================================================










<PAGE>

                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                             CROSS REFERENCE SHEET
                              PART A -- PROSPECTUS

<Table>
<Caption>
                          ITEM IN PART A OF FORM N-2
                            SPECIFIED IN PROSPECTUS                       LOCATION IN PROSPECTUS
                            -----------------------                       ----------------------
<S>          <C>                                                    <C>
Item 1.      Outside Front Cover..................................  Cover Page
Item 2.      Inside Front and Outside Back Cover Page.............  Cover Page; Inside Front Cover
                                                                      Page; Outside Back Cover Page
Item 3.      Fee Table and Synopsis...............................  Inapplicable
Item 4.      Financial Highlights.................................  Financial Highlights
Item 5.      Plan of Distribution.................................  Cover Page; Prospectus Summary;
                                                                      Underwriting
Item 6.      Selling Shareholders.................................  Inapplicable
Item 7.      Use of Proceeds......................................  Use of Proceeds; Investment
                                                                      Objectives and Policies
Item 8.      General Description of the Registrant................  Cover Page; Prospectus Summary;
                                                                      The Fund; Investment Objectives
                                                                      and Policies; Risk Factors; How
                                                                      the Fund Manages Risk
Item 9.      Management...........................................  Prospectus Summary; Management of
                                                                      the Fund; How the Fund Manages
                                                                      Risk
Item 10.     Capital Stock, Long-Term Debt, and Other
               Securities.........................................  Capitalization; Investment
                                                                      Objectives and Policies; Federal
                                                                      Taxation; Description of
                                                                      Preferred Shares; Description of
                                                                      Common Shares
Item 11.     Defaults and Arrears on Senior Securities............  Inapplicable
Item 12.     Legal Proceedings....................................  Inapplicable
Item 13.     Table of Contents of the Statement of Additional
               Information........................................  Table of Contents of the Statement
                                                                      of Additional Information
</Table>

                 PART B -- STATEMENT OF ADDITIONAL INFORMATION

<Table>
<Caption>
                                                                          LOCATION IN STATEMENT
                          ITEMS IN PART B OF FORM N-2                   OF ADDITIONAL INFORMATION
                          ---------------------------                   -------------------------
<S>          <C>                                                    <C>
Item 14.     Cover Page...........................................  Cover Page
Item 15.     Table of Contents....................................  Table of Contents
Item 16.     General Information and History......................  General Information
Item 17.     Investment Objectives and Policies...................  Additional Information about Fund
                                                                      Investment Objectives and
                                                                      Policies; Investment
                                                                      Restrictions
Item 18.     Management...........................................  Management of the Fund;
                                                                      Compensation of Directors
Item 19.     Control Persons and Principal Holders of
               Securities.........................................  Management of the Fund
Item 20.     Investment Advisory and Other Services...............  Investment Advisory and Other
                                                                      Services
Item 21.     Brokerage Allocation and Other Practices.............  Portfolio Transactions and
                                                                      Brokerage; Determination of Net
                                                                      Asset Value
Item 22.     Tax Status...........................................  Federal Taxation
Item 23.     Financial Statements.................................  Report of Independent Accountants;
                                                                      Financial Statements

                                     PART C -- OTHER INFORMATION

Item 24-33.  have been answered in Part C of this Registration
               Statement
</Table>










<PAGE>

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

                             SUBJECT TO COMPLETION,
                  PRELIMINARY PROSPECTUS DATED _________, 2002

PROSPECTUS

                                                          [COHEN & STEERS LOGO]

                                $______________

                                 COHEN & STEERS
                        QUALITY INCOME REALTY FUND, INC.
                TAXABLE AUCTION RATE CUMULATIVE PREFERRED SHARES
                          _________SHARES, SERIES ____
                          _________SHARES, SERIES ____
                    LIQUIDATION PREFERENCE $25,000 PER SHARE
                               -----------------

   Cohen & Steers Quality Income Realty Fund, Inc. (the 'Fund') is
simultaneously offering ___ Series ___ Taxable Auction Rate Cumulative Preferred
Shares and ___ Series ___ Taxable Auction Rate Cumulative Preferred Shares
(collectively, 'Preferred Shares'). The Fund is a recently organized, non-
diversified, closed-end management investment company. Our primary investment
objective is high current income through investment in real estate securities
and our secondary investment objective is capital appreciation. Under normal
market conditions, we will invest at least 90% of our total assets in common
stocks, preferred stocks and other equity securities issued by real estate
companies, such as 'real estate investment trusts' ('REITs'). At least 80% of
our total assets will be invested in income producing equity securities issued
by high quality REITs. We may invest up to 10% of our total assets in debt
securities issued or guaranteed by real estate companies. We will not invest
more than 20% of our total assets in non-investment grade preferred stock or
debt securities (commonly known as 'junk bonds'). There can be no assurance that
we will achieve our investment objectives. See 'Investment Objectives and
Policies.' The Fund's investment manager is Cohen & Steers Capital Management,
Inc.

                                                   (continued on following page)

   INVESTING IN PREFERRED SHARES INVOLVES RISKS. SEE 'RISK FACTORS' BEGINNING ON
PAGE 19 OF THIS PROSPECTUS.
                               -----------------

<Table>
<Caption>
                                                              PER SHARE    TOTAL
                                                              ---------    -----
<S>                                                           <C>         <C>
Public offering price.......................................   $25,000    $
Sales load..................................................      $250    $
Proceeds to the Fund(1).....................................   $24,750    $
</Table>

(1) Not including offering expenses payable by the Fund estimated to be
    $_______.

   The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the Preferred Shares are
first issued.

   Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

   The underwriters are offering the Preferred Shares subject to various
conditions. The underwriters expect to deliver the Preferred Shares to an
investor's broker-dealer, in book-entry form through the facilities of The
Depository Trust Company, on or about _______, 2002.
                               --------------------

                 The date of this prospectus is _________, 2002







<PAGE>


    Investors in Preferred Shares will be entitled to receive cash dividends at
an annual rate that may vary for the successive dividend periods for the
Preferred Shares. Preferred Shares have a liquidation preference of $25,000 per
share, plus any accumulated, unpaid dividends. Preferred Shares also have
priority over the Fund's common shares as to distribution of assets as described
in this Prospectus. See 'Description of Preferred Shares.' The dividend rate for
the initial dividend period will be ____% for Series ____ Preferred Shares and
___% for Series ____Preferred Shares. The initial dividend period is from the
date of issuance through ____________, 2002 for Series ____ Preferred Shares and
through ____________, 2002 for Series ____ Preferred Shares. For subsequent
dividend periods, the Preferred Shares will pay dividends based on a rate set at
auction, usually held every [seven] days in the case of the Series __ Preferred
Shares and [28] days in the case of the Series __ Preferred Shares. Investors
may only buy or sell Preferred Shares through an order placed at an auction with
or through a broker-dealer in accordance with the procedures specified in this
Prospectus. Broker-dealers are not required to maintain a secondary market in
Preferred Shares, and a secondary market may not provide you with liquidity. The
Fund may redeem Preferred Shares as described under 'Description of Preferred
Shares -- Redemption.'

    The Preferred Shares do not represent a deposit or obligation of, and are
not guaranteed or endorsed by, any bank or other insured depository institution,
and are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.

    The Preferred Shares will be senior to the Fund's outstanding common shares.
Preferred Shares are not listed on an exchange. The Fund's common shares are
traded on the New York Stock Exchange (the 'NYSE') under the symbol 'RQI.' It is
a condition of closing this offering that the Preferred Shares be offered with a
rating of 'AAA' from Standard & Poor's Ratings Services ('S&P') and of 'aaa'
from Moody's Investors Service, Inc. ('Moody's').











<PAGE>

                               TABLE OF CONTENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Prospectus Summary..........................................    4
Financial Highlights........................................   14
The Fund....................................................   15
Use of Proceeds.............................................   15
Capitalization..............................................   16
Investment Objectives and Policies..........................   17
Risk Factors................................................   19
How the Fund Manages Risk...................................   26
Management of the Fund......................................   27
Description of Preferred Shares.............................   29
The Auction.................................................   37
Description of Common Shares................................   41
Certain Provisions of the Charter and By-Laws...............   41
Conversion to Open-End Fund.................................   43
Federal Taxation............................................   43
Underwriting................................................   47
Custodian, Auction Agent, Transfer Agent, Dividend Paying
  Agent and Registrar.......................................   48
Legal Opinions..............................................   48
Independent Auditors........................................   48
Further Information.........................................   48
Table of Contents for the Statement of Additional
  Information...............................................   49
</Table>

                              -------------------

    YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. NEITHER THE FUND NOR THE UNDERWRITERS HAVE
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEITHER THE FUND NOR THE UNDERWRITERS ARE MAKING AN OFFER TO SELL THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU
SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS
OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. THE FUND'S BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.

    THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT THE FUND YOU SHOULD
KNOW BEFORE INVESTING. YOU SHOULD READ THE PROSPECTUS BEFORE DECIDING WHETHER TO
INVEST AND RETAIN IT FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL
INFORMATION, DATED ___________, 2002 (THE 'SAI'), CONTAINING ADDITIONAL
INFORMATION ABOUT THE FUND, HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ('SEC') AND IS INCORPORATED BY REFERENCE INTO (WHICH MEANS IT IS
CONSIDERED PART OF) THIS PROSPECTUS. YOU CAN REVIEW THE TABLE OF CONTENTS OF THE
SAI ON PAGE 49 OF THIS PROSPECTUS. YOU MAY REQUEST A FREE COPY OF THE SAI BY
CALLING (800) 437-9912. YOU MAY ALSO OBTAIN THE SAI AND OTHER INFORMATION
REGARDING THE FUND ON THE SEC WEB SITE (HTTP://WWW.SEC.GOV).

    THROUGH AND INCLUDING ___________, 2002, ALL DEALERS EFFECTING TRANSACTIONS
IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION
TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

                                       3











<PAGE>
                               PROSPECTUS SUMMARY

    This is only a summary. This summary does not contain all of the information
that you should consider before investing in Preferred Shares. You should review
the more detailed information contained in this Prospectus and in the Statement
of Additional Information (the 'SAI'), especially the information set forth
under the heading 'Risk Factors.'

<Table>
<S>                                    <C>
THE FUND.............................  The Cohen & Steers Quality Income Realty Fund, Inc.
                                       (the 'Fund') is a recently organized, non-
                                       diversified, closed-end management investment
                                       company. The Fund was organized as a Maryland
                                       corporation on August 22, 2001 and is registered
                                       under the Investment Company Act of 1940, as
                                       amended (the '1940 Act'). The Fund commenced
                                       investment operations on February __, 2002 upon the
                                       closing of an initial public offering of ______
                                       common shares, par value $0.001 per share ('Common
                                       Shares'). As of __________, 2002, the Fund had
                                       Common Shares outstanding and net assets of
                                       $_________. The Fund's principal office is located
                                       at 757 Third Avenue, New York, New York 10017, and
                                       its telephone number is (212) 832-3232.

THE OFFERING.......................    We are offering ___ Series __ Preferred Shares, par value
                                       $0.001 and ___ Series __ Preferred Shares, par value
                                       $0.001 (collectively, the 'Preferred Shares'), each
                                       at a purchase price of $25,000 per share plus
                                       dividends, if any, that have accumulated from the
                                       date the Fund first issues the Preferred Shares.
                                       The Preferred Shares are offered through a group of
                                       underwriters led by [________________].

                                       The Preferred Shares entitle their holders to
                                       receive cash dividends at an annual rate that may
                                       vary for the successive dividend periods for the
                                       Preferred Shares. In general, except as described
                                       under ' -- Dividends and Dividend Periods' below
                                       and 'Description of Preferred Shares -- Dividends
                                       and Dividend Periods,' the dividend period for the
                                       Series ___ Preferred Shares will be [seven] days
                                       and the dividend period for the Series ___
                                       Preferred Shares will be [28] days. The auction
                                       agent will determine the dividend rate for a
                                       particular period by an auction conducted on the
                                       business day immediately prior to the start of that
                                       rate period. See 'The Auction.'

                                       The Preferred Shares are not listed on an exchange.
                                       Instead, investors may buy or sell Preferred Shares
                                       in an auction by submitting orders to broker-dealers
                                       that have
</Table>

                                       4







<PAGE>

<Table>
<S>                                    <C>
                                       entered into an agreement with the auction agent
                                       and the Fund.

                                       Generally, investors in Preferred Shares will not
                                       receive certificates representing ownership of
                                       their shares. The securities depository (The
                                       Depository Trust Company or any successor) or its
                                       nominee for the account of the investor's
                                       broker-dealer will maintain record ownership of
                                       Preferred Shares in book-entry form. An investor's
                                       broker-dealer, in turn, will maintain records of
                                       that investor's beneficial ownership of Preferred
                                       Shares.

RATINGS..............................  The Fund will issue Preferred Shares only if such
                                       shares have received a credit quality rating of
                                       'AAA' from Standard & Poor's Rating Services
                                       ('S&P') and 'aaa' from Moody's Investors Service,
                                       Inc. ('Moody's').

INVESTMENT OBJECTIVES AND POLICIES...  Our primary investment objective is high current
                                       income through investment in real estate
                                       securities. Capital appreciation is a secondary
                                       investment objective. Our investment objectives and
                                       certain investment policies are considered
                                       fundamental and may not be changed without
                                       shareholder approval. See 'Investment Objectives
                                       and Policies.'

                                       Under normal market conditions, we will invest at
                                       least 90% of our total assets in common stocks,
                                       preferred stocks and other equity securities issued
                                       by real estate companies, such as 'real estate
                                       investment trusts' ('REITs'). At least 80% of our
                                       total assets will be invested in income producing
                                       equity securities issued by high quality REITs, and
                                       substantially all of the equity securities of real
                                       estate companies in which we intend to invest are
                                       traded on a national securities exchange or in the
                                       over-the-counter market. High quality REITs are
                                       companies that, in the opinion of the Investment
                                       Manager, offer excellent prospects for consistent,
                                       above-average revenue and earnings growth. To
                                       determine whether a company is of high quality, the
                                       Investment Manager generally looks to a strong
                                       record of earnings growth, as well as to a
                                       company's current ratio of debt to capital and the
                                       quality of its management. All of the REITs in
                                       which the Fund will invest will have a market
                                       capitalization greater than $100 million. A real
                                       estate company generally derives at least 50% of
                                       its revenue from real estate or has at least 50% of
                                       its assets in real
</Table>

                                       5







<PAGE>

<Table>
<S>                                    <C>
                                       estate. A REIT is a company dedicated to owning,
                                       and usually operating, income producing real
                                       estate, or to financing real estate. REITs are
                                       generally not taxed on income distributed to
                                       shareholders provided they distribute to their
                                       shareholders substantially all of their income and
                                       otherwise comply with the requirements of the
                                       Internal Revenue Code of 1986, as amended (the
                                       'Code'). As a result, REITs generally pay
                                       relatively high dividends (as compared to other
                                       types of companies) and the Fund intends to use
                                       these REIT dividends in an effort to meet its
                                       objective of high current income. We may invest up
                                       to 10% of our total assets in debt securities
                                       issued or guaranteed by real estate companies. It
                                       is our current intention to invest approximately
                                       70% of our total assets in common stocks of real
                                       estate companies and approximately 30% of our total
                                       assets in preferred stocks of real estate
                                       companies, although the actual percentage of common
                                       and preferred stocks in our investment portfolio
                                       may vary over time. We will not invest more than
                                       20% of the Fund's total assets in preferred stock
                                       or debt securities rated below investment grade
                                       (commonly known as 'junk bonds') or unrated
                                       securities of comparable quality. Preferred stock
                                       or debt securities will be considered to be
                                       investment grade if, at the time of investment,
                                       such security has a rating of 'BBB' or higher by
                                       S&P, 'Baa' or higher by Moody's or an equivalent
                                       rating by a nationally recognized statistical
                                       rating agency. The Investment Manager may also
                                       invest in preferred stock or debt securities which
                                       are unrated but which, in the opinion of the
                                       Investment Manager, are determined to be of
                                       equivalent quality. All of our investments will be
                                       in securities of U.S. issuers and we will generally
                                       not invest more than 10% of our total assets in the
                                       securities of one issuer. There can be no assurance
                                       that our investment objectives will be achieved.
                                       See 'Investment Objectives and Policies.'

INVESTMENT MANAGER...................  Cohen & Steers Capital Management, Inc. (the
                                       'Investment Manager') is the investment manager
                                       pursuant to an Investment Management Agreement. The
                                       Investment Manager, which was formed in 1986, is a
                                       leading firm specializing in the management of real
                                       estate securities portfolios and as of December 31,
                                       2001 had approximately $5.7 billion in assets under
</Table>

                                       6







<PAGE>

<Table>
<S>                                    <C>
                                       management. Its clients include pension plans,
                                       endowment funds and mutual funds, including the
                                       largest open-end and closed-end real estate funds.
                                       The Investment Manager's client accounts are
                                       invested principally in real estate securities and
                                       the Investment Manager focuses exclusively on real
                                       estate. The Investment Manager also is responsible
                                       for providing administrative services, and
                                       assisting the Fund with operational needs pursuant
                                       to an administration agreement (the 'Administration
                                       Agreement'). In accordance with the terms of the
                                       Administration Agreement, the Fund has entered into
                                       an agreement with State Street Bank and Trust
                                       Company ('State Street Bank') to perform certain
                                       administrative functions subject to the supervision
                                       of the Investment Manager (the 'Sub-Administration
                                       Agreement'). See 'Management of the Fund --
                                       Administration and Sub-Administration Agreement.'

PRINCIPAL INVESTMENT RISKS...........  Risk is inherent in all investing. Therefore,
                                       before investing in Preferred Shares and the Fund
                                       you should consider certain risks carefully. The
                                       primary risks of investing in Preferred Shares are:
                                       the Fund will not be permitted to declare dividends
                                       or other distributions with respect to your
                                       Preferred

                                         Shares or redeem your Preferred Shares unless the
                                         Fund meets certain asset coverage requirements;

                                         if an auction fails, you may not be able to sell
                                         some or all of your Preferred Shares;

                                         you may receive less than the price you paid for
                                         your Preferred Shares if you sell them outside of
                                         the auction, especially when market interest rates
                                         are rising;

                                         a rating agency could downgrade the rating assigned
                                         to the Preferred Shares, which could affect
                                         liquidity;

                                         the Fund may be forced to redeem your Preferred
                                         Shares to meet regulatory or rating agency
                                         requirements or may voluntarily redeem your shares
                                         in certain circumstances;

                                         in certain circumstances the Fund may not earn
                                         sufficient income from its investments to pay
                                         dividends on Preferred Shares;
</Table>

                                       7







<PAGE>

<Table>
<S>                                    <C>
                                         the value of the Fund's investment portfolio may
                                         decline, reducing the asset coverage for the
                                         Preferred Shares; and

                                         if an issuer of a common stock in which the Fund
                                         invests experiences financial difficulties or if an
                                         issuer's preferred stock or debt security is
                                         downgraded or defaults or if an issuer in which the
                                         Fund invests is affected by other adverse market
                                         factors, there may be a negative impact on the
                                         income and/or asset value of the Fund's investment
                                         portfolio.

                                       In addition, although the offering of Preferred
                                       Shares is conditioned upon receipt of ratings of
                                       'AAA' from S&P and 'aaa' from Moody's for the
                                       Preferred Shares, there are additional risks
                                       related to the investment policies of the Fund,
                                       such as:

                                       Real Estate Risks. Since we concentrate our assets
                                       in the real estate industry, the Fund's investments
                                       will be closely linked to the performance of the
                                       real estate markets. Property values may fall due
                                       to increasing vacancies or declining rents
                                       resulting from economic, legal, cultural or
                                       technological developments. REIT prices also may
                                       drop because of the failure of borrowers to pay
                                       their loans and poor management. Many REITs utilize
                                       leverage, which increases investment risk and could
                                       adversely affect a REIT's operations and market
                                       value in periods of rising interest rates as well
                                       as risks normally associated with debt financing.
                                       In addition, there are specific risks associated
                                       with particular sectors of real estate investments
                                       such as retail, office, hotel, healthcare, and
                                       multifamily properties.

                                       We may also invest in preferred stocks and debt
                                       securities of real estate companies. These
                                       securities also are more sensitive to changes in
                                       interest rates than common stocks. When interest
                                       rates rise, the value of preferred stocks and debt
                                       securities may fall.

                                       Lower-Rated Securities Risk. Lower-rated preferred
                                       stock or debt securities, or equivalent unrated
                                       securities, which are commonly known as 'junk
                                       bonds,' generally involve greater volatility of
                                       price and risk of loss of income and principal, and
                                       may be more susceptible to real or perceived
                                       adverse economic and competitive industry
                                       conditions than higher grade securities. It is
                                       reasonable
</Table>

                                       8







<PAGE>

<Table>
<S>                                    <C>
                                       to expect that any adverse economic conditions
                                       could disrupt the market for lower-rated
                                       securities, have an adverse impact on the value of
                                       those securities, and adversely affect the ability
                                       of the issuers of those securities to repay
                                       principal and interest on those securities.

                                       Recent Developments. As a result of the terrorist
                                       attacks on the World Trade Center and the Pentagon
                                       on September 11, 2001, some of the U.S. securities
                                       markets were closed for a four-day period. These
                                       terrorist attacks and related events have led to
                                       increased short-term market volatility and may have
                                       long-term effects on U.S. and world economies and
                                       markets. A similar disruption of the financial
                                       markets could impact interest rates, auctions,
                                       secondary trading, ratings, credit risk, inflation
                                       and other factors relating to the Common Shares and
                                       the Preferred Shares.

                                       For further discussion of the risks associated with
                                       investing in the Preferred Shares and the Fund, see
                                       'Risk Factors.'

DIVIDENDS AND RATE PERIODS..........   The table below shows the dividend rates, the
                                       dividend payment dates and the number of days for
                                       the initial rate periods on Preferred Shares
                                       offered in this Prospectus. For subsequent dividend
                                       periods, Preferred Shares will pay dividends based
                                       on a rate set at auctions normally held every
                                       [seven] days in the case of the Series ___
                                       Preferred Shares, and [28] days in the case of the
                                       Series ___ Preferred Shares. In most instances,
                                       dividends are payable on the first business day
                                       following the end of the rate period. The rate set
                                       at auction will not exceed the applicable maximum
                                       rate.

                                       The dividend payment date for special rate periods
                                       will be set out in the notice designating a special
                                       rate period. Dividends on Preferred Shares will be
                                       cumulative from the date the shares are first
                                       issued and will be paid out of legally available
                                       funds.
</Table>

<Table>
<Caption>
                                                                            DIVIDEND
                                                              INITIAL     PAYMENT DATE        NUMBER OF
                                                              DIVIDEND     FOR INITIAL     DAYS OF INITIAL
                                       PREFERRED SHARES         RATE       RATE PERIOD       RATE PERIOD
                                       ----------------         ----       -----------       -----------
                                       <S>                    <C>        <C>               <C>
                                       Series ___...........       %             , 2002          [7]
                                       Series ___...........       %             , 2002         [28]
</Table>

                                       9







<PAGE>

<Table>
<S>                                    <C>
                                       The Fund may, subject to certain conditions,
                                       designate special rate periods of more than [seven]
                                       days in the case of the Series ___ Preferred Shares,
                                       and [28] days in the case of the Series ___ Preferred
                                       Shares.

                                       The Fund may not designate a special rate period
                                       unless sufficient clearing bids were made in the
                                       most recent auction. In addition, full cumulative
                                       dividends, any amounts due with respect to
                                       mandatory redemptions and any additional dividends
                                       payable prior to such date must be paid in full.
                                       The Fund also must have received confirmation from
                                       Moody's and S&P or any substitute rating agency
                                       that the proposed special rate period will not
                                       adversely affect such agency's then-current rating
                                       on the Preferred Shares and the lead Broker-Dealer
                                       designated by the Fund, initially [_________], must
                                       not have objected to declaration of a special rate
                                       period.

                                       See 'Description of Preferred Shares -- Dividends
                                       and Rate Periods' and ' -- Designation of Special
                                       Rate Periods' and 'The Auction.'

SECONDARY MARKET TRADING.............  Broker-dealers may, but are not obligated to,
                                       maintain a secondary trading market in Preferred
                                       Shares outside of auctions. There can be no
                                       assurance that a secondary market will provide
                                       owners with liquidity. You may transfer shares
                                       outside of auctions only to or through a
                                       broker-dealer that has entered into an agreement
                                       with the auction agent and the Fund or other
                                       persons as the Fund permits.

INTEREST RATE TRANSACTIONS...........  In order to reduce the interest rate risk inherent
                                       in our underlying investments and capital
                                       structure, we may enter into interest rate swap or
                                       cap transactions. The use of interest rate swaps
                                       and caps is a highly specialized activity that
                                       involves investment techniques and risks different
                                       from those associated with ordinary portfolio
                                       security transactions. In an interest rate swap,
                                       the Fund would agree to pay to the other party to
                                       the interest rate swap (which is known as the
                                       'counterparty') a fixed rate payment in exchange
                                       for the counterparty agreeing to pay to the Fund a
                                       variable rate payment that is intended to
                                       approximate the Fund's variable rate payment
                                       obligation on the Preferred Shares. The payment
                                       would be based on the notional amount of the swap.
                                       In an interest rate cap, the Fund would pay a
                                       premium to the counterparty to the interest rate
                                       cap
</Table>

                                       10







<PAGE>

<Table>
<S>                                    <C>
                                       and, to the extent that a specified variable rate
                                       index exceeds a predetermined fixed rate, would
                                       receive from the counterparty payments of the
                                       difference based on the notional amount of such
                                       cap. If the counterparty to an interest rate swap
                                       or cap defaults, the Fund would be obligated to
                                       make the payments that it had intended to avoid.
                                       Depending on the general state of short-term
                                       interest rates and the returns on the Fund's
                                       portfolio securities at that point in time, this
                                       default could negatively impact the Fund's ability
                                       to make dividend payments on the Preferred Shares.
                                       In addition, at the time an interest rate swap or
                                       cap transaction reaches its scheduled termination
                                       date, there is a risk that the Fund will not be
                                       able to obtain a replacement transaction or that
                                       the terms of the replacement will not be as
                                       favorable as on the expiring transaction. If this
                                       occurs, it could have a negative impact on the
                                       Fund's ability to make dividend payments on the
                                       Preferred Shares. If the Fund fails to maintain the
                                       required asset coverage on the outstanding
                                       Preferred Shares or fails to comply with other
                                       covenants, the Fund may be required to redeem some
                                       or all of these shares. Such redemption likely
                                       would result in the Fund seeking to terminate early
                                       all or a portion of any swap or cap transaction.
                                       Early termination of the swap could result in a
                                       termination payment by or to the Fund. Early
                                       termination of a cap could result in a termination
                                       payment to the Fund. We would not enter into
                                       interest rate swap or cap transactions having a
                                       notional amount that exceeded the outstanding
                                       amount of the Preferred Shares. See 'How the Fund
                                       Manages Risk -- Interest Rate Transactions' for
                                       additional information.

ASSET MAINTENANCE....................  Under the Fund's Articles Supplementary for
                                       Preferred Shares, which establishes and fixes the
                                       rights and preferences of the shares of each series
                                       of Preferred Shares, the Fund must maintain:

                                         asset coverage of the Preferred Shares as required
                                         by the rating agency or agencies rating the
                                         Preferred Shares, and

                                         asset coverage of at least 200% with respect to
                                         senior securities that are stock, including the
                                         Preferred Shares.
</Table>

                                       11







<PAGE>

<Table>
<S>                                    <C>
                                       In the event that the Fund does not maintain or
                                       cure these coverage tests, some or all of the
                                       Preferred Shares will be subject to mandatory
                                       redemption. See 'Description of Preferred Shares --
                                       Redemption.'

                                       Based on the composition of the Fund's portfolio as
                                       of __________, 2002, the asset coverage of the
                                       Preferred Shares as measured pursuant to the 1940
                                       Act would be approximately ___% if the Fund were to
                                       issue all of the Preferred Shares offered in this
                                       Prospectus, representing approximately 33 1/3% of
                                       the Fund's managed assets (as defined below).

REDEMPTION...........................  The Fund does not expect to and ordinarily will not
                                       redeem Preferred Shares. However, under the
                                       Articles Supplementary, it may be required to
                                       redeem Preferred Shares in order, for example, to
                                       meet an asset coverage ratio or to correct a
                                       failure to meet a rating agency guideline in a
                                       timely manner. The Fund may also voluntarily redeem
                                       Preferred Shares without the consent of holders of
                                       the Preferred Shares under certain conditions. See
                                       'Description of Preferred Shares -- Redemption.'

LIQUIDATION PREFERENCE...............  The liquidation preference (that is, the amount the
                                       Fund must pay to holders of Preferred Shares if the
                                       Fund is liquidated) for Preferred Shares will be
                                       $25,000 per share plus accumulated but unpaid
                                       dividends, if any, whether or not earned or
                                       declared.

VOTING RIGHTS........................  The 1940 Act requires that the holders of Preferred
                                       Shares, and the holders of any other series of
                                       preferred stock of the Fund, voting as a separate
                                       class, have the right to:

                                         elect at least two directors at all times, and

                                         elect a majority of the directors if at any time
                                         the Fund fails to pay dividends on either series of
                                         Preferred Shares, or any other series of preferred
                                         stock of the Fund, for two full years and will
                                         continue to be so represented until all dividends
                                         in arrears have been paid or otherwise provided for.

                                       The holders of Preferred Shares, and the holders of
                                       any other series of preferred stock of the Fund,
                                       will vote as a separate class or series on other
                                       matters as required under the Fund's Articles of
                                       Incorporation (which, as hereafter amended,
                                       restated or supplemented from time to time, is
                                       together with the Articles Supplementary,
</Table>

                                       12







<PAGE>

<Table>
<S>                                    <C>
                                       referred to as the 'Charter'), the 1940 Act and
                                       Maryland law. Each Common Share, each Preferred
                                       Share, and each share of any other series of
                                       preferred stock of the Fund is entitled to one vote
                                       per share.

FEDERAL INCOME TAXATION..............  The distributions with respect to Preferred Shares
                                       (other than distributions in redemption of
                                       Preferred Shares subject to Section 302(b) of the
                                       Code) will constitute dividends to the extent of
                                       the Fund's current or accumulated earnings and
                                       profits, as calculated for federal income tax
                                       purposes. Such dividends generally will be taxable
                                       as ordinary income to holders. Distributions of net
                                       capital gain that are designated by the Fund as
                                       capital gain dividends will be treated as long-term
                                       capital gains in the hands of holders receiving
                                       such distributions. The Internal Revenue Service
                                       ('IRS') currently requires that a regulated
                                       investment company that has two or more classes of
                                       stock allocate to each such class proportionate
                                       amounts of each type of its income (such as
                                       ordinary income and capital gains) based upon the
                                       percentage of total dividends distributed to each
                                       class for the tax year. Accordingly, the Fund
                                       intends each year to allocate capital gain
                                       dividends as between its Common Shares, Series ___
                                       Preferred Shares and Series ___ Preferred Shares in
                                       proportion to the total dividends paid to each
                                       class during or with respect to such year. Ordinary
                                       income dividends and dividends qualifying for the
                                       dividends received deduction will similarly be
                                       allocated between classes. See 'Federal Taxation.'

CUSTODIAN, AUCTION AGENT, TRANSFER
AGENT, DIVIDEND PAYING AGENT AND
REGISTRAR............................  State Street Bank serves as the Fund's custodian.

                                       _______________________ serves as auction agent,
                                       transfer agent, dividend paying agent and registrar
                                       for the Preferred Shares.
</Table>

                                       13








<PAGE>

                        FINANCIAL HIGHLIGHTS (UNAUDITED)

    Information contained in the table below under the headings 'Per Share
Operating Performance' and 'Ratios/Supplemental Data' shows the unaudited
operating performance of the Fund from the commencement of the Fund's investment
operations on ____________, 2002 through ____________, 2002. Because the Fund
was recently organized and commenced investment operations on ____________,
2002, the table covers less than __ weeks of operations, during which a
substantial portion of the Fund's portfolio was held in temporary investments
pending investment in real estate securities that meet the Fund's investment
objectives and policies. Accordingly, the information presented may not provide
a meaningful picture of the Fund's operating performance.

<Table>
<Caption>
                                                                    FOR THE PERIOD
                                                                   FROM ____, 2002*
                                                                 THROUGH __________,
                                                                         2002
                                                                     (UNAUDITED)
                                                                     -----------
<S>                                                           <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period........................           $
Less Offering Cost..........................................           $
                                                                       --------
Income From Investment Operations:
    Net Investment Income...................................           $
    Net Realized and Unrealized Gain/(Loss) on
      Investments...........................................           $
                                                                       --------
        Total From Investment Operations....................           $
                                                                       --------
Less Dividends and Distributions to Shareholders from:
    Net Investment Income...................................           $
    Net Realized Gain on Investments........................           $
    Tax Return of Capital...................................           $
                                                                       --------
        Total Dividends and Distributions to Shareholders...           $
                                                                       --------
Net Increase/(Decrease) in Net Assets.......................           $
                                                                       --------
Net Asset Value, End of Period..............................           $
                                                                       --------
                                                                       --------
Per Share Market Value, End of Period.......................           $
                                                                       --------
Total Return on NAV.........................................               %(1)
                                                                       --------
                                                                       --------
Total Investment Return on Market Value.....................               %(1)
                                                                       --------
                                                                       --------
RATIOS/SUPPLEMENTAL DATA:
    Net Assets, End of Period (In millions).................           $
                                                                       --------
                                                                       --------
    Ratio of Expenses to Average Daily Net Assets
      (Before Expense Reduction)............................               %(2)
                                                                       --------
                                                                       --------
    Ratio of Expenses to Average Daily Net Assets
      (Net of Expense Reduction)............................               %(2)
                                                                       --------
                                                                       --------
    Ratio of Net Investment Income to Average Daily Net
      Assets (Before Expense Reduction).....................               %(2)
                                                                       --------
                                                                       --------
    Ratio of Net Investment Income to Average Daily Net
      Assets
      (Net of Expense Reduction)............................               %(2)
                                                                       --------
                                                                       --------
    Portfolio Turnover Rate.................................               %(1)
                                                                       --------
                                                                       --------
</Table>

- ---------

*  Date of commencement of operations

(1) Not annualized

(2) Annualized

                                       14





<PAGE>
                                    THE FUND

    The Fund is a recently organized, non-diversified, closed-end management
investment company. We were organized as a Maryland corporation on August 22,
2001 and are registered as an investment company with the SEC under the
Investment Company Act of 1940 (the '1940 Act'). The Fund issued an aggregate of
______ Common Shares, par value $.001 per share, pursuant to the initial public
offering thereof and commenced its operations with the closing of this initial
public offering on ____________, 2002. On ____________, 2002, the Fund issued
______ additional Common Shares, respectively, in connection with a partial
exercise by the underwriters of the over-allotment option. The Fund's Common
Shares are traded on the NYSE under the symbol 'RQI.' The Fund's principal
office is located at 757 Third Avenue, New York, New York 10017, and our
telephone number is (212) 832-3232.

    The following provides information about the Fund's outstanding shares as of
____________, 2002:

<Table>
<Caption>
                                                                AMOUNT HELD
                                                  AMOUNT      BY THE FUND OR      AMOUNT
TITLE OF CLASS                                  AUTHORIZED    FOR ITS ACCOUNT   OUTSTANDING
- --------------                                  ----------    ---------------   -----------
<S>                                             <C>           <C>               <C>
Common Shares.................................  100,000,000         -0-              --
Preferred Shares..............................
    Series....................................           --         -0-             -0-
    Series....................................           --         -0-             -0-
</Table>

                                USE OF PROCEEDS

    We estimate the net proceeds of this offering of Preferred Shares, after
payment of the sales load and offering expenses, will be $____. The net proceeds
will be invested in accordance with the policies set forth under 'Investment
Objectives and Policies.' We estimate that the net proceeds of this offering
will be fully invested in accordance with our investment objectives and policies
within four months of the completion of this offering. Pending such investment,
those proceeds may be invested in U.S. Government securities or high quality,
short-term money market instruments. See 'Investment Objectives and Policies.'

                                       15





<PAGE>
                           CAPITALIZATION (UNAUDITED)

    The following table sets forth the unaudited capitalization of the Fund as
of ____________, 2002, and as adjusted to give effect to the issuance of the
Preferred Shares offered in this Prospectus.

<Table>
<Caption>
                                                              ACTUAL      AS ADJUSTED
                                                              ------      -----------
                                                                   (UNAUDITED)
<S>                                                        <C>            <C>
SHAREHOLDERS' EQUITY:
    Preferred Shares, $0.001 par value, $25,000
      liquidation value; shares authorized (no shares
      issued and Series Preferred Shares and Series
      Preferred Shares issued, as adjusted,
      respectively)......................................  $         --   $         --
    Common Shares, $.001 par value per share; shares
      authorized, shares outstanding.....................  $         --   $         --
    Paid-in surplus......................................  $         --   $         --
    Balance of undistributed net investment income.......  $         --   $         --
    Accumulated net realized gain (loss) from investment
      transactions.......................................            --             --
    Net unrealized appreciation (depreciation) of
      investments........................................  $         --   $         --
    Net assets...........................................  $         --   $         --
</Table>

                                       16









<PAGE>
                       INVESTMENT OBJECTIVES AND POLICIES

GENERAL

    Our primary investment objective is high current income through investment
in real estate securities. Capital appreciation is a secondary investment
objective. The Fund's investment objectives and certain other policies are
fundamental and may not be changed without the approval of shareholders. Unless
otherwise indicated, the Fund's investment policies are not fundamental and may
be changed by the Board of Directors without the approval of shareholders,
although we have no current intention of doing so. The Fund has a policy of
concentrating its investments in the U.S. real estate industry and not in any
other industry. This investment policy is fundamental and cannot be changed
without the approval of a majority of the Fund's outstanding voting securities,
as defined in the 1940 Act, as amended. Under normal market conditions, we will
invest at least 90% of our total assets in common stocks, preferred stocks and
other equity securities issued by real estate companies, such as 'real estate
investment trusts' ('REITs'). At least 80% of our total assets will be invested
in income producing equity securities issued by high quality REITs and
substantially all of the equity securities of real estate companies in which we
intend to invest are traded on a national securities exchange or in the
over-the-counter market. High quality REITs are companies that, in the opinion
of the Investment Manager, offer excellent prospects for consistent,
above-average revenue and earnings growth. To determine whether a company is of
high quality, the Investment Manager generally looks to a strong record of
earnings growth, as well as to a company's current ratio of debt to capital and
the quality of its management. All of the REITs in which the Fund will invest
will have a market capitalization greater than $100 million. We may invest up to
10% of our total assets in debt securities issued or guaranteed by real estate
companies. We will not invest more than 20% of our total assets in preferred
stock or debt securities rated below investment grade (commonly known as 'junk
bonds') or unrated securities of comparable quality. Preferred stock or debt
securities will be considered to be investment grade if, at the time of
investment, such security has a rating of 'BBB' or higher by S&P, 'Baa' or
higher by Moody's or an equivalent rating by a nationally recognized statistical
rating agency. The Investment Manager may also invest in preferred stock or debt
securities which are unrated but which, in the opinion of the Investment
Manager, are determined to be of equivalent quality. See Appendix A in the SAI
for a description of bond ratings. These two policies are fundamental and cannot
be changed without the approval of a majority of the Fund's voting securities,
as defined in the 1940 Act, as amended. We will invest only in securities of
U.S. issuers and generally will not invest more than 10% of our total assets in
the securities of one issuer.

    We will not enter into short sales or invest in derivatives, except as
described in this Prospectus in connection with the interest rate swap or
interest rate cap transactions. See 'How the Fund Manages Risk -- Interest Rate
Transactions.' There can be no assurance that our investment objectives will be
achieved.

INVESTMENT STRATEGIES

    In making investment decisions on behalf of the Fund, the Investment Manager
relies on a fundamental analysis of each company. The Investment Manager reviews
each company's potential for success in light of the company's current financial
condition, its industry and sector position,

                                       17





<PAGE>
and economic and market conditions. The Investment Manager also evaluates a
number of factors, including growth potential, earnings estimates and the
quality of management.

PORTFOLIO COMPOSITION

    Our portfolio will be composed principally of the following investments. A
more detailed description of our investment policies and restrictions and more
detailed information about our portfolio investments are contained in the SAI.

    Real Estate Companies. For purposes of our investment policies, a real
estate company is one that:

     derives at least 50% of its revenues from the ownership, construction,
     financing, management or sale of commercial, industrial, or residential
     real estate; or

     has at least 50% of its assets in such real estate.

    Under normal market conditions, we will invest at least 90% of our total
assets in the equity securities of real estate companies. These equity
securities can consist of:

     common stocks (including REIT shares);

     preferred stocks;

     rights or warrants to purchase common and preferred stocks; and

     securities convertible into common and preferred stocks where the
     conversion feature represents, in the Investment Manager's view, a
     significant element of the securities' value.

    Real Estate Investment Trusts. We invest at least 80% of our total assets in
income producing equity securities of REITs. A REIT is a company dedicated to
owning, and usually operating, income producing real estate, or to financing
real estate. REITs pool investors' funds for investment primarily in income
producing real estate or real estate-related loans or interests. A REIT is not
taxed on income distributed to shareholders if, among other things, it
distributes to its shareholders substantially all of its taxable income (other
than net capital gains) for each taxable year. As a result, REITs tend to pay
relatively higher dividends than other types of companies and we intend to use
these REIT dividends in an effort to meet the current income goal of our
investment objectives.

    REITs can generally be classified as Equity REITs, Mortgage REITs and Hybrid
REITs. Equity REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs. We do not
currently intend to invest more than 10% of our total assets in Mortgage REITs
or Hybrid REITs.

    Preferred Stocks. Preferred stocks pay fixed or floating dividends to
investors, and have a 'preference' over common stock in the payment of dividends
and the liquidation of a company's assets. This means that a company must pay
dividends on preferred stock before paying any dividends on its common stock.
Preferred stockholders usually have no right to vote for corporate directors or
on other matters. Under current market conditions, the Investment Manager
expects to invest approximately 70% of our total assets in common shares of real
estate companies and

                                       18





<PAGE>
approximately 30% in preferred shares of REITs. The actual percentage of common
and preferred shares in our investment portfolio may vary over time based on the
Investment Manager's assessment of market conditions.

    Debt Securities. We may invest a maximum of 10% of our total assets in
investment grade and non-investment grade debt securities issued or guaranteed
by real estate companies.

    Lower-rated Securities. We will not invest more than 20% of our total assets
in preferred stock and debt securities rated below investment grade (commonly
known as 'junk bonds') and equivalent unrated securities of comparable quality.
Securities rated non-investment grade (lower than 'BBB' by S&P or lower than
'Baa' by Moody's, are sometimes referred to as 'high yield' or 'junk' bonds. We
may only invest in high yield securities that are rated 'CCC' or higher by S&P,
or rated 'Caa' or higher by Moody's, or unrated securities determined by the
Investment Manager to be of comparable quality. The issuers of these securities
have a currently identifiable vulnerability to default and such issues may be in
default or there may be present elements of danger with respect to principal or
interest. We will not invest in securities that are in default at the time of
purchase. For a description of bond ratings, see Appendix A of the SAI.

    Defensive Position. When the Investment Manager believes that market or
general economic conditions justify a temporary defensive position, we may
deviate from our investment objectives and invest all or any portion of our
assets in investment grade debt securities, without regard to whether the issuer
is a real estate company. When and to the extent we assume a temporary defensive
position, we may not pursue or achieve our investment objectives.

OTHER INVESTMENTS

    The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments. Money market instruments in which we may
invest our cash reserves will generally consist of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and such
obligations that are subject to repurchase agreements and commercial paper. See
'Additional Information about Fund Investment Objectives and Policies' in the
SAI.

                                  RISK FACTORS

    Risk is inherent in all investing. Before investing you should consider
carefully the following risks that you assume when you invest in Preferred
Shares.

RISKS OF INVESTING IN PREFERRED SHARES

    Leverage Risk. The Fund uses financial leverage for investment purposes by
issuing Preferred Shares. It is currently anticipated that, taking into account
the Preferred Shares being offered in this Prospectus, the amount of leverage
will represent approximately 33 1/3% of the Fund's managed assets (as defined
below).

    The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. These
include the possibility of higher volatility of the net asset value of the Fund
and the Preferred Shares' asset coverage. As long as the Preferred Shares are
outstanding, the Fund does not intend to utilize other forms of leverage.

                                       19





<PAGE>
    Because the fee paid to the Investment Manager will be calculated on the
basis of the Fund's managed assets (which equals the aggregate net asset value
('NAV') of the Common Shares plus the liquidation preference of the Preferred
Shares), the fee will be higher when leverage is utilized, giving the Investment
Manager an incentive to utilize leverage.

    Interest Rate Risk. The Fund issues Preferred Shares, which pay dividends
based on short-term interest rates. The Fund purchases real estate equity
securities that pay dividends that are based on the performance of the issuing
companies. The Fund also may buy real estate debt securities that pay interest
based on longer-term yields. These dividends and interest payments are
typically, although not always, higher than short-term interest rates. Real
estate company dividends, as well as long-term and short-term interest rates,
fluctuate. If short-term interest rates rise, dividend rates on the Preferred
Shares may rise so that the amount of dividends to be paid to stockholders of
Preferred Shares exceeds the income from the portfolio securities. Because
income from the Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the Preferred Shares offering) is
available to pay dividends on the Preferred Shares, however, dividend rates on
the Preferred Shares would need to greatly exceed the Fund's net portfolio
income before the Fund's ability to pay dividends on the Preferred Shares would
be jeopardized. If long-term interest rates rise, this could negatively impact
the value of the Fund's investment portfolio, reducing the amount of assets
serving as asset coverage for the Preferred Shares. The Fund anticipates
entering into interest rate swap or cap transactions with the intent to reduce
or eliminate the risk posed by an increase in short-term interest rates. There
is no guarantee that the Fund will engage in these transactions or that these
transactions will be successful in reducing or eliminating interest rate risk.
See 'How the Fund Manages Risk.'

    Auction Risk. You may not be able to sell your Preferred Shares at an
auction if the auction fails, i.e., if there are more Preferred Shares offered
for sale than there are buyers for those shares. Also, if you place hold orders
(orders to retain Preferred Shares) at an auction only at a specified rate, and
that bid rate exceeds the rate set at the auction, you will not retain your
Preferred Shares. Additionally, if you buy shares or elect to retain shares
without specifying a rate below which you would not wish to continue to hold
those shares, and the auction sets a below-market rate, you may receive a lower
rate of return on your shares than the market rate. Finally, the dividend period
may be changed, subject to certain conditions and with notice to the holders of
the Preferred Shares, which could also affect the liquidity of your investment.
See 'Description of Preferred Shares' and 'The Auction.'

    Secondary Market Risk. If you try to sell your Preferred Shares between
auctions, you may not be able to sell any or all of your shares, or you may not
be able to sell them for $25,000 per share or $25,000 per share plus accumulated
dividends. If the Fund has designated a special rate period (a dividend period
of more than [seven] days in the case of the Series __ Preferred Shares, and
[28] days in the case of the Series __ Preferred Shares), changes in interest
rates could affect the price you would receive if you sold your shares in the
secondary market. Broker-dealers that maintain a secondary trading market for
Preferred Shares are not required to maintain this market, and the Fund is not
required to redeem shares either if an auction or an attempted secondary market
sale fails because of a lack of buyers. Preferred Shares are not registered on a
stock exchange or the National Association of Securities Dealers Automated
Quotations, Inc. ('NASDAQ') stock market. If you sell your Preferred Shares to a
broker-dealer between auctions, you may receive less than the price you paid for
them, especially when market interest rates have risen since the last auction
and during a special rate period.

                                       20





<PAGE>
    Ratings and Asset Coverage Risk. While it is a condition to the closing of
the offering that S&P assigns a rating of 'AAA' and Moody's assigns a rating of
'aaa' to the Preferred Shares, the ratings do not eliminate or necessarily
mitigate the risks of investing in Preferred Shares. In addition, Moody's, S&P
or another rating agency then rating the Preferred Shares could downgrade the
Preferred Shares, which may make your shares less liquid at an auction or in the
secondary market. If a rating agency downgrades the Preferred Shares, the
dividend rate on the Preferred Shares will be the applicable maximum rate based
on the credit rating of the Preferred Shares, which will be a rate higher than
is payable currently on the Preferred Shares. See 'Description of Preferred
Shares -- Rating Agency Guidelines' for a description of the asset maintenance
tests the Fund must meet.

    Portfolio Security Risk. Portfolio security risk is the risk that an issuer
of a security in which the Fund invests will not be able, in the case of common
stocks, to make dividend distributions at the level forecast by the Fund's
Investment Manager, or that the issuer becomes unable to meet its obligation to
pay fixed dividends at the specified rate, in the case of preferred stock, or to
make interest and principal payments in the case of debt securities. Common
stock is not rated by rating agencies and it is incumbent on the Investment
Manager to select securities of real estate companies that it believes have the
ability to pay dividends at the forecasted level. Preferred stock and debt
securities may be rated. The Fund may invest up to 20% of its total assets in
preferred stock or debt securities rated below investment grade (commonly known
as 'junk bonds') by S&P or Moody's, or unrated securities considered to be of
comparable quality by the Investment Manager. In general, lower-rated securities
carry a greater degree of risk. If rating agencies lower their ratings of
securities held in the Fund's portfolio, the value of those securities could
decline, which could jeopardize the rating agencies' ratings of the Preferred
Shares. The failure of a company to pay common stock or preferred stock
dividends, or interest payments, at forecasted or contractual rates, could have
a negative impact on the Fund's ability to pay dividends on the Preferred Shares
and could result in the redemption of some or all of the Preferred Shares.

    Restrictions on Dividends and other Distributions. Restrictions imposed on
the declaration and payment of dividends or other distributions to the holders
of the Fund's Common Shares and Preferred Shares, both by the 1940 Act and by
requirements imposed by rating agencies, might impair the Fund's ability to
maintain its qualification as a regulated investment company for federal income
tax purposes. While the Fund intends to redeem Preferred Shares to enable the
Fund to distribute its income as required to maintain its qualification as a
regulated investment company under the Code, there can be no assurance that such
actions can be effected in time to meet the Code requirements. See 'Federal
Taxation.'

GENERAL RISKS OF INVESTING IN THE FUND

    We are a non-diversified, closed-end management investment company designed
primarily as a long-term investment and not as a trading vehicle. The Fund is
not intended to be a complete investment program and, due to the uncertainty
inherent in all investments, there can be no assurance that we will achieve our
investment objectives.

    Limited Operating History. We are a recently organized, non-diversified,
closed-end management investment company with a limited operating history.

    Stock Market Risk. Because prices of equity securities fluctuate from
day-to-day, the value of our portfolio will vary based upon general market
conditions.

                                       21





<PAGE>
    General Risks of Securities Linked to the Real Estate Market. We will not
invest in real estate directly, but only in securities issued by real estate
companies, including REITs. However, because of our policy of concentration in
the securities of companies in the real estate industry, we are also subject to
the risks associated with the direct ownership of real estate. These risks
include:

     declines in the value of real estate

     risks related to general and local economic conditions

     possible lack of availability of mortgage funds

     overbuilding

     extended vacancies of properties

     increased competition

     increases in property taxes and operating expenses

     changes in zoning laws

     losses due to costs resulting from the clean-up of environmental problems

     liability to third parties for damages resulting from environmental
     problems

     casualty or condemnation losses

     limitations on rents

     changes in neighborhood values and the appeal of properties to tenants

     changes in interest rates

    Thus, the value of our portfolio securities may change at different rates
compared to the value of portfolio securities of a registered investment company
with investments in a mix of different industries and will depend on the general
condition of the economy. An economic downturn could have a material adverse
effect on the real estate markets and on real estate companies in which the Fund
invests, which in turn could result in the Fund not achieving its investment
objectives.

    General Real Estate Risks. Real property investments are subject to varying
degrees of risk. The yields available from investments in real estate depend on
the amount of income and capital appreciation generated by the related
properties. Income and real estate values may also be adversely affected by such
factors as applicable laws (e.g., Americans with Disabilities Act and tax laws),
interest rate levels, and the availability of financing. If the properties do
not generate sufficient income to meet operating expenses, including, where
applicable, debt service, ground lease payments, tenant improvements,
third-party leasing commissions and other capital expenditures, the income and
ability of the real estate company to make payments of any interest and
principal on its debt securities will be adversely affected. In addition, real
property may be subject to the quality of credit extended and defaults by
borrowers and tenants. The performance of the economy in each of the regions in
which the real estate owned by the portfolio company is located affects
occupancy, market rental rates and expenses and, consequently, has an impact on
the income from such properties and their underlying values. The financial
results of major local employers also may have an impact on the cash flow and
value of certain properties. In addition, real estate investments are relatively
illiquid and, therefore, the ability of real estate companies to vary their
portfolios promptly in response to changes in economic or other conditions is
limited. A

                                       22





<PAGE>
real estate company may also have joint venture investments in certain of its
properties, and, consequently, its ability to control decisions relating to such
properties may be limited.

    Real property investments are also subject to risks which are specific to
the investment sector or type of property in which the real estate companies are
investing.

    Retail Properties. Retail properties are affected by the overall health of
the applicable economy. A retail property may be adversely affected by the
growth of alternative forms of retailing, bankruptcy, decline in drawing power,
departure or cessation of operations of an anchor tenant, a shift in consumer
demand due to demographic changes, and/or changes in consumer preference (for
example, to discount retailers) and spending patterns. A retail property may
also be adversely affected if a significant tenant ceases operation at such
location, voluntarily or otherwise. Certain tenants at retail properties may be
entitled to terminate their leases if an anchor tenant ceases operations at such
property.

    Office Properties. Office properties generally require their owners to
expend significant amounts for general capital improvements, tenant improvements
and costs of reletting space. In addition, office properties that are not
equipped to accommodate the needs of modern businesses may become functionally
obsolete and thus non-competitive. Office properties may also be adversely
affected if there is an economic decline in the businesses operated by their
tenants. The risks of such an adverse effect is increased if the property
revenue is dependent on a single tenant or if there is a significant
concentration of tenants in a particular business or industry.

    Hotel Properties. The risks of hotel properties include, among other things,
the necessity of a high level of continuing capital expenditures to keep
necessary furniture, fixtures and equipment updated, competition from other
hotels, increases in operating costs (which increases may not necessarily be
offset in the future by increased room rates), dependence on business and
commercial travelers and tourism, increases in fuel costs and other expenses of
travel, changes to regulation of operating liquor and other licenses, and
adverse effects of general and local economic conditions. Due to the fact that
hotel rooms are generally rented for short periods of time, hotel properties
tend to be more sensitive to adverse economic conditions and competition than
many other commercial properties.

    Also, hotels may be operated pursuant to franchise, management and operating
agreements that may be terminable by the franchiser, the manager or the
operator. Contrarily, it may be difficult to terminate an ineffective operator
of a hotel property subsequent to a foreclosure of such property.

    Healthcare Properties. Healthcare properties and healthcare providers are
affected by several significant factors including federal, state and local laws
governing licenses, certification, adequacy of care, pharmaceutical
distribution, rates, equipment, personnel and other factors regarding
operations; continued availability of revenue from government reimbursement
programs (primarily Medicaid and Medicare); and competition in terms of
appearance, reputation, quality and cost of care with similar properties on a
local and regional basis.

    These governmental laws and regulations are subject to frequent and
substantial changes resulting from legislation, adoption of rules and
regulations, and administrative and judicial interpretations of existing law.
Changes may also be applied retroactively and the timing of such changes cannot
be predicted. The failure of any healthcare operator to comply with governmental
laws and regulations may affect its ability to operate its facility or receive
government

                                       23





<PAGE>
reimbursement. In addition, in the event that a tenant is in default on its
lease, a new operator or purchaser at a foreclosure sale will have to apply in
its own right for all relevant licenses if such new operator does not already
hold such licenses. There can be no assurance that such new licenses could be
obtained, and consequently, there can be no assurance that any healthcare
property subject to foreclosure will be disposed of in a timely manner.

    Multifamily Properties. The value and successful operation of a multifamily
property may be affected by a number of factors such as the location of the
property, the ability of management to provide adequate maintenance and
insurance, types of services provided by the property, the level of mortgage
rates, presence of competing properties, the relocation of tenants to new
projects with better amenities, adverse economic conditions in the locale, the
amount of rent charged, and oversupply of units due to new construction. In
addition, multifamily properties may be subject to rent control laws or other
laws affecting such properties, which could impact the future cash flows of such
properties.

    Insurance Issues. Certain of the portfolio companies may, in connection with
the issuance of securities, have disclosed that they carry comprehensive
liability, fire, flood, extended coverage and rental loss insurance with policy
specifications, limits and deductibles customarily carried for similar
properties. However such insurance is not uniform among the portfolio companies.
Moreover, there are certain types of extraordinary losses that may be
uninsurable, or not economically insurable. Certain of the properties may be
located in areas that are subject to earthquake activity for which insurance may
not be maintained. Should a property sustain damage as a result of an
earthquake, even if the portfolio company maintains earthquake insurance, the
portfolio company may incur substantial losses due to insurance deductibles,
co-payments on insured losses or uninsured losses. Should any type of uninsured
loss occur, the portfolio company could lose its investment in, and anticipated
profits and cash flows from, a number of properties and, as a result, impact the
Fund's investment performance.

    Credit Risk. REITs may be highly leveraged and financial covenants may
affect the ability of REITs to operate effectively. The portfolio companies are
subject to risks normally associated with debt financing. If the principal
payments of a real estate company's debt cannot be refinanced, extended or paid
with proceeds from other capital transactions, such as new equity capital, the
real estate company's cash flow may not be sufficient to repay all maturing debt
outstanding.

    In addition, a portfolio company's obligation to comply with financial
covenants, such as debt-to-asset ratios, secured debt-to-total asset ratios and
other contractual obligations, may restrict a REIT's range of operating
activity. A portfolio company, therefore, may be limited from incurring
additional indebtedness, selling its assets and engaging in mergers or making
acquisitions which may be beneficial to the operation of the REIT.

    Environmental Issues. In connection with the ownership (direct or indirect),
operation, management and development of real properties that may contain
hazardous or toxic substances, a portfolio company may be considered an owner or
operator of such properties or as having arranged for the disposal or treatment
of hazardous or toxic substances and, therefore, may be potentially liable for
removal or remediation costs, as well as certain other costs, including
governmental fines and liabilities for injuries to persons and property. The
existence of any such material environmental liability could have a material
adverse effect on the results of operations and cash flow of any such portfolio
company and, as a result, the amount available to make distributions on the
shares could be reduced.

                                       24





<PAGE>
    Smaller Companies. Even the larger REITs in the industry tend to be small to
medium-sized companies in relation to the equity markets as a whole. There may
be less trading in a smaller company's stock, which means that buy and sell
transactions in that stock could have a larger impact on the stock's price than
is the case with larger company stocks. Smaller companies also may have fewer
lines of business so that changes in any one line of business may have a greater
impact on a smaller company's stock price than is the case for a larger company.
Further, smaller company stocks may perform in different cycles than larger
company stocks. Accordingly, REIT shares can be more volatile than -- and at
times will perform differently from -- large company stocks such as those found
in the Dow Jones Industrial Average.

    Tax Issues. REITs are subject to a highly technical and complex set of
provisions in the Code. It is possible that the Fund may invest in a real estate
company which purports to be a REIT and that the company could fail to qualify
as a REIT. In the event of any such unexpected failure to qualify as a REIT, the
company would be subject to corporate-level taxation, significantly reducing the
return to the Fund on its investment in such company. REITs could possibly fail
to qualify for tax free pass-through of income under the Code, or to maintain
their exemptions from registration under the 1940 Act. The above factors may
also adversely affect a borrower's or a lessee's ability to meet its obligations
to the REIT. In the event of a default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting its investments.

    Preferred Stocks and Debt Securities Risk. In addition to the risks of
equity securities and securities linked to the real estate market, preferred
stocks and debt securities also are more sensitive to changes in interest rates
than common stocks. When interest rates rise, the value of preferred stocks and
debt securities may fall.

    Lower-Rated Securities. Lower-rated securities may be considered speculative
with respect to the issuer's continuing ability to make principal and interest
payments. Analysis of the creditworthiness of issuers of lower-rated securities
may be more complex than for issuers of higher quality debt securities, and our
ability to achieve our investment objectives may, to the extent we are invested
in lower-rated debt securities, be more dependent upon such creditworthiness
analysis than would be the case if we were investing in higher quality
securities. We may invest in high yield securities that are rated 'CCC' or
higher by S&P or 'Caa' or higher by Moody's or unrated securities that are
determined by the Investment Manager to be of comparable quality. An issuer of
these securities has a currently identifiable vulnerability to default and the
issues may be in default or there may be present elements of danger with respect
to principal or interest. We will not invest in securities which are in default
at the time of purchase.

    Lower-rated securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of lower-rated securities have been found to be less sensitive to
interest-rate changes than more highly rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. Yields on
lower-rated securities will fluctuate. If the issuer of lower-rated securities
defaults, the Fund may incur additional expenses to seek recovery.

    The secondary markets in which lower-rated securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at which we could
sell a particular lower-rated security when necessary to meet liquidity needs or
in response to a specific economic event, such as a deterioration in the

                                       25





<PAGE>
creditworthiness of the issuer, and could adversely affect and cause large
fluctuations in the NAV of our shares. Adverse publicity and investor
perceptions may decrease the values and liquidity of high yield securities.

    It is reasonable to expect that any adverse economic conditions could
disrupt the market for lower-rated securities, have an adverse impact on the
value of such securities, and adversely affect the ability of the issuers of
such securities to repay principal and pay interest thereon. New laws and
proposed new laws may adversely impact the market for lower-rated securities.

    Recent Developments. As a result of the terrorist attacks on the World Trade
Center and the Pentagon on September 11, 2001, some of the U.S. securities
markets were closed for a four-day period. These terrorist attacks and related
events have led to increased short-term market volatility and may have long-term
effects on U.S. and world economies and markets. A similar disruption of the
financial markets could impact interest rates, auctions, secondary trading,
ratings, credit risk, inflation and other factors relating to the Common Shares
and the Preferred Shares.

                           HOW THE FUND MANAGES RISK

INVESTMENT LIMITATIONS

    The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority, as defined in the 1940 Act, of the outstanding Common Shares and
Preferred Shares voting together as a single class, and the approval of the
holders of a majority, as defined in the 1940 Act, of the outstanding Preferred
Shares voting as a separate class. The Fund will not invest more than 20% of its
total assets in preferred stock or debt securities rated below investment grade
(commonly known as 'junk bonds') or unrated securities of comparable quality.
All of our investments will be in securities of U.S. issuers and we will
generally not invest more than 10% of our total assets in the securities of one
issuer. The Fund may become subject to guidelines that are more limiting than
the investment restrictions set forth above in order to obtain and maintain
ratings from S&P or Moody's on the Preferred Shares. See 'Investment
Restrictions' in the SAI for a complete list of the fundamental and
non-fundamental investment policies of the Fund.

INTEREST RATE TRANSACTIONS

    In order to reduce the interest rate risk inherent in our underlying
investments and capital structure, we may enter into interest rate swap or cap
transactions.

    The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. In an interest rate swap, the
Fund would agree to pay to the other party to the interest rate swap (which is
known as the 'counterparty') a fixed rate payment in exchange for the
counterparty agreeing to pay to the Fund a variable rate payment that is
intended to approximate the Fund's variable rate payment obligation on the
Preferred Shares or any variable rate borrowing. The payment would be based on
the notional amount of the swap. In an interest rate cap, the Fund would pay a
premium to the counterparty to the interest rate cap and, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, would receive
from the counterparty payments of the difference based on the notional amount of
such cap. If the

                                       26





<PAGE>
counterparty to an interest rate swap or cap defaults, the Fund would be
obligated to make the payments that it had intended to avoid. Depending on the
general state of short-term interest rates and the returns on the Fund's
portfolio securities at that point in time, a default could negatively impact
the Fund's ability to make dividend payments on the Preferred Shares. In
addition, at the time an interest rate swap or cap transaction reaches its
scheduled termination date, there is a risk that the Fund will not be able to
obtain a replacement transaction or that the terms of the replacement will not
be as favorable as on the expiring transaction. If this occurs, it could have a
negative impact on the Fund's ability to make dividend payments on the Preferred
Shares. To the extent there is a decline in interest rates, the value of the
interest rate swap or cap could decline, resulting in a decline in the asset
coverage for the Preferred Shares. A sudden and dramatic decline in interest
rates may result in a significant decline in the asset coverage. Under the terms
of the Preferred Shares, if the Fund fails to maintain the required asset
coverage on the outstanding Preferred Shares or fails to comply with other
covenants, the Fund may be required to redeem some or all of these shares. The
Fund may also choose to redeem some or all of the Preferred Shares. Such
redemption would likely result in the Fund seeking to terminate early all or a
portion of any swap or cap transaction. Early termination of the swap could
result in the termination payment by or to the Fund. Early termination of a cap
could result in the termination payment to the Fund.

    The Fund will usually enter into swaps or caps on a net basis; that is, the
two payment streams will be netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked to market daily. We would not enter into interest rate
swap or cap transactions having a notional amount that exceeded the outstanding
amount of the Fund's leverage.

                             MANAGEMENT OF THE FUND

    The overall management of the business and affairs of the Fund is vested
with the Board of Directors. The Directors approve all significant agreements
between the Fund and persons or companies furnishing services to it, including
the Fund's agreement with its Investment Manager, administrator, custodian and
transfer agent. The management of the Fund's day-to-day operations is delegated
to its officers, the Investment Manager and the Fund's administrator, subject
always to the investment objectives and policies of the Fund and to the general
supervision of the Directors. The names and business addresses of the Directors
and officers of the Fund and their principal occupations and other affiliations
during the past five years are set forth under 'Management of the Fund' in the
SAI.

INVESTMENT MANAGER

    Cohen & Steers Capital Management, Inc., with offices located at 757 Third
Avenue, New York, New York 10017, has been retained to provide investment
advice, and, in general, to conduct the management and investment program of the
Fund under the overall supervision and control of the Directors of the Fund.
Cohen & Steers Capital Management, Inc., a registered investment adviser, was
formed in 1986 and is a leading U.S. manager of portfolios dedicated to

                                       27





<PAGE>
investments primarily in REITs with more than $5.7 billion of assets under
management. Its current clients include pension plans, endowment funds and
registered investment companies, including the Fund, Cohen & Steers Advantage
Income Realty Fund, Inc. and Cohen & Steers Total Return Realty Fund, Inc.,
which are closed-end investment companies, and Cohen & Steers Institutional
Realty Shares, Inc., Cohen & Steers Realty Shares, Inc., Cohen & Steers Special
Equity Fund, Inc. and Cohen & Steers Equity Income Fund, Inc., which are
open-end investment companies. Cohen & Steers Realty Shares, Inc. is currently
the largest registered investment company that invests primarily in real estate
securities. Cohen & Steers' client accounts are invested principally in real
estate securities.

INVESTMENT MANAGEMENT AGREEMENT

    Under its Investment Management Agreement with the Fund (the 'Investment
Management Agreement'), the Investment Manager furnishes a continuous investment
program for the Fund's portfolio, makes the day-to-day investment decisions for
the Fund, and generally manages the Fund's investments in accordance with the
stated policies of the Fund, subject to the general supervision of the Board of
Directors of the Fund. The Investment Manager also performs certain
administrative services for the Fund and provides persons satisfactory to the
directors of the Fund to serve as officers of the Fund. Such officers, as well
as certain other employees and directors of the Fund, may be directors,
officers, or employees of the Investment Manager.

    For its services under the Investment Management Agreement, the Fund pays
the Investment Manager a monthly management fee computed at the annual rate of
0.85% of the average daily managed asset value of the Fund. Managed asset value
is the net asset value of the Common Shares plus the liquidation preference of
any Preferred Shares. This fee is higher than the fees incurred by many other
investment companies but is comparable to fees paid by many registered
management investment companies that invest primarily in real estate securities.
In addition to the monthly management fee, the Fund pays all other costs and
expenses of its operations, including compensation of its directors, custodian,
transfer agency and dividend disbursing expenses, legal fees, expenses of
independent auditors, expenses of repurchasing shares, expenses of issuing any
Preferred Shares, expenses of preparing, printing and distributing stockholder
reports, notices, proxy statements and reports to governmental agencies, and
taxes, if any.

    When the Fund is utilizing leverage, the fees paid to the Investment Manager
for investment advisory and management services will be higher than if the Fund
did not utilize leverage because the fees paid will be calculated based on the
Fund's managed assets, which includes the liquidation preference of any
Preferred Shares for leverage.

    The Fund's portfolio managers are:

        Martin Cohen -- Mr. Cohen is a Director, President and Treasurer of the
    Fund. He is, and has been since its inception, President of Cohen & Steers
    Capital Management, Inc., the Fund's Investment Manager. Mr. Cohen is a
    'controlling person' of the Investment Manager on the basis of his ownership
    of the Investment Manager's stock.

        Robert H. Steers -- Mr. Steers is a Director, Chairman and Secretary of
    the Fund. He is, and has been since their inception, Chairman of Cohen &
    Steers Capital Management, Inc., the Fund's Investment Manager. Mr. Steers
    is a 'controlling person' of the Investment Manager on the basis of his
    ownership of the Investment Manager's stock.

                                       28





<PAGE>
        Greg E. Brooks -- Mr. Brooks joined Cohen & Steers Capital Management,
    Inc., the Fund's investment adviser, as a Vice President in April 2000 and
    has been a Senior Vice President since January 2002. Prior to joining Cohen
    & Steers, Mr. Brooks was an investment analyst with another real estate
    securities investment manager. Mr. Brooks is a Certified Financial Analyst.

ADMINISTRATION AND SUB-ADMINISTRATION AGREEMENT

    Under its Administration Agreement with the Fund, the Investment Manager
provides certain administrative and accounting functions for the Fund, including
providing administrative services necessary for the operations of the Fund and
furnishing office space and facilities required for conducting the business of
the Fund.

    In accordance with the Administration Agreement and with the approval of the
Board of Directors of the Fund, the Fund has entered into an agreement with
State Street Bank as sub-administrator under a fund accounting and
administration agreement (the 'Sub-Administration Agreement'). Under the
Sub-Administration Agreement, State Street Bank has assumed responsibility for
certain fund administration services.

    Under the Administration Agreement, the Fund pays the Investment Manager an
amount equal to on an annual basis 0.02% of the Fund's managed assets. Under the
Sub-Administration agreement, the Fund pays State Street Bank a monthly
administration fee. The sub-administration fee paid by the Fund to State Street
Bank is computed on the basis of the net assets in the Fund at an annual rate
equal to 0.040% of the first $200 million in assets, 0.030% of the next $200
million, and 0.015% of assets in excess of $400 million, with a minimum fee of
$120,000. The aggregate fee paid by the Fund and the other funds advised by the
Investment Manager to State Street Bank is computed by multiplying the total
number of funds by each break point in the above schedule in order to determine
the aggregate break points to be used in calculating the total fee paid by the
Cohen & Steers family of funds (i.e., 6 funds at $200 million or $1.2 billion at
0.040%, etc.). The Fund is then responsible for its pro rata amount of the
aggregate sub-administration fee. State Street Bank also serves as the Fund's
custodian and ___________ has been retained to serve as the Fund's auction
agent, transfer agent, dividend paying agent and registrar for the Fund's
Preferred Shares. See 'Custodian, Auction Agent, Transfer Agent, Dividend
Paying Agent and Registrar.'

                        DESCRIPTION OF PREFERRED SHARES

    The following is a brief description of the terms of the Preferred Shares.
For the complete terms of the Preferred Shares, please refer to the detailed
description of the Preferred Shares in the Fund's Articles Supplementary
attached as Appendix B to the SAI.

GENERAL

    Under its Charter, the Fund is authorized to issue shares of preferred
stock, with rights as determined by the Board of Directors, without the approval
of holders of Common Shares. Each Series of Preferred Shares will have a
liquidation preference of $25,000 per share, plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared). The Preferred Shares
of each series will rank on a parity with shares of any other series of
Preferred Shares, and with shares of any other series of preferred stock of the
Fund, as to the payment of dividends and

                                       29





<PAGE>
the distribution of assets upon liquidation. The Preferred Shares carry one vote
per share on all matters on which such shares are entitled to vote. The
Preferred Shares, when issued by the Fund and paid for pursuant to the terms of
this Prospectus, will be fully paid and non-assessable and will have no
preemptive, exchange or conversion rights. Any Preferred Shares repurchased or
redeemed by the Fund will be classified as authorized and unissued Preferred
Shares. The Board of Directors may by resolution classify or reclassify any
authorized and unissued Preferred Shares from time to time by setting or
changing the preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of such shares.
The Preferred Shares will not be subject to any sinking fund, but will be
subject to mandatory redemption under certain circumstances described below.

DIVIDENDS AND RATE PERIODS

    General. The following is a general description of dividends and rate
periods for the Preferred Shares. The initial rate period for the Series __
Preferred Shares will be [seven] days and the dividend rate for this period will
be __%. The initial rate period for the Series __ Preferred Shares will be [28]
days and the dividend rate for this period will be __%. Subsequent rate periods
generally will be [seven] days in the case of the Series __ Preferred Shares and
[28] days in the case of Series __ Preferred Shares and the dividend rates for
those periods will be determined by auction. The Fund, subject to certain
conditions, may change the length of subsequent rate periods by designating them
as special rate periods. See 'Designation of Special Rate Periods' below.

    Dividend Payment Dates. Dividends on Preferred Shares will be payable, when,
as and if declared by the Board, out of legally available funds in accordance
with the Fund's Charter and applicable law. Dividend periods generally will
begin on the first calendar day after an auction. If dividends are payable on a
day that is not a business day, then dividends will generally be payable on the
next day if such day is a business day, or as otherwise specified in the
Articles Supplementary.

    Dividends will be paid through the Depository Trust Company ('DTC') on each
dividend payment date. The dividend payment date will normally be the first
business day after the dividend period ends. DTC, in accordance with its current
procedures, is expected to distribute dividends received from the auction agent
in same-day funds on each dividend payment date to Agent Members (members of DTC
that will act on behalf of existing or potential holders of Preferred Shares).
These Agent Members are in turn expected to distribute such dividends to the
persons for whom they are acting as agents. However, each of the current
Broker-Dealers has indicated to the Fund that dividend payments will be
available in same-day funds on each dividend payment date to customers that use
a Broker-Dealer or a Broker-Dealer's designee as Agent Member.

    Calculation of Dividend Payment. The Fund computes the dividend per
Preferred Share by multiplying the applicable rate in effect by a fraction. The
numerator of this fraction will normally be the number of days in the rate
period and the denominator will normally be 360. This rate is then multiplied by
$25,000 to arrive at the dividends per share.

    Dividends on Preferred Shares will accumulate from the date of their
original issue, which is _________, 2002. For each dividend payment period after
the initial rate period, the dividend will

                                       30





<PAGE>
be the dividend rate determined at auction. The dividend rate that results from
an auction will not be greater than the maximum rate described below.

    The maximum applicable rate for any regular period will be the applicable
percentage (set forth in the table below) of the applicable 'AA' Composite
Commercial Paper Rate. In the case of a special rate period, the maximum
applicable rate will be specified by the Fund in the notice of the special rate
period for such dividend payment period. The applicable percentage is determined
on the day that a notice of a special rate period is delivered if the notice
specifies a maximum applicable rate for a special rate period. The applicable
percentage will be determined based on the lower of the credit rating or ratings
assigned to the Preferred Shares by Moody's and S&P. If Moody's or S&P or both
shall not make such rating available, the rate shall be determined by reference
to equivalent ratings issued by a substitute rating agency.

<Table>
<Caption>
                                                 APPLICABLE
              CREDIT RATINGS                     PERCENTAGE:
      MOODY'S                 S&P              NO NOTIFICATION
      -------                 ---              ---------------
    <S>                   <C>                    <C>
  'aa3' or higher        AA - or higher                [150]%
   'a3' to 'a1'            A - to A+                   [200]%
 'baa3' to 'baa1'        BBB - to BBB+                 [225]%
   Below 'baa3'           Below BBB -                  [275]%
</Table>

    Prior to each dividend payment date, the Fund is required to deposit with
the auction agent sufficient funds for the payment of declared dividends. The
failure to make such deposit will not result in the cancellation of any auction.
The Fund does not intend to establish any reserves for the payment of dividends.

    Restriction on Dividends and Other Distributions. While any of the Preferred
Shares are outstanding, the Fund generally may not declare, pay or set apart for
payment, any dividend or other distribution in respect of its common shares
(other than in additional shares of common stock or rights to purchase common
stock) or repurchase any of its common shares (except by conversion into or
exchange for shares of the Fund ranking junior to the Preferred Shares as to the
payment of dividends and the distribution of assets upon liquidation) unless
each of the following conditions have been satisfied:

     In the case of the Moody's coverage requirements, immediately after such
     transaction, the aggregate Moody's Coverage Value (i.e., the aggregate
     value of the Fund's portfolio discounted according to Moody's criteria)
     would be equal to or greater than the Preferred Shares Basic Maintenance
     Amount (i.e., the amount necessary to pay all outstanding obligations of
     the Fund with respect to the Preferred Shares, any preferred stock
     outstanding, expenses for the next 90 days and any other liabilities of the
     Fund) (see 'Rating Agency Guidelines' below);

     In the case of S&P's coverage requirements, immediately after such
     transaction, the Aggregate S&P value (i.e., the aggregate value of the
     Fund's portfolio discounted according to S&P criteria) would be equal to or
     greater than the Preferred Shares Basic Maintenance Amount.

     Immediately after such transaction, the 1940 Act Preferred Shares Asset
     Coverage (as defined in this Prospectus under 'Rating Agency Guidelines'
     below) is met;

                                       31





<PAGE>
     Full cumulative dividends on the Preferred Shares due on or prior to the
     date of the transaction have been declared and paid or shall have been
     declared and sufficient funds for the payment thereof deposited with the
     auction agent; and

     The Fund has redeemed the full number of Preferred Shares required to be
     redeemed by any provision for mandatory redemption contained in the
     Articles Supplementary.

    The Fund generally will not declare, pay or set apart for payment any
dividend on any shares of the Fund ranking as to the payment of dividends on a
parity with Preferred Shares unless the Fund has declared and paid or
contemporaneously declares and pays full cumulative dividends on the Preferred
Shares through its most recent dividend payment date. However, when the Fund has
not paid dividends in full on the Preferred Shares through the most recent
dividend payment date or upon any shares of the Fund ranking, as to the payment
of dividends, on a parity with Preferred Shares through their most recent
respective dividend payment dates, the amount of dividends declared per share on
Preferred Shares and such other class or series of shares will in all cases bear
to each other the same ratio that accumulated dividends per share on the
Preferred Shares and such other class or series of shares bear to each other.

    Designation of Special Rate Periods. The Fund may, in certain situations, at
its sole option, declare a special rate period. Prior to declaring a special
rate period, the Fund will give notice (a 'notice of special rate period') to
the auction agent and to each Broker-Dealer. The notice will state that the next
succeeding rate period for the Preferred Shares will be a number of days as
specified in such notice. The Fund may not designate a special rate period
unless sufficient clearing bids were made in the most recent auction. In
addition, full cumulative dividends, any amounts due with respect to mandatory
redemptions and any additional dividends payable prior to such date must be paid
in full or deposited with the auction agent. The Fund also must have received
confirmation from Moody's and S&P or any substitute rating agency that the
proposed special rate period will not adversely affect such agency's
then-current rating on the Preferred Shares and the lead Broker-Dealer
designated by the Fund, initially _________, must not have objected to
declaration of a special rate period. A notice of special rate period also will
specify whether the shares of Preferred Shares will be subject to optional
redemption during such special rate period and, if so, the redemption, premium,
if any, required to be paid by the Fund in connection with such optional
redemption.

VOTING RIGHTS

    Except as noted below, the Fund's Common Shares and Preferred Shares have
equal voting rights of one vote per share and vote together as a single class.
In elections of directors, the holders of Preferred Shares, as a separate class,
vote to elect two directors, and the holders of the Common Shares and holders of
Preferred Shares vote together as a single class to elect the remaining
directors. In addition, during any period ('Voting Period') in which the Fund
has not paid dividends on the Preferred Shares in an amount equal to two full
years dividends, the holders of Preferred Shares, voting as a single class, are
entitled to elect (in addition to the two directors set forth above) the
smallest number of additional directors as is necessary to ensure that a
majority of the directors has been elected by the holders of Preferred Shares.
The holders of Preferred Shares will continue to have these rights until all
dividends in arrears have been paid or otherwise provided for.

                                       32





<PAGE>
    In an instance when the Fund has not paid dividends as set forth in the
immediately preceding paragraph, the terms of office of all persons who are
directors of the Fund at the time of the commencement of a Voting Period will
continue, notwithstanding the election by the holders of the Preferred Shares of
the number of directors that such holders are entitled to elect. The persons
elected by the holders of the Preferred Shares, together with the incumbent
directors, will constitute the duly elected directors of the Fund. When all
dividends in arrears on the Preferred Shares have been paid or provided for, the
terms of office of the additional directors elected by the holders of the
Preferred Shares will terminate.

    So long as any of the Preferred Shares are outstanding, the Fund will not,
without the affirmative vote of the holders of a majority of the outstanding
Preferred Shares, (i) institute any proceedings to be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or insolvency proceedings
against it, or file a petition seeking or consenting to reorganization or relief
under any applicable federal or state law relating to bankruptcy or insolvency,
or consent to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Fund or a substantial part of
its property, or make any assignment for the benefit of creditors, or, except as
may be required by applicable law, admit in writing its inability to pay its
debts generally as they become due or take any corporate action in furtherance
of any such action; (ii) create, incur or suffer to exist, or agree to create,
incur or suffer to exist, or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) the creation, incurrence or existence
of any material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or Fund receipt or other material encumbrance of any
kind upon any of the Fund's assets as a whole, except (A) liens the validity of
which are being contested in good faith by appropriate proceedings, (B) liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (C) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness
senior to the Preferred Shares, (D) liens, pledges, charges, security interests,
security agreements or other encumbrances arising in connection with any
indebtedness permitted under clause (iii) below and (E) liens to secure payment
for services rendered including, without limitation, services rendered by the
Fund's Paying Agent and the Auction Agent; or (iii) create, authorize, issue,
incur or suffer to exist any indebtedness for borrowed money or any direct or
indirect guarantee of such indebtedness for borrowed money or any direct or
indirect guarantee of such indebtedness, except the Fund may borrow as may be
permitted by the Fund's investment restrictions; provided, however, that
transfers of assets by the Fund subject to an obligation to repurchase shall not
be deemed to be indebtedness for purposes of this provision to the extent that
after any such transaction the Fund has eligible assets with an aggregate
discounted value at least equal to the Preferred Shares Basic Maintenance Amount
as of the immediately preceding valuation date.

    In addition, the affirmative vote of the holders of a majority, as defined
in the 1940 Act, of the outstanding Preferred Shares shall be required to
approve any plan of reorganization (as such term is used in the 1940 Act)
adversely affecting such shares or any action requiring a vote of security
holders of the Fund under Section 13(a) of the 1940 Act, including, among other
things, changes in the Fund's investment restrictions described under
'Investment Restrictions' in the SAI and changes in the Fund's subclassification
as a closed-end investment company.

    The affirmative vote of the holders of a majority, as defined in the 1940
Act, of the outstanding Preferred Shares of any series, voting separately from
any other series, shall be required with respect to any matter that materially
and adversely affects the rights, preferences, or

                                       33





<PAGE>
powers of that series in a manner different from that of other series or classes
of the Fund's shares of capital stock. For purposes of the foregoing, no matter
shall be deemed to adversely affect any right, preference or power unless such
matter (i) alters or abolishes any preferential right of such series;
(ii) creates, alters or abolishes any right in respect of redemption of such
series; or (iii) creates or alters (other than to abolish) any restriction on
transfer applicable to such series. The vote of holders of any series described
in this paragraph will in each case be in addition to a separate vote of the
requisite percentage of Common Shares and/or preferred stock necessary to
authorize the action in question.

    The Common Shares and the Preferred Shares also will vote separately to the
extent otherwise required under Maryland law or the 1940 Act as in effect from
time to time. The class votes of holders of Preferred Shares described above
will in each case be in addition to any separate vote of the requisite
percentage of Common Shares and Preferred Shares, voting together as a single
class, necessary to authorize the action in question.

    For purpose of any right of the holders of Preferred Shares to vote on any
matter, whether the right is created by the Charter, by statute or otherwise, a
holder of a Preferred Share is not entitled to vote and the Preferred Share will
not be deemed to be outstanding for the purpose of voting or determining the
number of Preferred Shares required to constitute a quorum, if prior to or
concurrently with a determination of the Preferred Shares entitled to vote or of
Preferred Shares deemed outstanding for quorum purposes, as the case may be, a
notice of redemption was given in respect of those Preferred Shares and
sufficient Deposit Securities (as defined in the SAI) for the redemption of
those Preferred Shares were deposited.

RATING AGENCY GUIDELINES

    The Fund is required under S&P and Moody's guidelines to maintain assets
having in the aggregate a discounted value at least equal to the Preferred
Shares Basic Maintenance Amount (as defined below). S&P and Moody's have each
established separate guidelines for determining discounted value. To the extent
any particular portfolio holding does not satisfy the applicable rating agency's
guidelines, all or a portion of such holding's value will not be included in the
calculation of discounted value (as defined by the rating agency). The S&P and
Moody's guidelines also impose certain diversification requirements on the
Fund's overall portfolio. The 'Preferred Shares Basic Maintenance Amount'
includes the sum of (i) the aggregate liquidation preference of the Preferred
Shares then outstanding, (ii) the total principal of any senior debt (plus
accrued and projected dividends), (iii) certain Fund expenses and (iv) certain
other current liabilities.

    The Fund also is required under rating agency guidelines to maintain, with
respect to the Preferred Shares, as of the last business day of each month in
which Preferred Shares are outstanding, asset coverage of at least 200% with
respect to senior securities that are shares of the Fund, including the
Preferred Shares (or such other asset coverage as may in the future be specified
in or under the 1940 Act as the minimum asset coverage for senior securities
that are shares of a closed-end investment company as a condition of declaring
dividends on its Common Shares) ('1940 Act Preferred Shares Asset Coverage').
Based on the Fund's assets and liabilities as of ________________, 2002, and
assuming the issuance of all Preferred Shares offered hereby

                                       34





<PAGE>
and the use of the proceeds as intended, the 1940 Act Preferred Shares Asset
Coverage with respect to Preferred Shares would be computed as follows:

<Table>
<C>                                                   <S>  <C>       <C>  <C>
       Value of Fund assets less liabilities
          not constituting senior securities               $
      ----------------------------------------        =              =       %
    Senior securities representing indebtedness            $
   plus liquidation value of the Preferred Shares
</Table>

    If the Fund does not timely cure a failure to maintain (1) a discounted
value of its portfolio equal to the Preferred Shares Basic Maintenance Amount or
(2) the 1940 Act Preferred Shares Asset Coverage, in each case in accordance
with the requirements of the rating agency or agencies then rating the Preferred
Shares, the Fund will be required to redeem Preferred Shares as described below
under ' -- Redemption.'

    The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by S&P or Moody's. Failure to adopt
any such modifications, however, may result in a change or a withdrawal of the
ratings altogether. In addition, any rating agency providing a rating for the
Preferred Shares may, at any time, change or withdraw any such rating. The Board
of Directors may, without stockholder approval, amend, alter, add to or repeal
any or all of the definitions and related provisions that have been adopted by
the Fund pursuant to the rating agency guidelines in the event the Fund receives
written confirmation from S&P or Moody's, or both, as appropriate, that any such
change would not impair the ratings then assigned by S&P and Moody's to the
Preferred Shares.

    The Board of Directors may amend the definition of Maximum Rate to increase
the percentage amount by which the Reference Rate is multiplied to determine the
Maximum Rate shown therein without the vote or consent of the holders of
Preferred Shares, including each Series, or any other stockholder of the
Corporation, but only with confirmation from each Rating Agency, and after
consultation with the broker-dealers, provided that immediately following any
such increase the Fund could meet the Preferred Shares Basic Maintenance Amount
Test.

    As described by S&P and Moody's, the Preferred Shares rating is an
assessment of the capacity and willingness of the Fund to pay Preferred Shares'
obligations. The ratings on the Preferred Shares are not recommendations to
purchase, hold or sell the Preferred Shares, inasmuch as the ratings do not
comment as to market price or suitability for a particular investor. The rating
agency guidelines also do not address the likelihood that an owner of the
Preferred Shares will be able to sell such shares in an auction or otherwise.
The ratings are based on current information furnished to S&P and Moody's by the
Fund and the Investment Manager and information obtained from other sources. The
ratings may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information.

    The rating agency guidelines will apply to the Preferred Shares only so long
as such rating agency is rating these shares. The Fund will pay fees to S&P and
Moody's for rating the Preferred Shares.

REDEMPTION

    Mandatory Redemption. If the Fund does not timely cure a failure to
(1) maintain a discounted value of its portfolio equal to the Preferred Shares
Basic Maintenance Amount,

                                       35





<PAGE>
(2) maintain the 1940 Act Preferred Shares Asset Coverage, or (3) file a
required certificate related to asset coverage on time, the Preferred Shares
will be subject to mandatory redemption out of funds legally available therefor
in accordance with the Articles Supplementary and applicable law, at the
redemption price of $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption. Any such redemption will be limited to
the number of Preferred Shares necessary to restore the required discounted
value or the 1940 Act Preferred Shares Asset Coverage, as the case may be.

    In determining the number of Preferred Shares required to be redeemed in
accordance with the foregoing, the Fund will allocate the number of shares
required to be redeemed to satisfy the Preferred Shares Basic Maintenance Amount
or the 1940 Act Preferred Shares Asset Coverage, as the case may be, pro rata
among the Preferred Shares of the Fund and any other preferred stock of the
Fund, subject to redemption or retirement. If fewer than all outstanding shares
of any series are, as a result, to be redeemed, the Fund may redeem such shares
by lot or other method that it deems fair and equitable.

    Optional Redemption. To the extent permitted under the 1940 Act and Maryland
law, the Fund at its option may without the consent of the holders of Preferred
Shares, redeem Preferred Shares having a dividend period of one year or less, in
whole or in part, on the business day after the last day of such dividend period
upon not less than 15 calendar days and not more than 40 calendar days prior
notice. The optional redemption price per share will be $25,000 per share, plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to the date fixed for redemption. Preferred Shares having a
dividend period of more than one year are redeemable at the option of the Fund,
in whole or in part, prior to the end of the relevant dividend period, subject
to any specific redemption provisions, which may include the payment of
redemption premiums to the extent required under any applicable specific
redemption provisions. The Fund will not make any optional redemption unless,
after giving effect thereto, (i) the Fund has available certain deposit
securities with maturities or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount
(including any applicable premium) due to holders of the Preferred Shares by
reason of the redemption of the Preferred Shares on such date fixed for the
redemption and (ii) the Fund has eligible assets with an aggregate discounted
value at least equal to the Preferred Shares Basic Maintenance Amount.

    Notwithstanding the foregoing, Preferred Shares may not be redeemed at the
option of the Fund unless all dividends in arrears on the outstanding Preferred
Shares, including all outstanding preferred shares, have been or are being
contemporaneously paid or set aside for payment. This would not prevent the
lawful purchase or exchange offer for Preferred Shares made on the same terms to
holders of all outstanding preferred shares.

LIQUIDATION

    Subject to the rights of holders of any series or class or classes of shares
ranking on a parity with Preferred Shares with respect to the distribution of
assets upon liquidation of the Fund, upon a liquidation of the Fund, whether
voluntary or involuntary, the holders of Preferred Shares then outstanding will
be entitled to receive and to be paid out of the assets of the Fund available
for distribution to its stockholders, before any payment or distribution shall
be made on the Common Shares, an amount equal to the liquidation preference with
respect to such shares ($25,000 per

                                       36





<PAGE>
share), plus an amount equal to all dividends thereon (whether or not earned or
declared by the Fund, but excluding the interest thereon) accumulated but unpaid
to and including the date of final distribution in same-day funds in connection
with the liquidation of the Fund. After the payment to the holders of Preferred
Shares of the full preferential amounts provided for as described herein, the
holders of Preferred Shares as such shall have no right or claim to any of the
remaining assets of the Fund.

    Neither the sale of all or substantially all the property or business of the
Fund, nor the merger or consolidation of the Fund into or with any other
corporation nor the merger or consolidation of any other corporation into or
with the Fund, shall be a liquidation, whether voluntary or involuntary, for the
purposes of the foregoing paragraph.

                                  THE AUCTION

GENERAL

    The Articles Supplementary provide that, except as otherwise described in
this prospectus, the applicable rate for the Preferred Shares for each rate
period after the initial rate period will be the rate that results from an
auction conducted as set forth in the Articles Supplementary and summarized
below. In such an auction, persons determine to hold or offer to sell or, based
on dividend rates bid by them, offer to purchase or sell Preferred Shares. See
the Articles Supplementary for a more complete description of the auction
process.

    Auction Agency Agreement. The Fund will enter into an auction agency
agreement with the auction agent (currently, ________) which provides, among
other things, that the auction agent will follow the auction procedures to
determine the applicable rate for Preferred Shares so long as the applicable
rate for Preferred Shares is to be based on the results of an auction.

    The auction agent may terminate the auction agency agreement upon notice to
the Fund no earlier than the business day after the second dividend payment date
for the Preferred Shares following the delivery of such notice. If the auction
agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor auction agent containing substantially the same terms
and conditions as the auction agency agreement. The Fund may remove the auction
agent provided that prior to such removal the Fund has entered into such an
agreement with a successor auction agent.

    Broker-Dealer Agreements. Each auction requires the participation of one or
more Broker-Dealers. The auction agent will enter into agreements with several
Broker-Dealers selected by the Fund, which provide for the participation of
those Broker-Dealers in auctions for Preferred Shares.

    The auction agent will pay to each Broker-Dealer after each auction from
funds provided by the Fund, a service charge at the annual rate of 1/4 of 1% of
the stated value ($25,000 per share) of the Preferred Shares held by a
Broker-Dealer's customer upon settlement in an auction.

AUCTION PROCEDURES

    Prior to the submission deadline on each auction date for the Preferred
Shares, each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the auction agent) as a beneficial owner of
Preferred Shares may submit the following types of orders with respect to
Preferred Shares to that Broker-Dealer:

    1. Hold Order -- indicating its desire to hold Preferred Shares without
       regard to the applicable rate for the next rate period.

                                       37





<PAGE>
    2. Bid -- indicating its desire to purchase or hold the indicated number of
       Preferred Shares at $25,000 per share if the applicable rate for shares
       of such series for the next rate period is not less than the rate or
       spread specified in the bid and which shall be deemed an irrevocable
       offer to sell Preferred Shares at $25,000 per share if the applicable
       rate for shares of such series for the next rate period is less than the
       rate or spread specified in the bid.

    3. Sell Order -- indicating its desire to sell Preferred Shares at $25,000
       per share without regard to the applicable rate for shares of such series
       for the next rate period.

    A beneficial owner of Preferred Shares may submit different types of orders
to its Broker-Dealer with respect to Preferred Shares then held by the
beneficial owner. A beneficial owner that submits a bid to its Broker-Dealer
having a rate higher than the maximum applicable rate on the auction date will
be treated as having submitted a sell order to its Broker-Dealer. A beneficial
owner that fails to submit an order to its Broker-Dealer will ordinarily be
deemed to have submitted a hold order to its Broker-Dealer. However, if a
beneficial owner fails to submit an order for some or all of its shares to its
Broker-Dealer for an auction relating to a rate period of more than [91] days,
such beneficial owner will be deemed to have submitted a sell order for such
shares to its Broker-Dealer. A sell order constitutes an irrevocable offer to
sell the Preferred Shares subject to the sell order. A beneficial owner that
offers to become the beneficial owner of additional Preferred Shares is, for the
purposes of such offer, a potential holder as discussed below.

    A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of Preferred Shares but that wishes to purchase Preferred
Shares or a beneficial owner that wishes to purchase additional Preferred
Shares. A potential holder may submit bids to its Broker-Dealer in which it
offers to purchase Preferred Shares at $25,000 per share if the applicable rate
for the next rate period is not less than the rate specified in such bid. A bid
placed by a potential holder specifying a rate higher than the maximum
applicable rate on the auction date will not be accepted.

    The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction agent.
However, neither the Fund nor the auction agent will be responsible for a
Broker-Dealer's failure to comply with these procedures. Any order placed with
the auction agent by a Broker-Dealer as or on behalf of an existing holder or a
potential holder will be treated the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the auction agent an order for any Preferred
Shares held by it or customers who are beneficial owners will be treated as a
beneficial owner's failure to submit to its Broker-Dealer an order in respect of
Preferred Shares held by it. A Broker-Dealer may also submit orders to the
auction agent for its own account as an existing holder or potential holder,
provided it is not an affiliate of the Fund.

    There are sufficient clearing bids in an auction if the number of shares
subject to bids submitted or deemed submitted to the auction agent by
Broker-Dealers for potential holders with rates or spreads equal to or lower
than the maximum applicable rate is at least equal to the number of Preferred
Shares subject to sell orders submitted or deemed submitted to the auction agent
by Broker-Dealers for existing holders. If there are sufficient clearing bids,
the applicable rate for Preferred Shares for the next succeeding rate period
thereof will be the lowest rate specified in the submitted bids which, taking
into account such rate and all lower rates bid by

                                       38





<PAGE>
Broker-Dealers as or on behalf of existing holders and potential holders, would
result in existing holders and potential holders owning the Preferred Shares
available for purchase in the auction.

    If there are not sufficient clearing bids, the applicable rate for the next
rate period will be the maximum rate on the auction date. However, if the Fund
has declared a special rate period and there not sufficient clearing bids, the
applicable rate for the next rate period will be the same as during the current
rate period. If there are not sufficient clearing bids, beneficial owners of
Preferred Shares that have submitted or are deemed to have submitted sell orders
may not be able to sell in the auction all shares subject to such sell orders.
If all of the outstanding Preferred Shares are the subject of submitted hold
orders, then the rate period following the auction will automatically be the
same length as the preceding rate period and the applicable rate for the next
rate period will be the 7-day 'AA' Composite Commercial Paper Rate in the case
of a Standard Dividend Period for the Series __ Preferred Shares and the 30 day
'AA' Composite Commercial Paper Rate in the case of a standard dividend period
for the Series __ Preferred Shares. The 'AA' Composite Commercial Paper Rate is
the rate on commercial paper issued by corporations whose bonds are rated AA by
S&P as made available by the Federal Reserve Bank of New York or, if such rate
is not made available by the Federal Reserve Bank of New York, the arithmetical
average of such rates as quoted to the auction agent by _________ or such other
commercial paper dealer as may be appointed by the Fund.

    The auction procedures include a pro rata allocation of shares for purchase
and sale, which may result in an existing holder continuing to hold or selling,
or a potential holder purchasing, a number of Preferred Shares that is different
than the number of shares specified in its order. To the extent the allocation
procedures have that result, Broker-Dealers that have designated themselves as
existing holders or potential holders in respect of customer orders will be
required to make appropriate pro rata allocations among their respective
customers.

    Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their Agent Members in same-day funds to
DTC against delivery to their respective Agent Members. DTC will make payment to
the sellers' Agent Members in accordance with DTC's normal procedures, which now
provide for payment against delivery by their Agent Members in same-day funds.

    The auctions for Preferred Shares will normally be held every [7] days in
the case of the Series __ Preferred Shares and every [28] days in the case of
Series __ Preferred Shares, and each subsequent rate period will normally begin
on the following business day.

    The first auction for Series _ Preferred Shares will be held on
________________, 2002, the business day preceding the dividend payment date for
the initial dividend period. Thereafter, except during special rate periods,
auctions for Series _ Preferred Shares normally will be held every _______, and
each subsequent dividend period for Series _ Preferred Shares normally will
begin on the following ____________.

     The first auction for Series _ Preferred Shares will be held on
________________, 2002, the business day preceding the dividend payment date for
the initial dividend period. Thereafter, except during special rate periods,
auctions for Series _ Preferred Shares normally will be held every [28 days],
and each subsequent dividend period for Series _ Preferred Shares normally will
begin on the following business day.

                                       39





<PAGE>
    The following is a simplified example of how a typical auction works. Assume
that the Fund has 1,000 outstanding Preferred Shares of either series, and three
current holders. The three current holders and three potential holders submit
orders through broker-dealers at the auction:

<Table>
<S>                     <C>                             <C>
Current Holder A......  Owns 500 shares, wants to sell  Bid order of 4.1% rate for all
                        all 500 shares if auction rate  500 Shares
                        is less than 4.1%

Current Holder B......  Owns 300 shares, wants to hold  Hold order -- will take the
                                                        auction rate

Current Holder C......  Owns 200 shares, wants to sell  Bid order of 3.9% rate for all
                        all 200 shares                  200 shares if auction rate is
                                                        less than 3.9%

Potential Holder D....  Wants to buy 200 shares         Places order to buy at or
                                                        above 4.0%

Potential Holder E....  Wants to buy 300 shares         Places order to buy at or
                                                        above 3.9%

Potential Holder F....  Wants to buy 200 shares         Places order to buy at or
                                                        above 4.1%
</Table>

    The lowest dividend rate that will result in all 1,000 Preferred Shares
continuing to be held is 4.0% (the offer by D). Therefore, the dividend rate
will be 4.0%. Current holders B and C will continue to own their shares. Current
holder A will sell its shares because A's dividend rate bid was higher than the
dividend rate. Potential holder D will buy 200 shares and potential holder E
will buy 300 shares because their bid rates were at or below the dividend rate.
Potential holder F will not buy any shares because its bid rate was above the
dividend rate.

SECONDARY MARKET TRADING AND TRANSFER OF PREFERRED SHARES

    The underwriters are not required to make a market in the Preferred Shares.
The broker-dealers (including the underwriters) may maintain a secondary trading
market for outside of auctions, but they are not required to do so. There can be
no assurance that a secondary trading market for Preferred Shares will develop
or, if it does develop, that it will provide owners with liquidity of
investment. Preferred Shares will not be registered on any stock exchange or on
the NASDAQ market. Investors who purchase Preferred Shares in an auction for a
special rate period should note that because the dividend rate on such shares
will be fixed for the length of that dividend period, the value of such shares
may fluctuate in response to the changes in interest rates, and may be more or
less than their original cost if sold on the open market in advance of the next
auction thereof, depending on market conditions.

    You may sell, transfer, or otherwise dispose of Preferred Shares only in
whole shares and only

     pursuant to a bid or sell order placed with the auction agent in accordance
     with the auction procedures;

     to a broker-dealer; or

     to such other persons as may be permitted by the Fund; provided, however,
     that (x) if you hold your Preferred Shares in the name of a broker-dealer,
     a sale or transfer of your Preferred Shares to that broker-dealer, or to
     another customer of that broker-dealer, will not be considered a sale or
     transfer for purposes of the foregoing if that broker-dealer remains the
     existing holder of the Preferred Shares immediately after the transaction;
     and (y) in the case of all transfers, other than through an auction, the
     broker-dealer (or other person, if the Fund permits) receiving the transfer
     will advise the auction agent of the transfer.

    Further description of the auction procedures can be found in the Articles
Supplementary.

                                       40





<PAGE>
                          DESCRIPTION OF COMMON SHARES

    The Fund is authorized to issue ________ Common Shares, par value $.001 per
share. All Common Shares have equal rights to the payment of dividends and the
distribution of assets upon liquidation. Common Shares are fully paid and
non-assessable when issued and have no preemptive, conversion, exchange,
redemption or cumulative voting rights. Holders of Common Shares are entitled to
one vote per share. Whenever Preferred Shares are outstanding, holders of Common
Shares will not be entitled to receive any distributions from the Fund unless
all accrued dividends on Preferred Shares have been paid, and unless asset
coverage (as defined in the 1940 Act) with respect to Preferred Shares would be
at least 200% after giving effect to the distributions. Under the rules of the
NYSE applicable to listed companies, the Fund is required to hold an annual
meeting of stockholders each year.

                 CERTAIN PROVISIONS OF THE CHARTER AND BY-LAWS

    The Fund has provisions in its Charter and By-Laws ('By-Laws') that could
have the effect of limiting the ability of other entities or persons to acquire
control of the Fund, to cause it to engage in certain transactions or to modify
its structure. Commencing with the first annual meeting of stockholders, the
Board of Directors will be divided into three classes, having initial terms of
one, two and three years, respectively. At the annual meeting of stockholders in
each year thereafter, the term of one class will expire and directors will be
elected to serve in that class for terms of three years. This provision could
delay for up to two years the replacement of a majority of the Board of
Directors. A director may be removed from office only for cause and only by a
vote of the holders of at least 75% of the outstanding shares of the Fund
entitled to vote on the matter.

    The affirmative vote of at least 75% of the entire Board of Directors is
required to authorize the conversion of the Fund from a closed-end to an
open-end investment company. Such conversion also requires the affirmative vote
of the holders of at least 75% of Common Shares and Preferred Shares outstanding
at the time, voting as a single class, unless it is approved by a vote of at
least 75% of the Continuing Directors (as defined below), in which event such
conversion requires the approval of the holders of a majority of the votes
entitled to be cast thereon by the stockholders of the Fund. A 'Continuing
Director' is any member of the Board of Directors of the Fund who (i) is not a
person or affiliate of a person who enters or proposes to enter into a Business
Combination (as defined below) with the Fund (an 'Interested Party') and (ii)
who has been a member of the Board of Directors of the Fund for a period of at
least 12 months, or has been a member of the Board of Directors since the Fund's
initial public offering of Common Shares, or is a successor of a Continuing
Director who is unaffiliated with an Interested Party and is recommended to
succeed a Continuing Director by a majority of the Continuing Directors then on
the Board of Directors of the Fund. The affirmative vote of at least 75% of the
entire Board of Directors and at least 75% of the holders of Common Shares and
Preferred Shares outstanding at the time, voting as a single class, will be
required to amend the Charter to change any of the provisions in this paragraph
and the preceding paragraph.

    The affirmative votes of at least 75% of the entire Board of Directors and
the holders of at least (i) 80% of Common Shares and Preferred Shares
outstanding at the time, voting as a single class, and (ii) in the case of a
Business Combination (as defined below), 66 2/3% of the Common Shares and
Preferred Shares outstanding at the time, voting as a single class, other than
votes held

                                       41





<PAGE>
by an Interested Party who is (or whose affiliate is) a party to a Business
Combination (as defined below) or an affiliate or associate of the Interested
Party, are required to authorize any of the following transactions:

        (i) merger, consolidation or statutory share exchange of the Fund with
    or into any other entity;

        (ii) issuance or transfer by the Fund (in one or a series of
    transactions in any 12-month period) of any securities of the Fund to any
    person or entity for cash, securities or other property (or combination
    thereof) having an aggregate fair market value of $1,000,000 or more,
    excluding issuances or transfers of debt securities of the Fund, sales of
    securities of the Fund in connection with a public offering, issuances of
    securities of the Fund pursuant to a dividend reinvestment plan adopted by
    the Fund, issuances of securities of the Fund upon the exercise of any stock
    subscription rights distributed by the Fund and portfolio transactions
    effected by the Fund in the ordinary course of business;

        (iii) sale, lease, exchange, mortgage, pledge, transfer or other
    disposition by the Fund (in one or a series of transactions in any 12 month
    period) to or with any person or entity of any assets of the Fund having an
    aggregate fair market value of $1,000,000 or more except for portfolio
    transactions (including pledges of portfolio securities in connection with
    borrowings) effected by the Fund in the ordinary course of its business
    (transactions within clauses (i), (ii) and (iii) above being known
    individually as a 'Business Combination');

        (iv) any voluntary liquidation or dissolution of the Fund or an
    amendment to the Fund's Charter to terminate the Fund's existence; or

        (v) any stockholder proposal as to specific investment decisions made or
    to be made with respect to the Fund's assets as to which stockholder
    approval is required under federal or Maryland law.

    However, the stockholder vote described above will not be required with
respect to the foregoing transactions (other than those set forth in (v) above)
if they are approved by a vote of at least 75% of the Continuing Directors. In
that case, if Maryland law requires stockholder approval, the affirmative vote
of a majority of votes entitled to be cast thereon shall be required and if
Maryland law does not require stockholder approval, no stockholder approval will
be required. The Fund's By-Laws contain provisions the effect of which is to
prevent matters, including nominations of directors, from being considered at a
stockholders' meeting where the Fund has not received notice of the matters
generally at least 90 but no more than 120 days prior to the first anniversary
of the preceding year's annual meeting.

    These provisions are in addition to any special voting rights granted to the
holders of the Preferred Shares in the Charter. See 'Description of Preferred
Shares -- Voting Rights.' The Board of Directors has determined that the
foregoing voting requirements, which are generally greater than the minimum
requirements under Maryland law and the 1940 Act, are in the best interest of
the Fund's stockholders generally.

    Reference is made to the Charter and By-Laws of the Fund, on file with the
SEC, for the full text of these provisions. These provisions could have the
effect of depriving stockholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction. In the
opinion of the Investment Manager, however, these provisions offer several
possible advantages.

                                       42





<PAGE>
They may require persons seeking control of a Fund to negotiate with its
management regarding the price to be paid for the shares required to obtain such
control, they promote continuity and stability and they enhance the Fund's
ability to pursue long-term strategies that are consistent with its investment
objectives.

                          CONVERSION TO OPEN-END FUND

    The Fund is a closed-end investment company and it may be converted to an
open-end investment company at any time by a vote of the outstanding shares. See
'Description of Preferred Shares -- Voting Rights' and 'Certain Provisions of
the Charter and By-Laws' for a discussion of voting requirements applicable to
conversion of the Fund to an open-end investment company. If the Fund converted
to an open-end investment company, it would be required to redeem all Preferred
Shares then outstanding (requiring in turn that it liquidate a portion of its
investment portfolio), and the Common Shares would no longer be listed on the
NYSE. Conversion to open-end status could also require the Fund to modify
certain investment restrictions and policies. Stockholders of an open-end
investment company may require the company to redeem their shares at any time
(except in certain circumstances as authorized by or permitted under the 1940
Act) at their net asset value, less such redemption charge, if any, as might be
in effect at the time of redemption. In order to avoid maintaining large cash
positions or liquidating favorable investments to meet redemptions, open-end
investment companies typically engage in a continuous offering of their shares.
Open-end investment companies are thus subject to periodic asset in-flows and
out-flows that can complicate portfolio management. The Board of Directors may
at any time propose conversion of the Fund to open-end status, depending upon
its judgment regarding the advisability of such action in light of circumstances
then prevailing. The Board of Directors believes, however, that the closed-end
structure is desirable in light of the Fund's investment objectives and policies
and it is currently not likely that the Board of Directors would vote to convert
the Fund to an open-end fund.

                                FEDERAL TAXATION

    The following discussion offers only a brief outline of the federal income
tax consequences of investing in the Fund and is based on the federal tax laws
in effect on the date hereof. Such tax laws are subject to change by
legislative, judicial or administrative action, possibly with retroactive
effect. Investors should consult their own tax advisers for more detailed
information and for information regarding the impact of state, local and foreign
taxes on an investment in the Fund.

FEDERAL INCOME TAX TREATMENT OF THE FUND

    The Fund intends to elect to be treated as, and to qualify annually as, a
regulated investment company under Subchapter M of the Code (a 'RIC'). To
qualify, the Fund must, among other things, (a) derive at least 90% of its gross
income each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock or
securities or foreign currencies, or other income derived from its business of
investing in stock or securities or foreign currencies (the 'Income
Requirement'); and (b) diversify its holdings so that, at the end of each
quarter of its taxable year, (i) at least 50% of the value of its total assets
is represented by cash, U.S. Government securities, securities of other RICs and
other securities, with such other securities limited, in respect of any one
issuer, to an amount that does not exceed 5% of the value of the Fund's total
assets and that does not represent more than 10% of the issuer's

                                       43





<PAGE>
outstanding voting securities and (ii) not more than 25% of the value of its
total assets is invested in the securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer, or of two or more
issuers which the Fund controls and which are engaged in the same or similar or
related trades or businesses.

    For each taxable year that the Fund qualifies otherwise as a RIC, it will
not be subject to U.S. federal income tax on that part of its investment company
taxable income (as that term is defined in the Code, but determined without
regard to any deduction for dividends paid) and net capital gain (the excess of
net long-term capital gain over net short-term capital loss) that it distributes
to its stockholders, if it distributes at least 90% of the sum of its investment
company taxable income and any net tax-exempt income for that year (the
'Distribution Requirement'). The Fund intends to make sufficient distributions
of its investment company taxable income each taxable year to meet the
Distribution Requirement. If the Fund failed to qualify for treatment as a RIC
for any taxable year or failed to satisfy the Distribution Requirement in any
taxable year, (a) it would be taxed as an ordinary corporation on the full
amount of its taxable income for that year without being able to deduct the
distributions it makes to its stockholders, and (b) its stockholders would treat
any such distributions, including distributions of net capital gain, as
dividends (that is, ordinary income) to the extent of the Fund's current and
accumulated earnings and profits.

    The Fund also currently intends to distribute all realized net capital gain
annually. If, however, the Board of Directors determines for any taxable year to
retain all or a portion of the Fund's net capital gain, that decision will not
affect the Fund's ability to qualify for treatment as a RIC, but will subject
the Fund to a tax of 35% of the amount retained. In that event, the Fund expects
to designate the retained amount as undistributed capital gains in a notice to
its stockholders, who (i) will be required to include their proportionate shares
of the undistributed amount in their gross income as long-term capital gain, and
(ii) will be entitled to credit their proportionate shares of the 35% tax paid
by the Fund against their federal income tax liabilities. For federal income tax
purposes, the tax basis of shares owned by a Fund stockholder will be increased
by an amount equal to 65% of the amount of undistributed capital gains included
in the stockholder's gross income.

    The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year at least 98% of the sum of
its ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts. For this
and other purposes, a distribution will be treated as paid by the Fund and
received by the stockholders on December 31 if it is declared by the Fund in
October, November or December of such year, made payable to stockholders of
record on a date in such a month and paid by the Fund during January of the
following year. Any such distribution thus will be taxable to stockholders whose
taxable year is the calendar year in the year the distribution is declared,
rather than the year in which the distribution is received. To prevent
application of the excise tax, the Fund intends to make its distributions in
accordance with the calendar year distribution requirement.

FEDERAL INCOME TAX TREATMENT OF HOLDERS OF PREFERRED SHARES

    Based in part on its lack of any present intention on the part of the Fund
to redeem or purchase the Preferred Shares at any time in the future, the Fund
believes that under present law

                                       44





<PAGE>
the Preferred Shares will constitute stock of the Fund and distributions with
respect to the Preferred Shares (other than distributions in redemption of the
Preferred Shares that are treated as exchanges of stock under Section 302(b) of
the Code) thus will constitute dividends to the extent of the Fund's current or
accumulated earnings and profits as calculated for federal income tax purposes.
Such dividends generally will be taxable as ordinary income to holders (other
than capital gain dividends, as described below) and generally will not qualify
for the dividends received deduction available to corporations under Section 243
of the Code, although if a portion of the Fund's income consists of qualifying
dividends paid by U.S. corporations (other than REITs), a portion of the
dividends paid by the Fund to corporate stockholders may qualify for the
dividends received deduction. This view relies in part on a published ruling of
the IRS stating that certain preferred stock similar in many material respects
to the Preferred Shares represents equity. It is possible, however, that the IRS
might take a contrary position asserting, for example, that the Preferred Shares
constitute debt of the Fund. If this position were upheld, the discussion of the
treatment of distributions above would not apply. Instead, distributions by the
Fund to holders of Preferred Shares would constitute interest, whether or not
such distributions exceeded the earnings and profits of the Fund, would be
included in full in the income of the recipient and would be taxed as ordinary
income.

    Dividends paid out of the Fund's current or accumulated earnings and profits
will, except in the case of capital gain dividends described below, be taxable
to stockholders as ordinary income. Distributions of net capital gain that are
designated by the Fund as capital gain dividends will be treated as long-term
capital gains in the hands of holders regardless of the holders' respective
holding periods for their Preferred Shares. Distributions, if any, in excess of
the Fund's current and accumulated earnings and profits will first reduce the
adjusted tax basis of a stockholder's shares and, after that basis has been
reduced to zero, will constitute a capital gain to the stockholder (assuming the
shares are held as a capital asset). The IRS currently requires that a regulated
investment company that has two or more classes of stock allocate to each such
class proportionate amounts of each type of its income (such as ordinary income
and capital gains) based upon the percentage of total dividends distributed to
each class for the tax year. Accordingly, the Fund intends each year to allocate
capital gain dividends between its Common Shares, Series __ Preferred Shares and
Series __ Preferred Shares in proportion to the total dividends paid out of
current or accumulated earnings or profits to each class with respect to such
tax year. Distributions in excess of the Fund's current and accumulated earnings
and profits (if any), however, will not be allocated proportionately among the
Common Shares, Series [  ] Preferred Shares and Series [  ] Preferred Shares.
Since the Fund's current and accumulated earnings and profits will first be used
to pay dividends on the Preferred Shares, distributions in excess of such
earnings and profits, if any, will be made disproportionately to holders of
Common Shares.

    Distributions will be treated in the manner described above regardless of
whether such distributions are paid in cash or invested in additional shares of
the Fund. Stockholders will be notified annually as to the U.S. federal tax
status of distributions.

SALE OF SHARES

    The sale or other disposition of Preferred Shares generally will be a
taxable transaction for federal income tax purposes. Selling holders of
Preferred Shares generally will recognize gain or loss in an amount equal to the
difference between the amount received in exchange therefor and

                                       45





<PAGE>
their respective bases in such Preferred Shares. If the Preferred Shares are
held as a capital asset, the gain or loss generally will be a capital gain or
loss. Similarly, a redemption (including a redemption resulting from liquidation
of the Fund), if any, of Preferred Shares by the Fund generally will give rise
to capital gain or loss if the holder does not own (and is not regarded under
certain tax law rules of constructive ownership as owning) any shares of Common
Shares in the Fund and provided that the redemption proceeds do not represent
declared but unpaid dividends.

    Generally, a holder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year. Capital gains of individuals are
generally taxed at a maximum rate of tax of 20% (or 18% for capital assets held
for more than five years and whose holding periods begin after December 31,
2000). However, any loss realized upon a taxable disposition of Preferred Shares
held for six months or less will be treated as a long-term capital loss to the
extent of any capital gain dividends received by the holder (or amounts credited
to the holder as undistributed capital gains) with respect to such shares. Also,
any loss realized upon a taxable disposition of Preferred Shares may be
disallowed if other Preferred Shares are acquired within a 61-day period
beginning 30 days before and ending 30 days after the date the shares are
disposed of. If disallowed, the loss will be reflected by an upward adjustment
to the basis of the Preferred Shares acquired.

BACKUP WITHHOLDING

    The Fund may be required to withhold, for U.S. federal income taxes, a
portion of all taxable dividends and redemption proceeds payable to stockholders
who fail to provide the Fund with their correct taxpayer identification numbers
or who otherwise fail to make required certifications, or if the Fund or a
stockholder has been notified by the IRS that such stockholder is subject to
backup withholding. Corporate stockholders and other stockholders specified in
the Code and the Treasury regulations promulgated thereunder are exempt from
such backup withholding. Backup withholding is not an additional tax. Any
amounts withheld will be allowed as a refund or a credit against the
stockholder's federal income tax liability if the appropriate information is
provided to the IRS.

OTHER TAXATION

    Foreign stockholders, including stockholders who are nonresident aliens, may
be subject to U.S. withholding tax on certain distributions at a rate of 30% or
such lower rates as may be prescribed by any applicable treaty. Investors are
advised to consult their own tax advisers with respect to the application to
their own circumstances of the above-described general taxation rules and with
respect to the state, local, foreign and other tax consequences to them of an
investment in Preferred Shares.

FURTHER INFORMATION

    The SAI summarizes further federal income tax considerations that may apply
to the Fund and its stockholders and may qualify the considerations discussed
herein.

                                       46





<PAGE>
                                  UNDERWRITING

    The underwriters named below (the 'Underwriters'), acting through
__________________, have severally agreed, subject to the terms and conditions
of the Purchase Agreement with the Fund to purchase, and the Fund has agreed to
sell, the number of Preferred Shares set forth opposite their respective names
offered in this Prospectus.

<Table>
<Caption>
                                                            NUMBER OF          NUMBER OF
                                                              SERIES             SERIES
                                                         PREFERRED SHARES   PREFERRED SHARES
UNDERWRITER                                              ----------------   ----------------
<S>                                                      <C>                <C>
 .......................................................

                                                              ------             ------
    Total..............................................
                                                              ------             ------
                                                              ------             ------
</Table>

    The Purchase Agreement provides that the obligations of the Underwriters to
purchase the shares included in this offering are subject to approval of legal
matters by counsel and to other conditions. The Underwriters are obligated to
purchase all the Preferred Shares if they purchase any of the shares. The Fund
and the Investment Manager have agreed to indemnify the ______ Underwriters
against certain liabilities, including liabilities arising under the Securities
Act of 1933, as amended, or to contribute payments to the Underwriters may be
required to make for any of those liabilities.

    The Fund has been advised by the Underwriters that they propose initially to
offer some of the shares directly to the public at the public offering price set
forth on the cover page of this Prospectus and some of the shares to dealers at
the public offering price less a concession not to exceed $____ per share. The
sales load the Fund will pay of $____ per share is equal to 1% of the initial
offering price. After the initial public offering, the Underwriters may change
the public offering price and the concession. Investors must pay for any
Preferred Shares purchased in the initial public offering on or before
____________, 2002.

    The Fund anticipates that the Underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions and that the
Underwriters, or their affiliates, may act as a counterparty in connection with
the interest rate transactions described above after they have ceased to be
Underwriters.

    The Fund anticipates that the Underwriters or their respective affiliates
may, from time to time, act in auctions as broker dealers and receive fees as
set forth under 'The Auction' and in the SAI. The Underwriters are active
Underwriters of, and dealers in, securities and act as market makers in a number
of such securities, and therefore can be expected to engage in portfolio
transactions with, and perform services for, the Fund.

    The principal business address of _______________ is
__________________.

                                       47





<PAGE>                       CUSTODIAN, AUCTION AGENT, TRANSFER
                   AGENT, DIVIDEND PAYING AGENT AND REGISTRAR

    ____________________________, whose principal place of business is
__________________________________, will act as auction agent, transfer agent,
dividend paying agent, and registrar for the Preferred Shares. State Street
Bank, whose principal business address is 225 Franklin Street, Boston, MA 02110,
has been retained to act as custodian of the Fund's investments. Neither
_____________________ nor State Street Bank has any part in deciding the Fund's
investment policies or which securities are to be purchased or sold for the
Fund's portfolio.

                                 LEGAL OPINIONS

    The validity of the shares offered hereby is being passed on for the Fund by
Simpson Thacher & Bartlett, New York, New York, and certain other legal matters
will be passed on for the Underwriters by __________________________________.
Venable, Baetjer and Howard, LLP will opine on certain matters pertaining to
Maryland law. Simpson Thacher & Bartlett and __________________________________
may rely as to certain matters of Maryland law on the opinion of Venable,
Baetjer and Howard, LLP.

                              INDEPENDENT AUDITORS

    The statement of assets and liabilities of the Fund at ____________, 2002
and the related statement of operations for the one day then ended have been
audited by ______________, independent auditors, as set forth in their report
given upon ____________'s authority as experts in accounting and auditing. The
address of ______________ is ___________________.

                              FURTHER INFORMATION

    The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and is required to file reports, proxy
statements and other information with the SEC. These documents can be inspected
and copied for a fee at the SEC's public reference room, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's New York Regional Office, Seven World
Trade Center, New York, New York 10048. Reports, proxy statements, and other
information about the Fund can be inspected at the offices of the NYSE.

    This Prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.

    Additional information about the Fund and Preferred Shares can be found in
the Fund's Registration Statement (including amendments, exhibits, and
schedules) on Form N-2 filed with the SEC. The Fund's SAI dated ______________,
2002 contains additional information about the Fund and is incorporated by
reference into (which means it is considered to be a part of) this prospectus.
The SEC maintains a web site (http://www.sec.gov) that contains the Fund's
Registration Statement, the SAI, other documents incorporated by reference, and
other information the Fund has filed electronically with the SEC, including
proxy statements and reports filed under the Securities Exchange Act of 1934.
Additional information may be found on the Internet at
http://www.cohenandsteers.com.

                                       48





<PAGE>
         TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
General Information.........................................    3
Additional Information about Fund Investment Objectives and
  Policies..................................................    3
Investment Restrictions.....................................    4
Management of the Fund......................................    6
Compensation of Directors...................................    7
Investment Advisory and Other Services......................    8
Portfolio Transactions and Brokerage........................   10
Determination of Net Asset Value............................   11
Additional Information Concerning the Auctions for Preferred
  Shares....................................................   12
S&P and Moody's Guidelines..................................   14
Federal Taxation............................................   20
Performance Data and Index Returns..........................   25
Experts.....................................................   26
Report of Independent Accountants...........................   27
Financial Statements........................................   28
Appendix A: Ratings of Investments..........................  A-1
Appendix B: Articles Supplementary..........................  B-1
</Table>

                                       49






<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

                               $________________

                                 COHEN & STEERS
                        QUALITY INCOME REALTY FUND, INC.

                TAXABLE AUCTION RATE CUMULATIVE PREFERRED SHARES

                         __________ SHARES, SERIES ____
                         __________ SHARES, SERIES ____

                    LIQUIDATION PREFERENCE $25,000 PER SHARE

                              [COHEN & STEERS LOGO]

                               ------------------
                                   PROSPECTUS
                               ------------------

                      ___________________________________

                              ______________, 2002

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------













<PAGE>



                              [COHEN & STEERS LOGO]

                                757 THIRD AVENUE
                            NEW YORK, NEW YORK 10017
                                 (800) 437-9912
- --------------------------------------------------------------------------------

                      STATEMENT OF ADDITIONAL INFORMATION

                Taxable Auction Rate Cumulative Preferred Shares

                             ____ Shares, Series __
                             ____ Shares, Series __

                                __________, 2002

   THIS STATEMENT OF ADDITIONAL INFORMATION ('SAI') OF COHEN & STEERS QUALITY
 INCOME REALTY FUND, INC. (THE 'FUND') RELATING TO THIS OFFERING OF THE FUND'S
   AUCTION RATE CUMULATIVE PREFERRED SHARES (THE 'PREFERRED SHARES') DOES NOT
   CONSTITUTE A PROSPECTUS, BUT SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
       PROSPECTUS RELATING TO THE PREFERRED SHARES DATED ________, 2002.
  THIS SAI DOES NOT INCLUDE ALL INFORMATION THAT A PROSPECTIVE INVESTOR SHOULD
  CONSIDER BEFORE PURCHASING PREFERRED SHARES IN THIS OFFERING, AND INVESTORS
 SHOULD OBTAIN AND READ THE PROSPECTUS PRIOR TO PURCHASING PREFERRED SHARES. A
COPY OF THE PROSPECTUS MAY BE OBTAINED WITHOUT CHARGE BY WRITING TO THE ADDRESS
                    OR CALLING THE PHONE NUMBER SHOWN ABOVE.

  CAPITALIZED TERMS USED IN THIS SAI HAVE THE MEANINGS ASSIGNED TO THEM IN THE
                   PROSPECTUS OR IN THE GLOSSARY OF THIS SAI.

- --------------------------------------------------------------------------------









<PAGE>
                               TABLE OF CONTENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
General Information.........................................    3
Additional Information about Fund Investment Objectives and
  Policies..................................................    3
Investment Restrictions.....................................    4
Management of the Fund......................................    6
Compensation of Directors...................................    7
Investment Advisory and Other Services......................    8
Portfolio Transactions and Brokerage........................   10
Determination of Net Asset Value............................   11
Additional Information Concerning the Auctions for Preferred
  Shares....................................................   12
S&P and Moody's Guidelines..................................   14
Federal Taxation............................................   20
Performance Data and Index Returns..........................   25
Experts.....................................................   26
Report of Independent Accountants...........................   27
Financial Statements........................................   28
Appendix A: Ratings of Investments..........................  A-1
Appendix B: Articles Supplementary..........................  B-1
</Table>

                                       2





<PAGE>
                              GENERAL INFORMATION

    The Fund is a non-diversified, closed-end management investment company
registered under the Investment Company Act of 1940 (the '1940 Act'). Cohen &
Steers Capital Management, Inc. (the 'Investment Manager') serves as the Fund's
investment manager. The Fund's primary investment objective is high current
income through investment in real estate securities and its secondary investment
objective is capital appreciation. No assurance can be given that the Fund will
achieve its investment objectives.

                          ADDITIONAL INFORMATION ABOUT
                    FUND INVESTMENT OBJECTIVES AND POLICIES

    The following descriptions supplement the descriptions of the principal
investment objectives, strategies and risks as set forth in the Prospectus.
Except as otherwise provided, the Fund's investment policies are not fundamental
and may be changed by the Board of Directors of the Fund without the approval of
the stockholders; however, the Fund will not change its non-fundamental
investment policies without written notice to stockholders.

INVESTMENTS IN REAL ESTATE COMPANIES AND REAL ESTATE INVESTMENT TRUSTS

    It is our fundamental policy to concentrate our investments in the U.S. real
estate market and not in any other industry. Under normal market conditions, we
invest at least 90% of our total assets in common stocks, preferred stocks and
other equity securities issued by real estate companies, such as real estate
investment trusts ('REITs').

REAL ESTATE COMPANIES

    For purposes of our investment policies, a real estate company is one that
derives at least 50% of its revenues from the ownership, construction,
financing, management or sale of commercial, industrial, or residential real
estate; or has at least 50% of its assets in real estate.

REAL ESTATE INVESTMENT TRUSTS

    A REIT is a company dedicated to owning, and usually operating, income
producing real estate, or to financing real estate. REITs can generally be
classified as Equity REITs, Mortgage REITs and Hybrid REITs. An Equity REIT
invests primarily in the fee ownership or leasehold ownership of land and
buildings and derives its income primarily from rental income. An Equity REIT
may also realize capital gains (or losses) by selling real estate properties in
its portfolio that have appreciated (or depreciated) in value. A Mortgage REIT
invests primarily in mortgages on real estate, which may secure construction,
development or long-term loans. A Mortgage REIT generally derives its income
primarily from interest payments on the credit it has extended. A Hybrid REIT
combines the characteristics of both Equity REITs and Mortgage REITs. It is
anticipated, although not required, that under normal market conditions at least
90% of the Fund's investments in REITs consist of securities issued by Equity
REITs. At least 80% of our total assets will be invested in income producing
equity securities issued by REITs.

PREFERRED STOCKS

    Preferred stocks pay fixed or floating dividends to investors, and have a
'preference' over common stock in the payment of dividends and the liquidation
of a company's assets. This means that a company must pay dividends on preferred
stock before paying any dividends on its common stock. Preferred stockholders
usually have no right to vote for corporate directors or on other matters. Under
current market conditions, the Investment Manager invests approximately 70% of
our total assets in common shares of real estate companies and approximately 30%
in preferred shares of REITs. The actual percentage of common and preferred
shares in our investment portfolio may vary over time based on the Investment
Manager's assessment of market conditions.

                                       3





<PAGE>
LOWER-RATED SECURITIES

    Securities rated non-investment grade (lower than BBB by Standard & Poor's
Rating Services ('S&P') or lower than baa by Moody's Investors Service Inc.
('Moody's')) are sometimes referred to as 'high yield' or 'junk' bonds. We may
only invest in securities rated 'CCC' or higher by S&P, or rated 'caa' or higher
by Moody's, or unrated securities of comparable quality. The issuers of these
securities have a currently identifiable vulnerability to default and the issues
may be in default or there may be present elements of danger with respect to
principal or interest. We may invest no more than 20% of our assets in preferred
stock and debt securities rated below investment grade and unrated securities of
comparable quality. This is a fundamental investment policy. We will not invest
in securities which are in default at the time of purchase.

ILLIQUID SECURITIES

    A security is illiquid if, for legal or market reasons, it cannot be
promptly sold (i.e., within seven days) at a price which approximates its fair
value. Although substantially all of the equity securities of real estate
companies in which we intend to invest are traded on a national securities
exchange or in the over-the-counter market, there are no limitations on our
ability to invest in illiquid securities.

CASH RESERVES

    The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments.

    Money market instruments in which the Fund may invest its cash reserves will
generally consist of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and such obligations which are subject to
repurchase agreements. Repurchase agreements may be entered into with member
banks of the Federal Reserve System or 'primary dealers' (as designated by the
Federal Reserve Bank of New York) in U.S. Government securities. Other
acceptable money market instruments include commercial paper rated by any
nationally recognized rating agency, such as S&P or Moody's, certificates of
deposit, bankers' acceptances issued by domestic banks having total assets in
excess of one billion dollars, and money market mutual funds.

    In entering into a repurchase agreement for the Fund, the Investment Manager
will evaluate and monitor the creditworthiness of the vendor. In the event that
a vendor should default on its repurchase obligation, the Fund might suffer a
loss to the extent that the proceeds from the sale of the collateral were less
than the repurchase price. If the vendor becomes bankrupt, the Fund might be
delayed, or may incur costs or possible losses of principal and income, in
selling the collateral.

                            INVESTMENT RESTRICTIONS

    The investment objectives and the general investment policies and investment
techniques of the Fund are described in the Prospectus. The Fund has also
adopted certain investment restrictions limiting the following activities except
as specifically authorized:

    The Fund may not:

        1. Issue senior securities (including borrowing money for other than
    temporary purposes) except in conformity with the limits set forth in the
    1940 Act; or pledge its assets other than to secure such issuances or
    borrowings or in connection with permitted investment strategies;
    notwithstanding the foregoing, the Fund may borrow up to an additional 5% of
    its total assets for temporary purposes;

        2. Act as an underwriter of securities issued by other persons, except
    insofar as the Fund may be deemed an underwriter in connection with the
    disposition of securities;

                                       4





<PAGE>
        3. Purchase or sell real estate, mortgages on real estate or
    commodities, except that the Fund may invest in securities of companies that
    deal in real estate or are engaged in the real estate business, including
    REITs, and securities secured by real estate or interests therein and the
    Fund may hold and sell real estate or mortgages on real estate acquired
    through default, liquidation, or other distributions of an interest in real
    estate as a result of the Fund's ownership of such securities;

        4. Purchase or sell commodities or commodity futures contracts, except
    that the Fund may invest in financial futures contracts, options thereon and
    such similar instruments;

        5. Make loans to other persons except through the lending of securities
    held by it (but not to exceed a value of one-third of total assets), through
    the use of repurchase agreements, and by the purchase of debt securities,
    all in accordance with its investment policies;

        6. Purchase preferred stock and debt securities rated below investment
    grade and unrated securities of comparable quality, if, as a result, more
    than 20% of the Fund's total assets would then be invested in such
    securities;

        7. Acquire or retain securities of any investment company, except that
    the Fund may (a) acquire securities of investment companies up to the limits
    permitted by Section 12(d)(1) of the 1940 Act, and (b) acquire securities of
    any investment company as part of a merger, consolidation or similar
    transaction;

        8. Invest in puts, calls, straddles, spreads or any combination thereof;

        9. Enter into short sales;

        10. Invest in the securities of a non-U.S. issuer;

        11. Invest in oil, gas or other mineral exploration programs,
    development programs or leases, except that the Fund may purchase securities
    of companies engaging in whole or in part in such activities;

        12. Pledge, mortgage or hypothecate its assets except in connection with
    permitted borrowings; or

        13. Purchase securities on margin, except short-term credits as are
    necessary for the purchase and sale of securities.

    The investment restrictions numbered 1 through 7 in this SAI have been
adopted as fundamental policies of the Fund. Under the 1940 Act, a fundamental
policy may not be changed without the vote of a majority of the outstanding
voting securities of the Fund, as defined under the 1940 Act. 'Majority of the
outstanding voting securities' means the lesser of (1) 67% or more of the shares
present at a meeting of stockholders of the Fund, if the holders of more than
50% of the outstanding shares of the Fund are present or represented by proxy,
or (2) more than 50% of the outstanding shares of the Fund. Investment
restrictions numbered 8 through 13 above are non-fundamental and may be changed
at any time by vote of a majority of the Board of Directors.

                                       5





<PAGE>
                             MANAGEMENT OF THE FUND

    The overall management of the business and affairs of the Fund is vested
with the Board of Directors. The directors approve all significant agreements
between the Fund and persons or companies furnishing services to it, including
the Fund's agreements with its Investment Manager, administrator, auction agent,
custodian and transfer agent. The management of the Fund's day-to-day operations
is delegated to its officers, the Investment Manager and the Fund's
administrator, subject always to the investment objectives and policies of the
Fund and to the general supervision of the Directors. As of February __, 2002,
the Directors and officers as a group beneficially owned directly or indirectly
less than 1% of the outstanding shares of the Fund.

DIRECTORS AND OFFICERS

    The Directors and officers of the Fund and their principal occupations
during the past five years are set forth below. Each director and officer is
also a director or officer of Cohen & Steers Advantage Income Realty Fund, Inc.
and Cohen & Steers Total Return Realty Fund, Inc., which are closed-end
investment companies also advised by the Investment Manager, and Cohen & Steers
Equity Income Fund, Inc., Cohen & Steers Institutional Realty Shares, Inc.,
Cohen & Steers Realty Shares, Inc. and Cohen & Steers Special Equity Fund, Inc.,
which are open-end investment companies advised by the Investment Manager. An
asterisk (*) has been placed next to the name of each director who is an
'interested person' of the Fund, as such term is defined in the 1940 Act, by
virtue of such person's affiliation with the Fund or the Investment Manager.

    The Directors and officers of the Fund, their addresses, their ages and
their principal occupations for at least the past five years are set forth
below.

<Table>
<Caption>
                                    POSITION(S)
                                     HELD WITH
    NAME, ADDRESS AND AGE              FUND          PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
    ---------------------              ----          --------------------------------------------
<S>                             <C>                  <C>
Robert H. Steers* ............  Director, Chairman   Chairman of Cohen & Steers Capital
757 Third Avenue                of the Board, and    Management, Inc., the Fund's Investment
New York, New York              Secretary            Manager.
Age: 48
Martin Cohen*'D','D'D' .......  Director, President  President of Cohen & Steers Capital
757 Third Avenue                and Treasurer          Management, Inc., the Fund's Investment
New York, New York                                     Manager.
Age: 52
Gregory C. Clark .............  Director             Private Investor. Prior thereto, President
376 Mountain Laurel Drive                            of Wellspring Management Group (investment
Aspen, Colorado                                        advisory firm).
Age: 54
Bonnie Cohen'D'D' ............  Director             Consultant. Prior thereto, Undersecretary
1824 Phelps Place, N.W.                              of State, United States Department of
Washington, D.C.                                       State.
Age: 59
George Grossman ..............  Director             Attorney-at-law.
17 Elm Place,
Rye, New York
Age: 47
Richard J. Norman ............  Director             Private Investor. Prior thereto,
7520 Hackamore Drive                                 Investment Representative of Morgan
Potomac, Maryland                                      Stanley Dean Witter.
Age: 58
</Table>

                                                  (table continued on next page)

                                       6





<PAGE>
(table continued from previous page)

<Table>
<Caption>
                                    POSITION(S)
                                     HELD WITH
    NAME, ADDRESS AND AGE              FUND          PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
    ---------------------              ----          --------------------------------------------
<S>                             <C>                  <C>
Willard H. Smith Jr.'D' ......  Director             Board member of Essex Property Trust, Inc.,
5208 Renaissance Avenue                                Highwoods Properties, Inc., Realty Income
San Diego, California                                  Corporation and Willis Lease Finance
Age: 64                                                Corporation. Managing Director at Merrill
                                                       Lynch & Co., Equity Capital Markets
                                                       Division from 1983 to 1995.
Greg E. Brooks ...............  Vice President       Senior Vice President of Cohen & Steers
757 Third Avenue                                       Capital Management, Inc., the Fund's
New York, New York                                     Investment Manager, since 2002 and Vice
Age: 35                                                President of the Fund's Investment Manager
                                                       since 2000. Prior thereto, investment
                                                       analyst with another real estate
                                                       securities investment manager.
Adam M. Derechin .............  Vice President and   Senior Vice President of Cohen & Steers
757 Third Avenue                Assistant Treasurer    Capital Management, Inc., the Fund's
New York, New York                                     Investment Manager, since 1998 and prior
Age: 37                                                to that Vice President of Cohen & Steers
                                                       Capital Management, Inc.
Lawrence B. Stoller ..........  Assistant Secretary  Senior Vice President and General Counsel of
757 Third Avenue                                       Cohen & Steers Capital Management, Inc.,
New York, New York                                     the Fund's Investment Manager, since 1999.
Age: 38                                                Prior to that, Associate General Counsel,
                                                       Neuberger Berman Management Inc. (money
                                                       manager); and Assistant General Counsel,
                                                       The Dreyfus Corporation (money manager).
</Table>

- ---------

 * 'Interested person,' as defined in the 1940 Act, of the Fund because of the
   affiliation with Cohen & Steers Capital Management, Inc., the Fund's
   Investment Manager.

 'D' These directors have been designated as preferred stock directors.

'D'D' Martin Cohen and Bonnie Cohen are unrelated.

                           COMPENSATION OF DIRECTORS

    The following table sets forth estimated information regarding compensation
expected to be paid to Directors by the Fund for the current fiscal year ending
December 31, 2002 and the aggregate compensation paid by the fund complex of
which the Fund is a part for the fiscal year ended December 31, 2001. Officers
of the Fund and Directors who are interested persons of the Fund do not receive
any compensation from the Fund or any other fund in the fund complex which is a
U.S. registered investment company. Each of the other Directors is paid an
annual retainer of $5,500, and a fee of $500 for each meeting attended and is
reimbursed for the expenses of attendance at such meetings. In the column headed
'Total Compensation From Fund Complex Paid to Directors,' the compensation paid
to each Director represents the six other funds that each Director serves in the
fund complex. The Directors do not receive any pension or retirement benefits
from the fund complex.

                                       7





<PAGE>

<Table>
<Caption>
                                                                                  TOTAL
                                                               AGGREGATE      COMPENSATION
                                                              COMPENSATION      FROM FUND
                                                                FROM THE     COMPLEX PAID TO
                          DIRECTOR                                FUND          DIRECTORS
                          --------                                ----          ---------
<S>                                                           <C>            <C>
Gregory C. Clark*, Director.................................     $7,500          $45,000
Bonnie Cohen*, Director.....................................     $7,500          $11,250***
Martin Cohen**, Director and President......................     $    0          $     0
George Grossman*, Director..................................     $7,500          $45,000
Richard J. Norman, Director.................................     $7,500          $11,250***
Willard H. Smith Jr.*, Director.............................     $7,500          $45,000
Robert H. Steers**, Director and Chairman...................     $    0          $     0
</Table>

- ---------

  * Member of the Audit Committee.

 ** 'Interested person,' as defined in the 1940 Act, of the Fund because of the
    affiliation with Cohen & Steers Capital Management, Inc., the Fund's
    Investment Manager.

*** Ms. Cohen and Mr. Norman were elected as Directors of the fund complex on
    December 3, 2001.

PRINCIPAL STOCKHOLDERS

    To the knowledge of the Fund, as of ________, 2002, no current director of
the Fund owned 1% or more of the outstanding Common Shares, and the officers and
directors of the Fund owned, as a group, less than 1% of the Common Shares and
no Preferred Shares.

    As of ________, 2002, no person to the knowledge of the Fund, owned
beneficially more than 5% of the outstanding Common Shares. The following person
is the only person holding of record more than 5% of the outstanding Common
Shares as of ________, 2002.


<Table>
<Caption>
                      NAME AND ADDRESS                        AMOUNT OF RECORD     PERCENT OF
                      OF RECORD OWNER                            OWNERSHIP       COMMON SHARES
                      ---------------                            ---------       -------------
                     <S>                                        <C>                <C>
</Table>


                     INVESTMENT ADVISORY AND OTHER SERVICES

THE INVESTMENT MANAGER

    Cohen & Steers Capital Management, Inc., with offices located at 757 Third
Avenue, New York, New York 10017, is the Investment Manager to the Fund. The
Investment Manager, a registered investment adviser, was formed in 1986 and
specializes in the management of real estate securities portfolios. Its current
clients include pension plans of leading corporations, endowment funds and
mutual funds, including Cohen & Steers Advantage Income Realty Fund, Inc. and
Cohen & Steers Total Return Realty Fund, Inc., both of which are closed-end
investment companies, and Cohen & Steers Equity Income Fund, Inc., Cohen &
Steers Institutional Realty Shares, Inc., Cohen & Steers Realty Shares, Inc. and
Cohen & Steers Special Equity Fund, Inc., which are open-end investment
companies. Cohen & Steers Realty Shares, Inc. is currently the largest
registered investment company that invests primarily in real estate securities.
Mr. Cohen and Mr. Steers are 'controlling persons' of the Investment Manager on
the basis of their ownership of the Investment Manager's stock.

    Pursuant to the Investment Management Agreement, the Investment Manager
furnishes a continuous investment program for the Fund's portfolio, makes the
day-to-day investment decisions for the Fund, executes the purchase and sale
orders for the portfolio transactions of the Fund and generally manages the
Fund's investments in accordance with the stated policies of the Fund, subject
to the general supervision of the Board of Directors of the Fund.

                                       8





<PAGE>
    Under the Investment Management Agreement, the Fund pays the Investment
Manager a monthly management fee computed at the annual rate of 0.85% of the
average daily value of the managed assets (which equals the net asset value of
the Common Shares including the liquidation preference on any Preferred Shares,
plus the principal amount on any borrowings) of the Fund.

    The Investment Manager also provides the Fund with such personnel as the
Fund may from time to time request for the performance of clerical, accounting
and other office services, such as coordinating matters with the
sub-administrator, the transfer agent and the custodian. The personnel rendering
these services, who may act as officers of the Fund, may be employees of the
Investment Manager or its affiliates. These services are provided at no
additional cost to the Fund. The Fund does not pay any additional amounts for
services performed by officers of the Investment Manager or its affiliates.

ADMINISTRATIVE SERVICES

    Pursuant to an Administration Agreement, the Investment Manager also
performs certain administrative and accounting functions for the Fund, including
(i) providing office space, telephone, office equipment and supplies for the
Fund; (ii) paying compensation of the Fund's officers for services rendered as
such; (iii) authorizing expenditures and approving bills for payment on behalf
of the Fund; (iv) supervising preparation of the periodic updating of the Fund's
registration statement, including prospectus and statement of additional
information, for the purpose of filings with the Securities and Exchange
Commission and state securities administrators and monitoring and maintaining
the effectiveness of such filings, as appropriate; (v) supervising preparation
of periodic reports to the Fund's shareholders and filing of these reports with
the Securities and Exchange Commission, Forms N-SAR filed with the Securities
and Exchange Commission, notices of dividends, capital gains distributions and
tax credits, and attending to routine correspondence and other communications
with individual shareholders; (vi) supervising the daily pricing of the Fund's
investment portfolio and the publication of the net asset value of the Fund's
shares, earnings reports and other financial data; (vii) monitoring
relationships with organizations providing services to the Fund, including the
Custodian, Transfer Agent and printers; (viii) providing trading desk facilities
for the Fund; (ix) supervising compliance by the Fund with record-keeping
requirements under the 1940 Act and regulations thereunder, maintaining books
and records for the Fund (other than those maintained by the Custodian and
Transfer Agent) and preparing and filing of tax reports other than the Fund's
income tax returns; and (x) providing executive, clerical and secretarial help
needed to carry out these responsibilities. Under the Administration Agreement,
the Fund pays the Investment Manager an amount equal to, on an annual basis,
0.02% of the Fund's managed assets.

    In accordance with the terms of the Administration Agreement and with the
approval of the Fund's Board of Directors, the Investment Manager has caused the
Fund to retain State Street Bank and Trust Company ('State Street Bank') as
sub-administrator under a fund accounting and administration agreement (the
'Sub-Administration Agreement'). Under the Sub-Administration Agreement, State
Street Bank has assumed responsibility for performing certain of the foregoing
administrative functions, including (i) determining the Fund's net asset value
and preparing these figures for publication; (ii) maintaining certain of the
Fund's books and records that are not maintained by the Investment Manager,
custodian or transfer agent; (iii) preparing financial information for the
Fund's income tax returns, proxy statements, shareholders reports, and SEC
filings; and (iv) responding to shareholder inquiries.

    Under the terms of the Sub-Administration Agreement, the Fund pays State
Street Bank a monthly sub-administration fee. The sub-administration fee paid by
the Fund to State Street Bank is computed on the basis of the net assets in the
Fund at an annual rate equal to 0.040% of the first $200 million in assets,
0.030% of the next $200 million, and 0.015% of assets in excess of $400 million,
with a minimum fee of $120,000. The aggregate fee paid by the Fund and the other
funds advised by the Investment Manager to State Street Bank is computed by
multiplying the total number of funds by each break point in the above schedule
in order to determine the aggregate break points to be used in calculating the
total fee paid by the Cohen & Steers family

                                       9





<PAGE>
of funds (i.e., 6 funds at $200 million or $1.2 billion at 0.040%, etc.). The
Fund is then responsible for its pro rata amount of the aggregate administration
fee.

    The Investment Manager remains responsible for monitoring and overseeing the
performance by State Street Bank, and EquiServe Trust Company, NA as custodian
and transfer and disbursing agent, of their obligations to the Fund under their
respective agreements with the Fund, subject to the overall authority of the
Fund's Board of Directors.

CUSTODIAN, AUCTION AGENT, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR

    ____________________________, whose principal place of business is
__________________________________, will act as auction agent, transfer agent,
dividend paying agent, and registrar for the Preferred Shares. State Street
Bank, whose principal business address is 225 Franklin Street, Boston, MA 02110,
has been retained to act as custodian of the Fund's investments. Neither Bankers
Trust Company nor State Street Bank has any part in deciding the Fund's
investment policies or which securities are to be purchased or sold for the
Fund's portfolio.

CODE OF ETHICS

    The Fund, Investment Manager and the Fund's principal underwriters have
adopted codes of ethics in compliance with Rule 17j-1 under the 1940 Act. The
codes of ethics of the Fund and the Investment Manager, among other things,
prohibit management personnel from investing in REITs and real estate
securities, prohibit purchases in an initial public offering and require
pre-approval for investments in private placements. The Fund's Independent
Directors are prohibited from purchasing or selling any security if they knew or
reasonably should have known at the time of the transaction that, within the
most recent 15 days, the security is being or has been considered for purchase
or sale by the Fund, or is being purchased or sold by the Fund. The codes of
ethics of the principal underwriters permit personnel of these firms that are
subject to the codes to invest in securities, including securities that may be
purchased or held by the Fund.

PRIVACY POLICY

    The Fund is committed to maintaining the privacy of its shareholders and to
safeguarding their nonpublic personal information. The following information is
provided to help you understand what personal information the Fund collects, how
we protect that information, and why in certain cases we may share this
information with others.

    The Fund does not receive any nonpublic personal information relating to the
shareholders who purchase shares through an intermediary that acts as the record
owner of the shares. In the case of shareholders who are record owners of the
Fund, we receive nonpublic personal information on account applications or other
forms. With respect to these shareholders, the Fund also has access to specific
information regarding their transactions in the Fund.

    The Fund does not disclose any nonpublic personal information about its
shareholders or former shareholders to anyone, except as permitted by law or as
is necessary to service shareholder accounts. The Fund restricts access to
nonpublic personal information about its shareholders to Cohen & Steers
employees with a legitimate business need for the information.

                      PORTFOLIO TRANSACTIONS AND BROKERAGE

    Subject to the supervision of the Directors, decisions to buy and sell
securities for the Fund and negotiation of its brokerage commission rates are
made by the Investment Manager. Transactions on U.S. stock exchanges involve the
payment by the Fund of negotiated brokerage commissions. There is generally no
stated commission in the case of securities traded in the over-the-counter
market but the price paid by the Fund usually includes an undisclosed dealer
commission or mark-up. In certain instances, the Fund may make purchases of
underwritten issues at prices which include underwriting fees.

                                       10





<PAGE>
    In selecting a broker to execute each particular transaction, the Investment
Manager will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Fund on a
continuing basis. Accordingly, the cost of the brokerage commissions to the Fund
in any transaction may be greater than that available from other brokers if the
difference is reasonably justified by other aspects of the portfolio execution
services offered. Subject to such policies and procedures as the directors may
determine, the Investment Manager shall not be deemed to have acted unlawfully
or to have breached any duty solely by reason of its having caused the Fund to
pay a broker that provides research services to the Investment Manager an amount
of commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker would have charged for effecting that
transaction, if the Investment Manager determines in good faith that such amount
of commission was reasonable in relation to the value of the research service
provided by such broker viewed in terms of either that particular transaction or
the Investment Manager's ongoing responsibilities with respect to the Fund.
Research and investment information is provided by these and other brokers at no
cost to the Investment Manager and is available for the benefit of other
accounts advised by the Investment Manager and its affiliates, and not all of
the information will be used in connection with the Fund. While this information
may be useful in varying degrees and may tend to reduce the Investment Manager's
expenses, it is not possible to estimate its value and in the opinion of the
Investment Manager it does not reduce the Investment Manager's expenses in a
determinable amount. The extent to which the Investment Manager makes use of
statistical, research and other services furnished by brokers is considered by
the Investment Manager in the allocation of brokerage business but there is no
formula by which such business is allocated. The Investment Manager does so in
accordance with its judgment of the best interests of the Fund and its
stockholders. The Investment Manager may also take into account payments made by
brokers effecting transactions for the Fund to other persons on behalf of the
Fund for services provided to it for which it would be obligated to pay (such as
custodial and professional fees). In addition, consistent with the Conduct Rules
of the National Association of Securities Dealers, Inc., and subject to seeking
best price and execution, the Investment Manager may consider sales of shares of
the Fund as a factor in the selection of brokers and dealers to enter into
portfolio transactions with the Fund.

                        DETERMINATION OF NET ASSET VALUE

    The Fund will determine the net asset value of its Common Shares daily, as
of the close of trading on the New York Stock Exchange (currently 4:00 p.m. New
York time). Net asset value is computed by dividing the value of all assets of
the Fund (including accrued interest and dividends), less all liabilities
(including accrued expenses, the liquidation preference of the Preferred Shares
and dividends declared but unpaid), by the total number of Common Shares
outstanding. Any swap transaction that the Fund enters into may, depending on
the applicable interest rate environment, have a positive or negative value for
purposes of calculating net asset value. Any cap transaction that the Fund
enters into may, depending on the applicable interest rate environment, have no
value or a positive value. In addition, accrued payments to the Fund under such
transactions will be assets of the Fund and accrued payments by the Fund will be
liabilities of the Fund.

    For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on the New York Stock Exchange are
valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Board of Directors shall determine in
good faith to reflect its fair market value. Readily marketable securities not
listed on the New York Stock Exchange but listed on other domestic or foreign
securities exchanges or admitted to trading on the National Association of
Securities Dealers Automated Quotations, Inc. ('NASDAQ') National List are
valued in a like manner. Portfolio

                                       11





<PAGE>
securities traded on more than one securities exchange are valued at the last
sale price on the business day as of which such value is being determined as
reflected on the tape at the close of the exchange representing the principal
market for such securities.

    Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the Investment
Manager to be over-the-counter, but excluding securities admitted to trading on
the NASDAQ National List, are valued at the current bid prices as reported by
NASDAQ or, in the case of securities not quoted by NASDAQ, the National
Quotation Bureau or such other comparable source as the directors deem
appropriate to reflect their fair market value. However, certain fixed-income
securities may be valued on the basis of prices provided by a pricing service
when such prices are believed by the Board of Directors to reflect the fair
market value of such securities. The prices provided by a pricing service take
into account institutional size trading in similar groups of securities and any
developments related to specific securities. Where securities are traded on more
than one exchange and also over-the-counter, the securities will generally be
valued using the quotations the Board of Directors believes reflect most closely
the value of such securities.

                 ADDITIONAL INFORMATION CONCERNING THE AUCTIONS
                              FOR PREFERRED SHARES

GENERAL

    Securities Depository. The Depository Trust Company ('DTC') will act as the
Securities Depository with respect to the Preferred Shares. One certificate for
all of the shares of each series will be registered in the name of Cede & Co.,
as nominee of the Securities Depository. Such certificate will bear a legend to
the effect that such certificate is issued subject to the provisions restricting
transfers of shares of the Preferred Shares contained in the Articles
Supplementary. The Fund will also issue stop-transfer instructions to the
transfer agent for the Preferred Shares. Prior to the commencement of the right
of holders of the Preferred Shares to elect a majority of the Fund's Directors,
as described under 'Description of the Preferred Shares -- Voting Rights' in the
prospectus, Cede & Co. will be the holder of record of the Preferred Shares and
owners of such shares will not be entitled to receive certificates representing
their ownership interest in such shares.

    DTC, a New York-chartered limited purpose trust company, performs services
for its participants, some of whom (and/or their representatives) own DTC. DTC
maintains lists of its participants and will maintain the positions (ownership
interests) held by each such participant in shares of the Preferred Shares,
whether for its own account or as a nominee for another person.

CONCERNING THE AUCTION AGENT

    The auction agent will act as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the auction
agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the auction
agency agreement between the Fund and the auction agent and will not be liable
for any error of judgment made in good faith unless the auction agent was
negligent in ascertaining the pertinent facts.

    The auction agent may rely upon, as evidence of the identities of the
holders of the Preferred Shares, the auction agent's registry of holders, and
the results of auctions and notices from any Broker-Dealer (or other person, if
permitted by the Fund) with respect to transfers described under 'The
Auction-Secondary Market Trading and Transfers of the Preferred Shares' in the
prospectus and notices from the Fund. The auction agent is not required to
accept any such notice for an auction unless it is received by the auction agent
by 3:00 p.m., New York City time, on the business day preceding such action.

    The auction agent may terminate its auction agency agreement with the Fund
upon notice to the Fund on a date no earlier than 45 days after such notice. If
the auction agent should resign,

                                       12





<PAGE>
the Fund will use its best efforts to enter into an agreement with a successor
auction agent containing substantially the same terms and conditions as the
auction agency agreement. The Fund may remove the auction agent provided that
prior to such removal the Fund shall have entered into such an agreement with a
successor auction agent.

BROKER-DEALERS

    The auction agent after each auction for the Preferred Shares will pay to
each Broker-Dealer, from funds provided by the Trust, a service charge at the
annual rate of 1/4 of 1% in the case of any auction immediately preceding the
dividend period of less than one year, or a percentage agreed to by the Fund and
the Broker-Dealer in the case of any auction immediately preceding a dividend
period of one year or longer, of the purchase price of the Preferred Shares
placed by such Broker-Dealer at such auction. For the purposes of the preceding
sentence, the Preferred Shares will be placed by a Broker-Dealer if such shares
were (a) the subject of hold orders deemed to have been submitted to the auction
agent by the Broker-Dealer and were acquired by such Broker-Dealer for its
customers who are beneficial owners or (b) the subject of an order submitted by
such Broker-Dealer that is (i) a submitted bid of an existing holder that
resulted in the existing holder continuing to hold such shares as a result of
the auction or (ii) a submitted bid of a potential bidder that resulted in the
potential holder purchasing such shares as a result of the auction or (iii) a
valid hold order.

    The Fund may request the auction agent to terminate one or more
Broker-Dealer agreements at any time, provided that at least one Broker-Dealer
agreement is in effect after such termination.

    The Broker-Dealer agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit orders in auctions for its own account, unless
the Trust notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit hold orders and sell orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
orders in auctions, but only if such orders are not for its own account. If a
Broker-Dealer submits an order for its own account in any auction, it might have
an advantage over other bidders because it would have knowledge of all orders
submitted by it in that auction; such Broker-Dealer, however, would not have
knowledge of orders submitted by other Broker-Dealers in that auction.

                                       13





<PAGE>
                           S&P AND MOODY'S GUIDELINES

    The descriptions of the S&P and Moody's Guidelines contained in this SAI do
not purport to be complete and are subject to and qualified in their entireties
by reference to the Articles Supplementary. A copy of the Articles Supplementary
is filed as an exhibit to the registration statement of which the Prospectus and
this SAI are a part and may be inspected, and copies thereof may be obtained, as
described under 'Further Information' in the Prospectus.

    The composition of the Fund's portfolio reflects guidelines (referred to
herein as the 'Rating Agency Guidelines') established by S&P and Moody's in
connection with the Fund's receipt of a rating of 'AAA' and 'aaa' from S&P and
Moody's, respectively, for the Preferred Shares. These Rating Agency Guidelines
relate, among other things, to industry and credit quality characteristics of
issuers and diversification requirements and specify various Discount Factors
for different types of securities (with the level of discount greater as the
rating of a security becomes lower). Under the Rating Agency Guidelines, certain
types of securities in which the Fund may otherwise invest consistent with its
investment strategy are not eligible for inclusion in the calculation of the
Discounted Value of the Fund's portfolio. Such instruments include, for example,
private placements (other than Rule 144A Securities) and other securities not
within the investment guidelines. Accordingly, although the Fund reserves the
right to invest in such securities to the extent set forth herein, they have not
and it is anticipated that they will not constitute a significant portion of the
Fund's portfolio.

    The Rating Agency Guidelines require that the Fund maintain assets having an
aggregate Discounted Value, determined on the basis of the Guidelines, greater
than the aggregate liquidation preference of the Preferred Shares plus specified
liabilities, payment obligations and other amounts, as of periodic Valuation
Dates. The Rating Agency Guidelines also require the Fund to maintain asset
coverage for the Preferred Shares on a non-discounted basis of at least 200% as
of the end of each month, and the 1940 Act requires this asset coverage as a
condition to paying dividends or other distributions on Common Shares. The
effect of compliance with the Rating Agency Guidelines may be to cause the Fund
to invest in higher quality assets and/or to maintain relatively substantial
balances of highly liquid assets or to restrict the Fund's ability to make
certain investments that would otherwise be deemed potentially desirable by the
Investment Manager, including private placements of other than Rule 144A
Securities (as defined herein). The Rating Agency Guidelines are subject to
change from time to time with the consent of the relevant rating agency and
would not apply if the Fund in the future elected not to use investment leverage
consisting of senior securities rated by one or more rating agencies, although
other similar arrangements might apply with respect to other senior securities
that the Fund may issue.

    The Fund intends to maintain, at specified times, a Discounted Value for its
portfolio at least equal to the amount specified by each rating agency (the
'Preferred Shares Basic Maintenance Amount'). S&P and Moody's have each
established separate guidelines for determining Discounted Value. To the extent
any particular portfolio holding does not satisfy the applicable Rating Agency's
Guidelines, all or a portion of such holding's value will not be included in the
calculation of Discounted Value (as defined by such rating agency).

    The Rating Agency Guidelines do not impose any limitations on the percentage
of Fund assets that may be invested in holdings not eligible for inclusion in
the calculation of the Discounted Value of the Fund's portfolio. The amount of
such assets included in the portfolio at any time may vary depending upon the
rating, diversification and other characteristics of the assets included in the
portfolio which are eligible for inclusion in the Discounted Value of the
portfolio under the Rating Agency Guidelines.

    As described by S&P, a preferred stock rating of AAA indicates strong asset
protection, conservative balance sheet ratios and positive indications of
continued protection of preferred dividend requirements. An S&P or Moody's
credit rating of preferred stock does not address the likelihood that a resale
mechanism (e.g., the Auction) will be successful. As described by Moody's, an
issue of preferred stock which is rated 'aaa' is considered to be top-quality
preferred stock

                                       14





<PAGE>
with good asset protection and the least risk of dividend impairment within the
universe of preferred stocks.

    Ratings are not recommendations to purchase, hold or sell Preferred Shares,
inasmuch as the rating does not comment as to market price or suitability for a
particular investor. The rating is based on current information furnished to S&P
and Moody's by the Fund and obtained by S&P and Moody's from other sources. The
rating may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information.

S&P GUIDELINES

    Under the S&P guidelines, the Fund is required to maintain specified
discounted asset values for its portfolio representing the Preferred Shares
Basic Maintenance Amount (as defined below). To the extent any particular
portfolio holding does not meet the applicable guidelines, it is not included
for purposes of calculating the Discounted Value of the Fund's portfolio, and,
among the requirements, the amount of such assets included in the portfolio at
any time, if any, may vary depending upon the credit quality (and related
Discounted Value) of the Fund's eligible assets at such time.

    The Preferred Shares Basic Maintenance Amount includes the sum of (1)
$25,000 times the number of Preferred Shares then outstanding and (2) certain
accrued and projected payment obligations of the Fund. Upon any failure to
maintain the required Discounted Value, the Fund would seek to alter the
composition of its portfolio to reestablish required asset coverage within the
specified ten Business Day cure period, thereby incurring additional transaction
costs and possible losses and/or gains on dispositions of portfolio securities.
To the extent any such failure is not cured in a timely manner, the holders of
the Preferred Shares will acquire certain rights. See 'Description of Preferred
Shares -- Asset Maintenance.' 'Business Day,' as used in the Prospectus and this
SAI, means each Monday, Tuesday, Wednesday, Thursday and Friday that is a day on
which the New York Stock Exchange is open for trading and that is not a day on
which banks in New York City are authorized or required by law or executive
order to close.

    Under S&P guidelines, for purposes of determining the Discounted Value of
any S&P Eligible Asset, the percentage determined as follows:

    (a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:

<Table>
<Caption>
                                                            DIVERSIFICATION STANDARD
                                                      -------------------------------------
                                                      LEVEL 1   LEVEL 2   LEVEL 3   LEVEL 4
                                                      -------   -------   -------   -------
<S>                                                   <C>       <C>       <C>       <C>
Minimum Number Of:
    Issuers(1)......................................     44        40        44        30
    Real Estate Industry/Property Sectors(2)........     10         8         7         7

Percent of Assets in:
    Largest Real Estate Industry/Property Sector....     17%       25%       30%       30%
    2nd Largest Real Estate Industry/Property
      Sector........................................     15%       20%       25%       25%
    3rd Largest Real Estate
      Industry/PropertySector.......................     12%       15%       15%       15%
    4th Largest Real Estate Industry/Property
      Sector........................................     12%       12%       12%       12%

S&P Discount Factor:
    common stock....................................    190%      208%      223%      231%
    preferred stock(3)..............................    157%      167%      174%      178%
</Table>

- ---------

(1) Three issuers may each constitute 6% of assets and four issuers may each
    constitute 5% of assets.

(2) As defined by the National Association of Real Estate Investment Trusts
    ('NAREIT').

(3) Applies to preferred stock of real estate companies, subject to
    diversification guidelines whereby at least 34% of the preferred assets are
    rated BB (or Moody's equivalent) or greater; at least 33% are rated B (or
    Moody's equivalent) or greater; and the balance of the preferred assets is
    rated B - (or Moody's equivalent) or is unrated. The Discount Factor for
    common stock will apply to preferred stock which is not in compliance with
    the diversification standard.

                                              (footnotes continued on next page)

                                       15





<PAGE>
(footnotes continued from previous page)

    (b) Debt Securities:

<Table>
<Caption>
                                                            DIVERSIFICATION STANDARD
                                                      -------------------------------------
                                                      LEVEL 1   LEVEL 2   LEVEL 3   LEVEL 4
                                                      -------   -------   -------   -------
<S>                                                   <C>       <C>       <C>       <C>
Bond Rating(1):
    A...............................................    116%      117%      119%      118%
    A -.............................................    117%      119%      120%      120%
    BBB+............................................    119%      121%      122%      122%
    BBB.............................................    121%      122%      124%      124%
    BBB -...........................................    122%      124%      126%      126%
    BB+.............................................    127%      130%      133%      132%
    BB..............................................    133%      137%      141%      139%
    BB -............................................    139%      144%      149%      147%
    B+..............................................    152%      159%      166%      164%
    B...............................................    163%      172%      182%      179%
    B -.............................................    176%      188%      202%      197%
    CCC+............................................    198%      212%      230%      224%
    CCC.............................................    236%      262%      295%      284%
</Table>

- ---------

(1) The S&P Discount Factors for debt securities shall also be applied to any
    interest rate swap or cap, in which case the rating of the counterparty
    shall determine the appropriate rating category.

(2) If a security is unrated by S&P but is rated by Moody's, the conversion
    chart under S&P OC Test Rating chart will apply.

    (c) U.S. Treasury Securities, including Treasury interest-only Strips and
Treasury principal-only Strips, as set forth below:

<Table>
<S>                                                           <C>
52-week Treasury Bills*.....................................  102%
Two-Year Treasury Notes.....................................  104%
Three-Year Treasury Notes...................................  108%
Five-Year Treasury Notes....................................  109%
10-Year Treasury Notes......................................  115%
30-Year Treasury Bonds......................................  126%
</Table>

- ---------

* Treasury Bills with maturities of less than 52 weeks will be discounted at the
  appropriate Short-Term Money Market Instrument levels. Treasury Bills that
  mature the next day are considered cash equivalents and are valued at 100%.

    Treasury Strips: Treasury interest-only Strips will apply the discount
factor for the Treasury category set forth above following the maturity of the
Treasury Strip, e.g., a Treasury interest-only Strip with a maturity of seven
years will apply the discount factor for the U.S. Treasury securities with a
10-year maturity. Treasury principal-only Strips will apply the discount factor
that is two categories greater than its maturity, e.g., a Treasury
principal-only Strip with a maturity of seven years will apply the discount
factor for U.S. Treasury securities with a 30-year maturity.

    (d) Cash and Cash Equivalents.

    The S&P Discount Factor applied to Cash and Cash Equivalents will be (A)
100%, and (B) 102% for those portfolio securities which mature in 181 to 360
calendar days.

    Under current S&P guidelines, the following are considered to be S&P
Eligible Assets:

        (a) Common Stock, Preferred Stock and any debt securities of REITs and
    Real Estate Companies;

        (b) Interest rate swaps entered into according to International Swap
    Dealers Association ('ISDA') standards if (i) the counterparty to the swap
    transaction has a short-term rating of not less than A-1 or, if the
    counterparty does not have a short-term rating, the counterparty's senior
    unsecured long-term debt rating is AA- or higher and (ii) the original
    aggregate notional amount of the interest rate swap transaction or
    transactions is not to be greater than

                                       16





<PAGE>
    the liquidation preference of the Preferred Shares originally issued. The
    interest rate swap transaction will be marked-to-market daily;

        (c) U.S. Treasury Securities and Treasury Strips (as defined by S&P);

        (d) Short-Term Money Market Instruments so long as (A) such securities
    are issued by an institution, which, at the time of investment, is a
    permitted bank (including commercial paper issued by a corporation which
    complies with the applicable assumptions that follow) ('permitted bank'
    means any bank, domestic or foreign, whose commercial paper is rated
    A-1+) provided, however, that Short-Term Money Market Instruments with
    maturities of 30 days of less, invested in an institution rated A-1 may
    comprise up to 20% of eligible portfolio assets; and

        (e) Cash, which is any immediately available funds in U.S. dollars or
    any currency other than U.S. dollars which is a freely convertible currency
    and Cash Equivalents, which means investments (other than Cash) that are one
    or more of the following obligations or Securities: (i) U.S. Government
    Securities; (ii) certificates of deposit of, banker's acceptances issued by
    or money market accounts in any depository institution or trust company
    incorporated under the laws of the United States of America or any state
    thereof and subject to supervision and examination by Federal and/or state
    banking authorities, so long as the deposits offered by such depository
    institution or trust company at the time of such investments are rated and
    have a rating of at least 'P-1' by Moody's and 'A-1+' by S&P (or, in the
    case of the principal depository institution in a holding company system
    whose deposits are not so rated, the long term debt obligations of such
    holding company are rated and such rating is at least 'A-1' by Moody's and
    'A+' by S&P); (iii) commercial paper issued by any depository institution or
    trust company incorporated under the laws of the United States of America or
    any state thereof and subject to supervision and examination by Federal
    and/or state banking authorities, or any corporation incorporated under the
    laws of the United States of America or any state thereof, so long as the
    commercial paper of such issuer is rated and has at the time of such
    investment a short term rating of at least 'P-1' by Moody's and 'A-1+' by
    S&P on its commercial paper; (iv) securities bearing interest or sold at a
    discount issued by any corporation incorporated under the laws of the United
    States of America or any state thereof the obligations of which at the time
    of such investment are rated and that have a credit rating of at least 'P-1'
    by Moody's and 'A-1+' by S&P either at the time of such investment or the
    making of a contractual commitment providing for such investment;
    (v) shares of any money market fund organized under the laws of a
    jurisdiction other than the United States, so long as such money market fund
    is rated and has at the time of such investment a short-term rating of at
    least 'AAAm' or 'AAAg' by S&P and 'Aaa' by Moody's and ownership of such
    investments will not cause the issuer to become engaged in a trade or
    business within the United States for U.S. Federal income tax purposes or
    subject the issuer to tax on a net income basis; and (vi) unleveraged
    overnight repurchase obligations on customary terms with respect to
    investments described in clauses (i) through (iv) above entered into a
    depository institution, trust company or corporation that has a short-term
    rating of at least 'A-1+' by S&P; provided, that (i) in no event shall Cash
    Equivalents include any obligation that provides for payment of interest
    alone; (ii) Cash Equivalents referred to in clauses (ii) and (iii) above
    shall mature within 183 days of issuance; (iii) if either Moody's or S&P
    changes its rating system, then any ratings included in this definition
    shall be deemed to be an equivalent rating in a successor rating category of
    Moody's or S&P, as the case may be; (iv) if either Moody's or S&P is not in
    the business of rating securities, then any ratings included in this
    definition shall be deemed to be an equivalent rating from another Rating
    Agency; (v) Cash Equivalents (other than U.S. Government Securities or money
    market funds maintained by the Custodian) shall not include any such
    investment of more than $100 million in any single issuer; and (vi) in no
    event shall Cash Equivalents include any obligation that is not denominated
    in Dollars, any synthetic securities, any Securities with ratings containing
    an 'r' subscript, any IOs or any POs (other than commercial paper with a
    maturity within 183 days of issuance).

                                       17





<PAGE>
MOODY'S GUIDELINES

    For purposes of calculating the Discounted Value of the Fund's portfolio
under current Moody's guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ('Moody's Eligible Assets')
must be discounted by certain discount factors set forth below ('Moody's
Discount Factors'). The Discounted Value of a portfolio security under Moody's
guidelines is the Market Value thereof, determined as specified by Moody's,
divided by the Moody's Discount Factor. The Moody's Discount Factor with respect
to securities other than those described below will be the percentage provided
in writing by Moody's.

    The following Discount Factors apply to portfolio holdings as described
below, subject to diversification, issuer size and other requirements, in order
to constitute Moody's Eligible Assets includable within the calculation of
Discounted Value:

    (a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:

<Table>
<Caption>
                                                              DISCOUNT FACTOR(1)(2)(3)
                                                              ------------------------
<S>                                                           <C>
common stock of REITs.......................................            154%
preferred stock of REITs
    with Senior Implied Moody's (or S&P) rating:............            154%
    without Senior Implied Moody's (or S&P) rating:.........            208%
preferred stock of Other Real Estate Companies
    with Senior Implied Moody's (or S&P) rating:............            208%
    without Senior Implied Moody's (or S&P) rating:.........            250%
</Table>

- ---------

(1) A Discount Factor of 250% will be applied to those assets in a single
    Moody's Real Estate Industry/ Property Sector Classification which exceed
    30% of Moody's Eligible Assets but are not greater than 35% of Moody's
    Eligible Assets.

(2) A Discount Factor of 250% will be applied if dividends on such securities
    have not been paid consistently (either quarterly or annually) over the
    previous three years, or for such shorter time period that such securities
    have been outstanding.

(3) A Discount Factor of 250% will be applied if the market capitalization
    (including common stock and preferred stock) of an issuer is below $500
    million.

    (b) Debt Securities of REITs and Other Real Estate Companies(1):

<Table>
<Caption>
   MATURITY IN YEARS      AAA     AA     A     BAA     BA     B     CAA    NR(2)
   -----------------      ---     --     -     ---     --     -     ---    -----
<S>                       <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>
1.......................  109%   112%   115%   118%   119%   125%   225%   250%
2.......................  115%   118%   122%   125%   127%   133%   225%   250%
3.......................  120%   123%   127%   131%   133%   140%   225%   250%
4.......................  126%   129%   133%   138%   140%   147%   225%   250%
5.......................  132%   135%   139%   144%   146%   154%   225%   250%
7.......................  139%   143%   147%   152%   156%   164%   225%   250%
10......................  145%   150%   155%   160%   164%   173%   225%   250%
15......................  150%   155%   160%   165%   170%   180%   225%   250%
20......................  150%   155%   160%   165%   170%   190%   225%   250%
30......................  150%   155%   160%   165%   170%   191%   225%   250%
</Table>

(1) The Moody's Discount Factors for debt securities shall also be applied to
    any interest rate swap or cap, in which case the rating of the counterparty
    shall determine the appropriate rating category.

(2) Unrated debt securities are limited to 10% of discounted Eligible Assets. If
    a security is unrated by Moody's but is rated by S&P, a rating two numeric
    ratings below the S&P rating will be used, e.g., where the S&P rating is
    AAA, a Moody's rating of Aa2 will be used; where the S&P rating is AA+, a
    Moody's rating of Aa3 will be used. If a security is unrated by either
    Moody's or S&P, the percentage set forth under 'NR' in this table will be
    used.

                                       18





<PAGE>
    (c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):

<Table>
<Caption>
                                                 U.S. TREASURY SECURITIES   U.S. TREASURY STRIPS
          REMAINING TERM TO MATURITY                 DISCOUNT FACTOR          DISCOUNT FACTOR
          --------------------------                 ---------------          ---------------
<S>                                              <C>                        <C>
1 year or less.................................            107%                     107%
2 years or less (but longer than 1 year).......            113%                     114%
3 years or less (but longer than 2 year).......            118%                     120%
4 years or less (but longer than 3 year).......            123%                     127%
5 years or less (but longer than 4 year).......            128%                     133%
7 years or less (but longer than 5 year).......            135%                     145%
10 years or less (but longer than 7 year)......            141%                     159%
15 years or less (but longer than 10 year).....            146%                     184%
20 years or less (but longer than 15 year).....            154%                     211%
30 years or less (but longer than 20 year).....            154%                     236%
</Table>

    (d) Short-Term Instruments and Cash.

    The Moody's Discount Factor applied to Moody's Eligible Assets that are
short term money instruments (as defined by Moody's) will be (i) 100%, so long
as such portfolio securities mature or have a demand feature at par exercisable
within 49 days of the relevant valuation date, (ii) 102%, so long as such
portfolio securities mature or have a demand feature at par not exercisable
within 49 days of the relevant valuation date, and (iii) 125%, if such
securities are not rated by Moody's, so long as such portfolio securities are
rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at
par exercisable within 49 days of the relevant valuation date. A Moody's
Discount Factor of 100% will be applied to cash.

    Under current Moody's guidelines, the following are considered to be Moody's
Eligible Assets:

        (a) Common Stock, Preferred Stock and any debt security of REITs and
    Other Real Estate Companies. (i) Common stock of REITs and preferred stock
    and any debt security of REITs and Other Real Estate Companies: (A) which
    comprise at least 7 of the 14 Moody's Real Estate Industry/ Property Sector
    Classifications ('Moody's Sector Classifications') and of which no more than
    35% may constitute a single such classification; (B) which in the aggregate
    constitute at least 40 separate classes of common stock, preferred stock,
    and debt securities, issued by at least 30 issuers; (C) issued by a single
    issuer which in the aggregate constitute no more than 7.0% of the Market
    Value of Moody's Eligible Assets, and (D) issued by a single issuer which,
    with respect to 50% of the Market Value of Moody's Eligible Assets,
    constitute in the aggregate no more than 5% of Market Value of Moody's
    Eligible Assets; and

           (ii) Unrated debt securities issued by an issuer which: (A) has not
       filed for bankruptcy within the past three years; (B) is current on all
       principal and interest on its fixed income obligations; (C) is current on
       all preferred stock dividends; (D) possesses a current, unqualified
       auditor's report without qualified, explanatory language and (E) in the
       aggregate, do not exceed 10% of the discounted Moody's Eligible Assets;

        (b) Interest rate swaps entered into according to International Swap
    Dealers Association ('ISDA') standards if (i) the counterparty to the swap
    transaction has a short-term rating of not less than P-1 or, if the
    counterparty does not have a short-term rating, the counterparty's senior
    unsecured long-term debt rating is Aa3 or higher and (ii) the original
    aggregate notional amount of the interest rate swap transaction or
    transactions is not to be greater than the liquidation preference of the
    Preferred Shares originally issued. The interest rate swap transaction will
    be marked-to-market daily;

        (c) U.S. Treasury Securities and Treasury Strips (as defined by
    Moody's);

        (d) Short-Term Money Market Instruments so long as (A) such securities
    are rated at least P-1, (B) in the case of demand deposits, time deposits
    and overnight funds, the supporting entity is rated at least A2, or (C) in
    all other cases, the supporting entity (1) is rated A2 and the security
    matures within one month, (2) is rated A1 and the security matures within
    three months or (3) is rated at least Aa3 and the security matures within
    six months;

                                       19





<PAGE>
    provided, however, that for purposes of this definition, such instruments
    (other than commercial paper rated by S&P and not rated by Moody's) need not
    meet any otherwise applicable Moody's rating criteria; and

        (e) Cash (including, for this purpose, interest and dividends due on
    assets rated (A) Baa3 or higher by Moody's if the payment date is within
    five Business Days of the Valuation Date, (B) A2 or higher if the payment
    date is within thirty days of the Valuation Date, and (C) A1 or higher if
    the payment date is within 49 days of the relevant valuation date) and
    receivables for Moody's Eligible Assets sold if the receivable is due within
    five Business Days of the Valuation Date, and if the trades which generated
    such receivables are (A) settled through clearing house firms with respect
    to which the Corporation has received prior written authorization from
    Moody's or (B)(1) with counterparties having a Moody's long-term debt rating
    of at least Baa3 or (2) with counterparties having a Moody's Short-Term
    Money Market Instrument rating of at least P-1.

    See the Articles Supplementary of the Fund for further detail on the above
Moody's Rating Agency Guidelines and for a description of Moody's Eligible
Assets.

    The foregoing Rating Agency Guidelines are subject to change from time to
time. The Fund may, but it is not required to, adopt any such change. Nationally
recognized rating agencies other than S&P and Moody's may also from time to time
rate the Preferred Shares; any nationally recognized rating agency providing a
rating for the Preferred Shares may, at any time, change or withdraw any such
rating.

                                FEDERAL TAXATION

    The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Fund and its stockholders. No attempt is
made to present a detailed explanation of the tax treatment of the Fund or its
stockholders, and the following discussion is not intended as a substitute for
careful tax planning. Stockholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Fund.

TAXATION OF THE FUND

    The Fund intends to elect to be taxed as, and to qualify annually as, a
regulated investment company under Subchapter M of the Code. As a regulated
investment company, the Fund generally is not subject to U.S. federal income tax
on the portion of its investment company taxable income (as that term is defined
in the Code, but determined without regard to any deduction for dividends paid)
and net capital gain (i.e., the excess of net long-term capital gain over net
short-term capital loss) that it distributes to stockholders, provided that it
distributes at least 90% of the sum of its investment company taxable income and
any tax-exempt income for the taxable year (the 'Distribution Requirement'), and
satisfies certain other requirements of the Code that are described below. The
Fund intends to make sufficient distributions of its investment company taxable
income each taxable year to meet the Distribution Requirement.

    In addition to satisfying the Distribution Requirement and an asset
diversification requirement discussed below, a regulated investment company must
derive at least 90% of its gross income for each taxable year from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies.

    In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of the
Fund's total assets in securities of any such issuer

                                       20





<PAGE>
and as to which the Fund does not hold more than 10% of the outstanding voting
securities of any such issuer), and no more than 25% of the value of its total
assets may be invested in the securities (other than U.S. Government securities
and securities of other regulated investment companies) of any one issuer, or of
two or more issuers which the Fund controls and which are engaged in the same or
similar or related trades or businesses.

    Upon any failure to meet the asset coverage requirements of the 1940 Act,
the Fund will be required (i) to suspend distributions to stockholders, and
(ii) under certain circumstances to partially redeem the Preferred Shares in
order to maintain or restore the requisite asset coverage, either of which could
prevent the Fund from making distributions required to qualify as a regulated
investment company for U.S. federal income tax purposes and to avoid the excise
taxes discussed below. Depending on the size of the Fund's assets relative to
its outstanding senior securities, redemption under certain circumstances of the
Preferred Shares might restore asset coverage. If asset coverage were restored,
the Fund would again be able to pay dividends and depending on the
circumstances, could requalify or avoid disqualification as a regulated
investment company and avoid the excise taxes discussed below.

    If for any taxable year the Fund does not qualify as a regulated investment
company or satisfy the Distribution Requirement, all of its taxable income
(including its net capital gain) will be subject to tax at regular corporate
rates without any deduction for distributions to stockholders, and such
distributions will be taxable as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. Such distributions generally will
be eligible for the dividends received deduction in the case of corporate
stockholders.

EXCISE TAX ON REGULATED INVESTMENT COMPANIES

    A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in a calendar year an amount equal to the sum of (1)
98% of its ordinary taxable income for the calendar year, (2) 98% of its capital
gain net income (i.e., capital gains in excess of capital losses) for the
one-year period ended on October 31 of such calendar year, and (3) any ordinary
taxable income and capital gain net income for previous years that was not
distributed or taxed to the regulated investment company during those years. A
distribution will be treated as paid on December 31 of the current calendar year
if it is declared by the Fund in October, November or December with a record
date in such a month and paid by the Fund during January of the following
calendar year. Such distributions will be taxed to stockholders in the calendar
year in which the distributions are declared, rather than the calendar year in
which the distributions are received. To prevent the application of the excise
tax, the Fund intends to make its distributions in accordance with the calendar
year distribution requirement.

DISTRIBUTIONS

    Dividends paid out of the Fund's current or accumulated earnings and profits
will, except in the case of capital gain dividends described below, be taxable
to stockholders as ordinary income. Although such dividends generally will not
qualify for the dividends received deduction available to corporations under
Section 243 of the Code, if a portion of the Fund's income consists of
qualifying dividends paid by U.S. corporations (other than REITs), a portion of
the dividends paid by the Fund to corporate stockholders may be eligible for the
corporate dividends received deduction.

    The Fund may either retain or distribute to stockholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it generally will be taxable to individual stockholders at long-term
capital gains rates regardless of the length of time the stockholders have held
their shares. Conversely, if the Fund elects to retain its net capital gain, the
Fund will be taxed thereon (except to the extent of any available capital loss
carryovers) at the applicable corporate tax rate. In such event, it is expected
that the Fund also will elect to treat such gain as having been distributed to
stockholders. As a result, each stockholder will be required to report his or
her pro

                                       21





<PAGE>
rata share of such gain on his or her tax return as long-term capital gain, will
be entitled to claim a tax credit for his or her pro rata share of tax paid by
the Fund on the gain, and will increase the tax basis for his or her shares by
an amount equal to the deemed distribution less the tax credit.

    Distributions by the Fund in excess of the Fund's current and accumulated
earnings and profits will be treated as a return of capital to the extent of
(and in reduction of) the stockholder's tax basis in his or her shares; any such
return of capital distributions in excess of the stockholder's tax basis will be
treated as gain from the sale of his or her shares, as discussed below.

    Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund. If the NAV at the time a stockholder purchases
shares of the Fund reflects undistributed income or gain, distributions of such
amounts will be taxable to the stockholder in the manner described above, even
though such distributions economically constitute a return of capital to the
stockholder.

    The IRS currently requires that a regulated investment company that has two
or more classes of stock allocate to each such class proportionate amounts of
each type of its income (such as ordinary income and capital gains) based upon
the percentage of total dividends distributed to each class for the tax year.
Accordingly, the Fund intends each year to allocate capital gain dividends
between its Common Shares, Series __ Preferred Shares and Series __
Preferred Shares in proportion to the total dividends paid out of current or
accumulated earnings or profits to each class with respect to such tax year.
Distributions in excess of the Fund's current and accumulated earnings and
profits (if any), however, will not be allocated proportionately among the
Common Shares, Series __ Preferred Shares and Series __ Preferred Shares.
Since the Fund's current and accumulated earnings and profits will first be used
to pay dividends on the Preferred Shares, distributions in excess of such
earnings and profits, if any, will be made disproportionately to holders of
Common Shares.

SALE OF SHARES

    A stockholder generally will recognize gain or loss on the sale or exchange
of shares of the Fund in an amount equal to the difference between the proceeds
of the sale and the stockholder's adjusted tax basis in the shares. In general,
any such gain or loss will be considered capital gain or loss if the shares are
held as capital assets, and gain or loss will be long-term or short-term,
depending upon the stockholder's holding period for the shares. Generally, a
stockholder's gain or loss will be a long-term gain or loss if the shares have
been held for more than one year. However, any capital loss arising from the
sale of shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
stockholder (or amounts credited to the stockholder as undistributed capital
gains) with respect to such shares. Also, any loss realized on a sale or
exchange of shares will be disallowed to the extent the shares disposed of are
replaced with other substantially identical shares within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of. In
such case, the tax basis of the acquired shares will be adjusted to reflect the
disallowed loss.

NATURE OF FUND'S INVESTMENTS

    Certain of the Fund's investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions. The Fund will monitor its transactions
and may make certain tax elections in order to mitigate the effect of these
provisions.

                                       22





<PAGE>
ORIGINAL ISSUE DISCOUNT SECURITIES

    Investments by the Fund in zero coupon or other discount securities will
result in income to the Fund equal to a portion of the excess of the face value
of the securities over their issue price (the 'original issue discount') each
year that the securities are held, even though the Fund receives no cash
interest payments. This income is included in determining the amount of income
which the Fund must distribute to maintain its status as a regulated investment
company and to avoid the payment of federal income tax and the 4% excise tax.
Because such income may not be matched by a corresponding cash distribution to
the Fund, the Fund may be required to borrow money or dispose of other
securities to be able to make distributions to its stockholders.

INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS

    The Fund may invest in REITs that hold residual interests in real estate
mortgage investment conduits ('REMICs'). Under Treasury regulations that have
not yet been issued, but may apply retroactively, a portion of the Fund's income
from a REIT that is attributable to the REIT's residual interest in a REMIC
(referred to in the Code as an 'excess inclusion') will be subject to federal
income tax in all events. These regulations are also expected to provide that
excess inclusion income of a regulated investment company, such as the Fund,
will be allocated to stockholders of the regulated investment company in
proportion to the dividends received by such stockholders, with the same
consequences as if the stockholders held the related REMIC residual interest
directly. In general, excess inclusion income allocated to stockholders (i)
cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable
income to entities (including a qualified pension plan, an individual retirement
account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax
on unrelated business income, thereby potentially requiring such an entity that
is allocated excess inclusion income, and otherwise might not be required to
file a tax return, to file a tax return and pay tax on such income, and (iii) in
the case of a foreign stockholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any taxable year a
'disqualified organization' (as defined in the Code) is a record holder of a
share in a regulated investment company, then the regulated investment company
will be subject to a tax equal to that portion of its excess inclusion income
for the taxable year that is allocable to the disqualified organization,
multiplied by the highest federal income tax rate imposed on corporations. The
Investment Manager does not intend on behalf of the Fund to invest in REITs, a
substantial portion of the assets of which consists of residual interests in
REMICs.

BACKUP WITHHOLDING

    If a stockholder fails to furnish a correct taxpayer identification number,
fails to report fully dividend or interest income, or fails to certify that he
or she has provided a correct taxpayer identification number and that he or she
is not subject to 'backup withholding,' the stockholder may be subject to a
'backup withholding' tax with respect to (1) taxable dividends and (2) the
proceeds of any sales or repurchases of Preferred Shares. An individual's
taxpayer identification number is generally his or her social security number.
Corporate stockholders and other stockholders specified in the Code or the
Treasury regulations promulgated thereunder are exempt from backup withholding.
Backup withholding is not an additional tax and any amounts withheld will be
allowed as a refund or a credit against a taxpayer's federal income tax
liability if the appropriate information is provided to the IRS.

FOREIGN STOCKHOLDER

    U.S. taxation of a stockholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ('foreign stockholder') depends on whether the income of
the Fund is 'effectively connected' with a U.S. trade or business carried on by
the stockholder.

                                       23





<PAGE>
    Income Not Effectively Connected. If the income from the Fund is not
'effectively connected' with a U.S. trade or business carried on by the foreign
stockholder, distributions of investment company taxable income will be subject
to a U.S. tax of 30% (or lower treaty rate, except in the case of any excess
inclusion income allocated to the stockholder (see 'Federal Taxation --
Investments in Real Estate Investment Trusts' above)), which tax is generally
withheld from such distributions.

    Capital gain dividends and any amounts retained by the Fund which are
designated as undistributed capital gains will not be subject to U.S. tax at the
rate of 30% (or lower treaty rate) unless the foreign stockholder is a
nonresident alien individual and is physically present in the United States for
more than 182 days during the taxable year and meets certain other requirements.
However, this 30% tax on capital gains of nonresident alien individuals who are
physically present in the United States for more than the 182 day period only
applies in exceptional cases because any individual present in the United States
for more than 182 days during the taxable year is generally treated as a
resident for U.S. income tax purposes; in that case, he or she would be subject
to U.S. income tax on his or her worldwide income at the graduated rates
applicable to U.S. citizens, rather than the 30% U.S. tax. In the case of a
foreign stockholder who is a nonresident alien individual, the Fund may be
required to withhold U.S. income tax on distributions of net capital gain unless
the foreign stockholder certifies his or her non-U.S. status under penalties of
perjury or otherwise establishes an exemption. See 'Federal Taxation -- Backup
Withholding,' above. Any gain that a foreign stockholder realizes upon the sale
or exchange of such stockholder's shares of the Fund will ordinarily be exempt
from U.S. tax unless (i) in the case of a stockholder that is a nonresident
alien individual, the gain is U.S. source income and such stockholder is
physically present in the United States for more than 182 days during the
taxable year and meets certain other requirements, or (ii) at any time during
the shorter of the period during which the foreign stockholder held shares of
the Fund and the five year period ending on the date of the disposition of those
shares, the Fund was a 'U.S. real property holding corporation' and the foreign
stockholder held more than 5% of the shares of the Fund, in which event the gain
would be taxed in the same manner as for a U.S. stockholder as discussed above
and a 10% U.S. withholding tax would be imposed on the amount realized on the
disposition of such shares to be credited against the foreign stockholder's U.S.
income tax liability on such disposition. A corporation is a 'U.S. real property
holding corporation' if the fair market value of its U.S. real property
interests equals or exceeds 50% of the fair market value of such interests plus
its interests in real property located outside the United States plus any other
assets used or held for use in a business. In the case of the Fund, U.S. real
property interests include interests in stock in U.S. real property holding
corporations (other than stock of a REIT controlled by U.S. persons and holdings
of 5% or less in the stock of publicly traded U.S. real property holding
corporations) and certain participating debt securities.

    Income Effectively Connected. If the income from the Fund is 'effectively
connected' with a U.S. trade or business carried on by a foreign stockholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by the Fund which are designated as
undistributed capital gains and any gains realized upon the sale or exchange of
shares of the Fund will be subject to U.S. income tax at the graduated rates
applicable to U.S. citizens, residents and domestic corporations. Foreign
corporate stockholders may also be subject to the branch profits tax imposed by
the Code.

    The tax consequences to a foreign stockholder entitled to claim the benefits
of an applicable tax treaty may differ from those described herein. Foreign
stockholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.

EFFECT OF FUTURE LEGISLATION; OTHER TAX CONSIDERATIONS

    The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions

                                       24





<PAGE>
expressed herein, and any such changes or decisions may have a retroactive
effect with respect to the transactions and considerations discussed herein.

    Income received by the Fund from foreign sources may be subject to
withholding and other taxes imposed by foreign jurisdictions, absent treaty
relief. Distributions to stockholders also may be subject to state, local and
foreign taxes, depending upon each stockholder's particular situation.
Stockholders are urged to consult their tax advisers as to the particular
consequences to them of an investment in the Fund.

                       PERFORMANCE DATA AND INDEX RETURNS

    From time to time, the Fund may quote the Fund's total return, aggregate
total return or yield in advertisements or in reports and other communications
to stockholders. The Fund's performance will vary depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing the Fund's
performance with that of other investment companies should give consideration to
the quality and maturity of the respective investment companies' portfolio
securities.

AVERAGE ANNUAL TOTAL RETURN

    The Fund's 'average annual total return' figures described in the Prospectus
are computed according to a formula prescribed by the SEC. The formula can be
expressed as follows:

                                  P(1 + T)'pp'n = ERV

<Table>
<S>     <C>  <C>  <C>
Where:    P  =    a hypothetical initial payment of $1,000
          T  =    average annual total return
          n  =    number of years
        ERV  =    Ending Redeemable Value of a hypothetical $1,000 investment
                  made at the beginning of a 1-, 5-, or 10-year period at the
                  end of a 1-, 5-, or 10-year period (or fractional portion
                  thereof), assuming reinvestment of all dividends and
                  distributions.
</Table>

YIELD

    Quotations of yield for the Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ('net investment income') and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:

                                     a - b
                                     -----
                               2[( cd + 1)'pp'6 - 1]

<Table>
<S>     <C>  <C>  <C>
Where:    a  =    dividends and interest earned during the period,
          b  =    expenses accrued for the period (net of reimbursements),
          c  =    the average daily number of shares outstanding during the
                  period that were entitled to receive dividends, and
          d  =    the maximum offering price per share on the last day of the
                  period.
</Table>

    In reports or other communications to stockholders of the Fund or in
advertising materials, the Fund may compare its performance with that of (i)
other investment companies listed in the rankings prepared by Lipper Analytical
Services, Inc., publications such as Barrons, Business Week, Forbes, Fortune,
Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual
Fund Values, The New York Times, The Wall Street Journal and USA Today or other
industry or

                                       25





<PAGE>
financial publications or (ii) the Standard and Poor's Index of 500 Stocks, the
Dow Jones Industrial Average, Dow Jones Utility Index, the National Association
of Real Estate Investment Trusts (NAREIT) Equity REIT Index, the Salomon
Brothers Broad Investment Grade Bond Index (BIG), Morgan Stanley Capital
International Europe Australia Far East (MSCI EAFE) Index, the NASDAQ Composite
Index, and other relevant indices and industry publications. The Fund may also
compare the historical volatility of its portfolio to the volatility of such
indices during the same time periods. (Volatility is a generally accepted
barometer of the market risk associated with a portfolio of securities and is
generally measured in comparison to the stock market as a whole -- the
beta -- or in absolute terms -- the standard deviation.)

                                    EXPERTS

    Simpson Thacher & Bartlett serves as counsel to the Fund, and is located at
425 Lexington Avenue, New York, New York 10017-3909. _________ have been
appointed as independent accountants for the Fund. The statement of assets and
liabilities and the statement of operations of the Fund as of _________, 2002
included in this statement of additional information has been so included in
reliance on the report of _________, New York, New York, independent
accountants, given the authority of the firm as experts in auditing and
accounting.

                                       26





<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholder and Board of Directors of
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.:

    In our opinion, the accompanying statement of assets and liabilities and the
related statement of operations present fairly, in all material respects, the
financial position of Cohen & Steers Quality Income Realty Fund, Inc. (the
'Fund') at ________________, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Fund's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

New York, New York
________________, 2002

                                       27





<PAGE>
        STATEMENT OF ASSETS AND LIABILITIES AS OF ________________, 2002

<Table>
<S>                                                           <C>
Assets:
    Cash....................................................  $
    Deferred Offering costs.................................
    Receivable from adviser.................................
                                                              ----------
        Total Assets........................................
                                                              ----------

Liabilities:
    Accrued expense.........................................
    Payable for organization costs..........................
                                                              ----------
        Total Liabilities...................................
                                                              ----------
Net Assets applicable to 7,000 shares of $.001 par value
  common stock outstanding..................................  $
                                                              ----------
                                                              ----------
        Net Asset Value per Common Share outstanding ($_____
          divided by 7,000 Common Shares outstanding).......           $

STATEMENT OF OPERATIONS PERIOD ENDED ____________, 2002
Investment income...........................................  $       --
                                                              ----------
Expenses:
    Organization costs......................................
    Expense reimbursement...................................      (     )
                                                              ----------
        Total Expenses......................................          --
                                                              ----------
Net Investment Income.......................................  $       --
                                                              ----------
                                                              ----------
</Table>

NOTES:

1. ORGANIZATION

    Cohen & Steers Quality Income Realty Fund, Inc. (the 'Fund') was
incorporated under the laws of the State of Maryland on August 22, 2001 and is
registered under the Investment Company Act of 1940 (the 'Act'), as amended, as
an closed-end non-diversified management investment company. The Fund commenced
investment operations on February __, 2002 upon the closing of an initial public
offering of _________ common shares, par value $0.001 ('Shares') under the
Securities Act of 1933, and the sale of 7,000 shares ('Initial Shares') for
$________ to Cohen & Steers Capital Management, Inc. (the 'Advisor'). The
proceeds of such initial Shares in the Fund were invested in cash. There are
100,000,000 shares of $0.001 par value common stock authorized.

2. ACCOUNTING POLICIES

    The preparation of the financial statements in accordance with accounting
principals generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results could
differ from these estimates.

3. INVESTMENT MANAGEMENT AGREEMENT

    The Fund has entered into an Investment Management Agreement with the
Advisor, under which the Advisor will provide general investment advisory and
administrative services for the Fund. For providing these services, facilities
and for bearing the related expenses, the Advisor will receive a fee from the
Fund, accrued daily and paid monthly, at an annual rate equal to 0.85% of the
average daily managed assets value is the net asset value of the Common Shares
plus the

                                       28





<PAGE>
liquidation preference of any Fund Preferred Shares and the principal amount of
any borrowings used for leverage.

4. INCOME TAXES

    The Fund intends to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
net investment income, in addition to any significant amounts of net realized
capital gains and/or market discount realized from investment transactions.

                                       29





<PAGE>
        STATEMENT OF ASSETS AND LIABILITIES AS OF ________________, 2002
                                  (UNAUDITED)

<Table>
<S>                                                           <C>
Assets:
Investments in securities at value (Identified cost --
  $_________)...............................................  $
    Cash....................................................
    Dividends and interest receivable.......................
    Other assets............................................
                                                              ----------
        Total Assets........................................
                                                              ----------
Liabilities:
    Payable for investment securities purchased.............
    Payable to investment adviser...........................
    Payable to administrator................................
    Other Liabilities.......................................
                                                              ----------
        Total Liabilities...................................
                                                              ----------
Net Assets applicable to_______ shares of $0.001 par value
  common stock outstanding..................................  $
                                                              ----------
                                                              ----------
        Net Asset Value per Share:
          ($/shares outstanding)............................  $
                                                              ----------
                                                              ----------
Market Value per Share:.....................................  $
                                                              ----------
                                                              ----------
Market Price Premium (Discount) to Net Asset Value per
  Share:....................................................            %
                                                              ----------
                                                              ----------
Net Assets consist of:
    Paid-in capital.........................................  $
    Accumulated undistributed net investment income.........
                                                              ----------
    Net unrealized appreciation on investments..............
                                                              ----------
                                                              $
                                                              ----------
                                                              ----------
STATEMENT OF OPERATIONS AS OF ____________, 2002 (UNAUDITED)
Investment Income:
    Dividend income.........................................  $
    Interest income.........................................
                                                              ----------
        Total Income........................................
                                                              ----------
Expenses:
    Investment advisory fees................................
    Miscellaneous...........................................
    Administration fees.....................................
    Transfer agent fees.....................................
    Professional fees.......................................
    Custodian fees and expenses.............................
    Reports to shareholders.................................
    Registration and filing fees............................
    Directors' fees and expenses............................
                                                              ----------
        Total Expenses......................................
                                                              ----------
    Reduction of Expenses...................................           ()
                                                              ----------
        Net Expenses........................................
                                                              ----------
Net Investment Income.......................................
                                                              ----------
Net Unrealized Gain on Investments:
    Net change in unrealized appreciation/(depreciation) on
      investments...........................................
                                                              ----------
Net Increase in Net Assets Resulting from Operations........  $
                                                              ----------
                                                              ----------
</Table>

                                       30





<PAGE>
                       STATEMENT OF CHANGES IN NET ASSETS
                            AS OF             , 2002
                                  (UNAUDITED)

<Table>
<Caption>
                                                                   FOR THE
                                                                 PERIOD FROM
                                                                           ,
                                                                     2002
                                                                   THROUGH
                                                                           ,
                                                                     2002
                                                                 (UNAUDITED)
                                                                 -----------
<S>                                                           <C>
Changes in Net Assets:
From Operations:
    Net investment income...................................      $
    Net change in unrealized appreciation/(depreciation) on
      investments...........................................
                                                                  ----------
        Net increase in net assets resulting from
          operations........................................
                                                                  ----------
Dividends and Distributions to Shareholders from (Note 1):
    Net investment income...................................              --
    Tax return of capital...................................              --
                                                                  ----------
        Total dividends and distributions to shareholders...              --
                                                                  ----------
Capital Stock Transactions (Note 4)
    Increase/(decrease) in net assets from Fund share
      transactions..........................................
                                                                  ----------
        Total increase/(decrease) in net assets.............
Net Assets
    Beginning of the period.................................
                                                                  ----------
    End of the period.......................................      $
                                                                  ----------
                                                                  ----------
</Table>

                 See accompanying notes to financial statements

                                       31





<PAGE>
                              FINANCIAL HIGHLIGHTS
                                  (UNAUDITED)

<Table>
<Caption>
                                                                 FOR THE
                                                               PERIOD FROM
                                                                        ,
                                                                  2002*
                                                                 THROUGH
                                                                        ,
                                                                  2002
                                                                  ----
<S>                                                           <C>
PER SHARE OPERATING PERFORMANCE
    Net Asset Value, Beginning of Period....................   $
    Less Offering Cost......................................            ()
                                                               ----------
Income From Investment Operations:
    Net Investment Income...................................          .
                                                               ----------
    Net Realized and Unrealized Gain/(Loss) on
      Investments...........................................          .
                                                               ----------
        Total From Investment Operations....................          .
                                                               ----------
Less Dividends and Distributions to Shareholders from:
    Net Investment Income...................................         0.00
    Net Realized Gain on Investments........................         0.00
    Tax Return of Capital...................................         0.00
                                                               ----------
        Total Dividends and Distributions to Shareholders...         0.00
                                                               ----------
Net Increase/(Decrease) in Net Assets.......................         0.
                                                               ----------
Net Asset Value, End of Period..............................   $
                                                               ----------
                                                               ----------
Per Share Market Value, End of Period.......................
                                                               ----------
Total Return on NAV.........................................            %(1)
                                                               ----------
Total Investment Return on Market Value.....................            %(1)
                                                               ----------
RATIOS/SUPPLEMENTAL DATA:
    Net Assets, End of Period (In millions).................   $
                                                               ----------
                                                               ----------
    Ratio of Expenses to Average Daily Net Assets (Before
      Expense Reduction)....................................            %(2)
                                                               ----------
                                                               ----------
    Ratio of Expenses to Average Daily Net Assets (Net of
      Expense Reduction)....................................            %(2)
                                                               ----------
                                                               ----------
    Ratio of Net Investment Income to Average Daily Net
      Assets (Before Expense Reduction).....................            %(2)
                                                               ----------
                                                               ----------
    Ratio of Net Investment Income to Average Daily Net
      Assets (Net of Expense Reduction).....................            %(2)
                                                               ----------
                                                               ----------
    Portfolio Turnover Rate.................................            %(1)
                                                               ----------
                                                               ----------
</Table>

- ---------

*  Date of commencement of operations

(1) Not annualized

(2) Annualized

                                       32





<PAGE>
NOTES

1. SIGNIFICANT ACCOUNTING POLICIES

    Cohen & Steers Quality Income Realty Fund, Inc. (the 'Fund') was
incorporated under the laws of the State of Maryland on August 22, 2001 and is
registered under the Investment Company Act of 1940, as amended, as a
closed-end, non-diversified management investment company. The Fund had no
operations until ________________ when it sold ________________ shares of common
stock for $________ to Cohen & Steers Capital Management, Inc. (the 'Investment
Manager'). Investment operations commenced on ________________, 2002. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of the
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.

    Portfolio Valuation: Investments in securities that are listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected at the close of the New York Stock Exchange on the business day
as of which such value is being determined. If there has been no sale on such
day, the securities are valued at the mean of the closing bid and asked prices
for the day. If no bid or asked prices are quoted on such day, then the security
is valued by such method as the Board of Directors shall determine in good faith
to reflect its fair market value.

    Securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. ('NASDAQ') National
Market System are valued in a similar manner. Securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined as reflected on the tape at the close of
the exchange representing the principal market for such securities.

    Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the Investment
Manager to be over-the-counter, but excluding securities admitted to trading on
the NASDAQ National List, are valued at the mean of the current bid and asked
prices as reported by NASDAQ, the National Quotations Bureau or such other
comparable sources as the Board of Directors deems appropriate to reflect their
fair market value. However, certain fixed-income securities may be valued on the
basis of prices provided by a pricing service when such prices are believed by
the Board of Directors to reflect the fair market value of such securities.
Where securities are traded on more than one exchange and also over-the-
counter, the securities will generally be valued using the quotations the Board
of Directors believes reflect most closely the value of such securities.

    Short-term debt securities, which have a maturity of 60 days or less, are
valued at amortized cost which approximates value.

    Security Transactions and Investment Income: Security transactions are
recorded on trade date. Realized gains and losses on investments sold are
recorded on the basis of identified cost for accounting and tax purposes.
Interest income is recorded on the accrual basis. Dividend income is recorded on
the ex-dividend date. Discounts and premiums of securities purchased are
amortized using the scientific method over their respective lives.

    Dividends and Distributions to Shareholders: Dividends from net investment
income are expected to be declared and paid monthly. The first monthly dividend
is expected to be declared approximately 45 days, and paid approximately
60-75 days, from the completion of the offering, depending on market conditions.
A portion of the Fund's dividend may consist of amounts in excess of net
investment income derived from non-taxable components of the dividends from the
Fund's portfolio investments. Net realized capital gains, unless offset by any
available capital loss carryforward, are distributed to shareholders annually.
Distributions to shareholders are recorded on the ex-dividend date.

                                       33





<PAGE>
    Dividends from net investment income and capital gain distributions are
determined in accordance with U.S. Federal income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to return of capital and capital gain distributions received by
the Fund on portfolio securities.

    Federal Income Taxes: It is the policy of the Fund to qualify as a regulated
investment company, if such qualification is in the best interest of the
shareholders, by complying with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, and by distributing
substantially all of its taxable earnings to its shareholders. Accordingly, no
provision for Federal income or excise tax is necessary.

    Organization & Offering Costs: All costs incurred in connection with
organizing and establishing the Fund are being reimbursed by the Investment
Manager. In addition, the Investment Manager has agreed to limit the offering
costs (other than the sales load) to $0.03 per share.

2. INVESTMENT MANAGEMENT FEES, ADMINISTRATION FEES AND OTHER TRANSACTIONS WITH
   AFFILIATES

    Investment Management Fees: Cohen & Steers Capital Management, Inc. (the
'Investment Manager') serves as the investment manager to the Fund, pursuant to
an Investment Management Agreement (the 'Management Agreement'). The Investment
Manager furnishes a continuous investment program for the Fund's portfolio,
makes the day-to-day investment decisions for the Fund and generally manages the
Fund's investments in accordance with the stated polices of the Fund, subject to
the general supervision of the Board of Directors of the Fund. The Investment
Manager also performs certain administrative services for the Fund. For the
services under the Management Agreement, the Fund pays the Investment Manager a
monthly management fee, computed daily and payable monthly at an annual rate of
0.85% of the Fund's average daily net assets. For the period ________________,
2002 (commencement of operations through ________________, 2002), the Fund
incurred investment management fees including waivers of $________.

    Administration Fees: Pursuant to an administration agreement, the Investment
Manager also performs certain administrative accounting functions for the Fund
and receives a fee of 0.02% of the Fund's managed assets. For the period
________________, 2001 (commencement of operations) through ________________,
2002, the Fund incurred $________ in administration fees.

    In addition, Cohen & Steers Quality Income Realty Fund, Inc., Cohen & Steers
Advantage Income Realty Shares, Inc., Cohen & Steers Realty Shares, Inc., Cohen
& Steers Institutional Realty Shares, Inc., Cohen & Steers Special Equity Fund,
Inc., Cohen & Steers Equity Income Fund, Inc., and Cohen & Steers Total Return
Realty Fund, Inc. (the 'Funds') have entered into a sub-administration agreement
with State Street Bank ('State Street') pursuant to which State Street performs
administration functions for the Fund. The sub-administration fee paid by the
Fund to State Street is computed on the basis of the net assets in the Fund at
an annual rate equal to 0.040% of the first $200 million in assets, 0.030% of
the next $200 million, and 0.015% of assets in excess of $400 million. The
aggregate fee paid by the Funds is computed by multiplying the total number of
funds by each break point in the above schedule in order to determine the
aggregate break points to be used in calculating the total fee paid by the
Funds. The Fund is then responsible for its pro rate amount of the aggregate
subadministration fee.

    Director's Fees: Certain directors and officers of the Fund are also
directors, officers and/or employees of the Investment Manager. None of the
directors and officers so affiliated received compensation for their services.
Fees and related expenses accrued for non-affiliated directors totaled $________
for the period ________________, 2002 (commencement of operations) through
________________, 2002.

                                       34





<PAGE>
3. PURCHASES AND SALES OF SECURITIES

    Purchases and sales of securities, excluding short-term investments, for the
________________, 2002 (commencement of operations) through ________________,
2002, totaled $________ and $0, respectively.

    At ________________, 2002, the cost and unrealized appreciation in value of
the investments owned by the Fund are as follows:

<Table>
<S>                                                           <C>
Aggregated cost.............................................  $
                                                              ----------
                                                              ----------
Gross unrealized appreciation...............................  $
Gross unrealized depreciation...............................        (   )
                                                              ----------
Net unrealized appreciation.................................  $
</Table>

4. COMMON STOCK

    At ________________, 2002, the Fund has one class of common stock, par value
$0.001 per share, of which 100 million shares are authorized and
________________ shares are outstanding. Cohen & Steers Capital Management, Inc.
owned 7,000 shares.

5. SUBSEQUENT EVENTS

    On ________________, 2002, the Board of Directors of the Fund declared a
dividend of $0._ per share payable on ________________ to shareholders of record
on ________________, 2002.

    Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase, from time to time, shares of its
common stock in the open market.

                                       35





<PAGE>
                                                                      APPENDIX A

                             RATINGS OF INVESTMENTS

    Description of certain ratings assigned by S&P and Moody's:

S&P

LONG-TERM

    'AAA' -- An obligation rated 'AAA' has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

    'AA' -- An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

    'A' -- An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

    'BBB' -- An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

    'BB', 'B', 'CCC', 'CC', and 'C' -- Obligations rated 'BB', 'B', 'CCC', 'CC',
and 'C' are regarded as having significant speculative characteristics. 'BB'
indicates the least degree of speculation and 'C' the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.

    'BB' -- An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

    'B' -- An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

    'CCC' -- An obligation rated 'CCC' is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.

    'CC' -- An obligation rated 'CC' is currently highly vulnerable to
nonpayment.

    'C' -- A subordinated debt or preferred stock obligation rated 'C' is
currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A 'C' also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.

    'D' -- An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.

    'R' -- The symbol 'r' is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or

                                      A-1





<PAGE>
commodities; obligations exposed to severe prepayment risk -- such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.

    'N.R.' -- The designation 'N.R.' indicates that no rating has been
requested, that there is insufficient information on which to base a rating, or
that S&P does not rate a particular obligation as a matter of policy.

    Note: The ratings from 'AA' to 'CCC' may be modified by the addition of a
plus (+) or minus ( - ) sign designation to show relative standing within the
major rating categories.

SHORT-TERM

    'A-1' -- A short-term obligation rated 'A-1' is rated in the highest
category by S&P. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are given a plus
sign (+) designation. This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.

    'A-2' -- A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.

    'A-3' -- A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.

    'B' -- A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet is
financial commitment on the obligation.

    'C' -- A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.

    'D' -- A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The 'D' rating also
will be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.

MOODY'S

LONG-TERM

    'AAA' -- Bonds rated 'Aaa' are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as 'gilt
edged.' Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

    'AA' -- Bonds rated 'Aa' are judged to be of high quality by all standards.
Together with the 'Aaa' group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the 'Aaa'
securities.

    'A' -- Bonds rated 'A' possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.

                                      A-2





<PAGE>
    'BAA' -- Bonds rated 'Baa' are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

    'BA' -- Bonds rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

    'B' -- Bonds rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

    'CAA' -- Bonds rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

    'CA' -- Bonds rated 'Ca' represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

    'C' -- Bonds rated 'C' are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

    Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from 'Aa' through 'Caa'. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.

PREFERRED STOCK

    Because of the fundamental differences between preferred stocks and bonds,
Moody's employs a variation of our familiar bond rating symbols in the quality
ranking of preferred stock.

    These symbols, presented below, are designed to avoid comparison with bond
quality in absolute terms. It should always be borne in mind that preferred
stock occupies a junior position to bonds within a particular capital structure
and that these securities are rated within the universe of preferred stocks.

    'AAA' -- An issue rated 'aaa' is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.

    'AA' -- An issue rated 'aa' is considered a high-grade preferred stock. This
rating indicates that there is a reasonable assurance the earnings and asset
protection will remain relatively well maintained in the foreseeable future.

    'A' -- An issue rated 'a' is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the 'aaa'
and 'aa' classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.

    'BAA' -- An issue rated 'baa' is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present, but may be questionable over any great
length of time.

    'BA' -- An issue rated 'ba' is considered to have speculative elements. Its
future cannot be considered well assured. Earnings and asset protection may be
very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.

    'B' -- An issue rated 'b' generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.

                                      A-3





<PAGE>
    'CAA' -- An issue rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.

    'CA' -- An issue rated 'ca' is speculative in a high degree and is likely to
be in arrears on dividends with little likelihood of eventual payments.

    'C' -- This is the lowest-rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor prospects of ever
attaining any real investment standing.

    Note: As in the case of bond ratings, Moody's applies to preferred stock
ratings the numerical modifiers 1, 2, and 3 in rating classifications 'aa'
through 'b'. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.

PRIME RATING SYSTEM (SHORT-TERM)

    Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:

        Leading market positions in well-established industries.

        High rates of return on funds employed.

        Conservative capitalization structure with moderate reliance on debt and
    ample asset protection.

        Broad margins in earnings coverage of fixed financial charges and high
    internal cash generation.

        Well-established access to a range of financial markets and assured
    sources of alternate liquidity.

    Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.

    Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.

    Issuers rated Not Prime do not fall within any of the Prime rating
categories.

                                      A-4






<Page>
                                                                      APPENDIX B

                             ARTICLES SUPPLEMENTARY

                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
            Articles Supplementary Creating And Fixing The Rights of
                          Series [__] and Series [__]
                Taxable Auction Rate Cumulative Preferred Shares

    Cohen & Steers Quality Income Realty Fund, Inc., a Maryland corporation
having its principal Maryland office in the City of Baltimore in the State of
Maryland (the 'Corporation'), certifies to the State Department of Assessments
and Taxation of Maryland that:

    First: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by Article FIFTH of its Amended and Restated Articles of
Incorporation (which as hereafter amended, restated and supplemented from time
to time, is together with these Articles Supplementary, the 'Charter'), and the
Maryland General Corporation Law (the 'MGCL'), the Board of Directors has duly
classified out of the Corporation's authorized and unissued common stock, and
authorized the creation and issuance of, ________ shares of the Corporation's
Taxable Auction Rate Cumulative Preferred Shares (par value $.001 per share) and
has further classified ________ of such shares as 'Series [__] Preferred
Shares', liquidation preference $25,000 per share, and ________ of such shares
as 'Series [__] Preferred Shares', liquidation preference $25,000 per share
(respectively the 'Series [__] Preferred Shares' and the 'Series [__] Preferred
Shares' and each a 'Series' of Taxable Auction Rate Cumulative Preferred Shares,
and, together, the 'Preferred Shares').

    Second: Pursuant to Section 2-411 of the MGCL and authority granted by
Article III of the Corporation's Amended and Restated By-laws, the Board of
Directors of the Corporation has appointed a pricing committee (the 'Pricing
Committee') and has authorized such Pricing Committee to fix the terms of the
Preferred Shares for each Series, as set forth herein.

    Third: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the
Preferred Shares are as follows:

                                  DESIGNATION

    Series [__] Preferred Shares: A series of ________ Preferred Shares, par
value $0.001 per share, liquidation preference $25,000 per share, is hereby
designated 'Series [__] Taxable Auction Rate Cumulative Preferred Shares'
('Series [__] Preferred Shares'). Each Series [__] Preferred Share may be issued
on a date to be determined by the Board of Directors of the Corporation or
pursuant to their delegated authority; have an initial dividend rate per annum,
initial Dividend Period and an initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of the
Corporation or pursuant to their delegated authority; and have such other
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, in addition to those
required by applicable law, or as are set forth in Part I and Part II of these
Articles Supplementary. The Series [__] Preferred Shares shall constitute a
separate series of Preferred Shares of the Corporation.

                                      B-1




<Page>
    Series [__] Preferred Shares: A series of ________ Preferred Shares, par
value $0.001 per share, liquidation preference $25,000 per share, is hereby
designated 'Series [__] Taxable Auction Rate Cumulative Preferred Shares'
('Series [__] Preferred Shares'). Each Series [__] Preferred Share may be issued
on a date to be determined by the Board of Directors of the Corporation or
pursuant to their delegated authority; have an initial dividend rate per annum,
initial Dividend Period and an initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of the
Corporation or pursuant to their delegated authority; and have such other
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, in addition to those
required by applicable law, or as are set forth in Part I and Part II of
these Articles Supplementary. The Series [__] Preferred Shares shall constitute
a separate series of Preferred Shares of the Corporation.

    Subject to the provisions of Section 11(b) of Part I hereof, the Board of
Directors of the Corporation may, in the future, reclassify additional shares of
the Corporation's unissued common stock as preferred stock, with the same
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption and other terms herein
described, except that the dividend rate for its initial Dividend Period, its
initial Dividend Payment Date and any other changes in the terms herein set
forth shall be as set forth in these Articles Supplementary with respect to the
additional shares.

    As used in Part I and Part II of these Articles Supplementary, capitalized
terms shall have the meanings provided in Section 17 of Part I and Section 1 of
Part II of these Articles Supplementary.

                         PART I: PREFERRED SHARE TERMS

    1. Number of Shares; Ranking.

    (a) The initial number of authorized shares constituting the Series [__]
Preferred Shares is ________ shares and the initial number of authorized shares
constituting the Series [__] Preferred Shares is ________ shares. No fractional
shares of any Series shall be issued.

    (b) Shares of each Series which at any time have been redeemed or purchased
by the Corporation shall, after such redemption or purchase, have the status of
authorized but unissued shares of preferred stock.

    (c) Shares of each Series shall rank on a parity with shares of any other
series of preferred stock of the Corporation (including any other Preferred
Shares) as to the payment of dividends to which such shares are entitled.

    (d) No Holder of shares of any Series shall have, solely by reason of being
such a holder, any preemptive or other right to acquire, purchase or subscribe
for any shares of any Series, Common Shares of the Corporation or other
securities of the Corporation which it may hereafter issue or sell.

    2. Dividends.

    (a) The Holders of shares of each Series shall be entitled to receive, when,
as and if declared by the Board of Directors, out of funds legally available
therefor, cumulative cash dividends on their shares at the Applicable Rate,
determined as set forth in paragraph (c) of this Section 2, and

                                      B-2




<Page>
no more, payable on the respective dates determined as set forth in
paragraph (b) of this Section 2. Dividends on the Outstanding shares of each
Series issued on the Date of Original Issue shall accumulate from the Date of
Original Issue.

    (b) (i) Dividends shall be payable when, as and if declared by the Board of
Directors following the initial Dividend Payment Date, subject to subparagraph
(b)(ii) of this Section 2, on the shares of each Series, as follows:

        (A) with respect to any Dividend Period of one year or less, on the
    Business Day following the last day of such Dividend Period; provided,
    however, if the Dividend Period is more than 91 days then on the 91st, 181st
    and 271st days within such period, if applicable, and on the Business Day
    following the last day of such Dividend Period; and

        (B) with respect to any Dividend Period of more than one year, on a
    quarterly basis on each January 1, April 1, July 1 and October 1 within such
    Dividend Period and on the Business Day following the last day of such
    Dividend Period.

    (ii) If a day for payment of dividends resulting from the application of
subparagraph (b) above is not a Business Day, then the Dividend Payment Date
shall be the first Business Day following such day for payment of dividends.

    (iii) The Corporation shall pay to the Paying Agent not later than
12:00 noon, New York City time, on each Dividend Payment Date for a Series, an
aggregate amount of immediately available funds equal to the dividends to be
paid to all Holders of such Series on such Dividend Payment Date. The
Corporation shall not be required to establish any reserves for the payment of
dividends.

    (iv) All moneys paid to the Paying Agent for the payment of dividends shall
be held in trust for the payment of such dividends by the Paying Agent for the
benefit of the Holders specified in subparagraph (b)(v) of this Section 2. Any
moneys paid to the Paying Agent in accordance with the foregoing but not applied
by the Paying Agent to the payment of dividends, including interest earned on
such moneys, will, to the extent permitted by law, be repaid to the Corporation
at the end of 90 days from the date on which such moneys were to have been so
applied.

    (v) Each dividend on each Series shall be paid on the Dividend Payment Date
therefor to the Holders of that Series as their names appear on the stock ledger
or stock records of the Corporation on the Business Day next preceding such
Dividend Payment Date; provided, however, if dividends are in arrears, they may
be declared and paid at any time to Holders as their names appear on the stock
ledger or stock records of the Corporation on such date not exceeding 15 days
preceding the payment date thereof, as may be fixed by the Board of Directors.
No interest will be payable in respect of any dividend payment or payments which
may be in arrears.

    (c) (i) The dividend rate on Outstanding shares of each Series during the
period from and after the Date of Original Issue to and including the last day
of the initial Dividend Period therefor shall be equal to the rate as determined
in the manner set forth under 'Designation' above. For each subsequent Dividend
Period for each Series, the dividend rate shall be equal to the rate per annum
that results from an Auction (but the rate set at the Auction will not exceed
the Maximum Rate); provided, however, that if an Auction for any subsequent
Dividend Period of a Series is not held for any reason or if Sufficient Clearing
Orders have not been made in an Auction (other than as a result of all shares of
any Series being the subject of Submitted Hold Orders and other than in an
auction for a Special Dividend Period), then the dividend rate on the

                                      B-3




<Page>
shares of that Series for any such Dividend Period shall be the Maximum Rate
(except (i) during a Default Period when the dividend rate shall be the Default
Rate, as set forth in Section 2(c)(ii) below or (ii) after a Default Period and
prior to the beginning of the next Dividend Period when the dividend rate shall
be the Maximum Rate at the close of business on the last day of such Default
Period). If the Fund has declared a Special Dividend Period and there are not
Sufficient Clearing Orders, the dividend rate for the next rate period will be
the same as during the current rate period.

    (ii) Subject to the cure provisions in Section 2(c)(iii) below, a 'Default
Period' with respect to a particular Series will commence on any date the
Corporation fails to deposit irrevocably in trust in same-day funds, with the
Paying Agent by 12:00 noon, New York City time, (A) the full amount of any
declared dividend on that Series payable on the Dividend Payment Date (a
'Dividend Default') or (B) the full amount of any redemption price (the
'Redemption Price') payable on the date fixed for redemption (the 'Redemption
Date') (a 'Redemption Default') and together with a Dividend Default,
hereinafter referred to as 'Default').

    Subject to the cure provisions of Section 2(c)(iii) below, a Default Period
with respect to a Dividend Default or a Redemption Default shall end on the
Business Day on which, by 12:00 noon, New York City time, all unpaid dividends
and any unpaid Redemption Price shall have been deposited irrevocably in trust
in same-day funds with the Paying Agent. In the case of a Dividend Default, the
Applicable Rate for each Dividend Period commencing during a Default Period will
be equal to the Default Rate, and each subsequent Dividend Period commencing
after the beginning of a Default Period shall be a Standard Dividend Period;
provided, however, that the commencement of a Default Period will not by itself
cause the commencement of a new Dividend Period. No Auction shall be held during
a Default Period applicable to that Series.

    (iii) No Default Period with respect to a Dividend Default or Redemption
Default shall be deemed to commence if the amount of any dividend or any
Redemption Price due (if such default is not solely due to the willful failure
of the Corporation) is deposited irrevocably in trust, in same-day funds with
the Paying Agent by 12:00 noon, New York City time within three Business Days
after the applicable Dividend Payment Date or Redemption Date, together with an
amount equal to the Default Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided by 360 for each
Series. The Default Rate shall be equal to the Reference Rate multiplied by
three (3).

    (iv) The amount of dividends per share payable (if declared) on each
Dividend Payment Date of each Dividend Period of less than one (1) year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) shall be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) that such share was Outstanding and for which the Applicable
Rate or the Default Rate was applicable and the denominator of which will be 360
for each Series, multiplying the amount so obtained by $25,000, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one (1)
year or more, the amount of dividends per share payable on any Dividend Payment
Date (or in respect of dividends on another date in connection with a redemption
during such Dividend Period) shall be computed as described in the preceding
sentence, except that it will be determined on the basis of a year consisting of
twelve 30-day months.

                                      B-4




<Page>
    (d) Any dividend payment made on shares of any Series shall first be
credited against the earliest accumulated but unpaid dividends due with respect
to that Series.

    (e) For so long as the Preferred Shares are Outstanding, except as otherwise
contemplated by Part I of these Articles Supplementary, the Corporation will not
declare, pay or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, Common Shares or other shares ranking
junior to the Preferred Shares as to dividends or upon liquidation) with respect
to Common Shares or any other capital stock of the Corporation ranking junior to
the Preferred Shares as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or other capital stock ranking junior to the Preferred Shares (except by
conversion into or exchange for shares of the Corporation ranking junior to the
Preferred Shares as to dividends and upon liquidation), unless (i) immediately
after such transaction, the Corporation would have Eligible Assets with an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount and the 1940 Act Preferred Shares Asset Coverage would be
achieved, (ii) all cumulative and unpaid dividends due on or prior to the date
of the transaction have been declared and paid in full with respect to the
Corporation's preferred stock, including the Preferred Shares or shall have been
declared and sufficient funds for the payment thereof deposited with the Auction
Agent, and (iii) the Corporation has redeemed the full number of shares of
preferred stock required to be redeemed by any mandatory provision for
redemption including the Preferred Shares required to be redeemed by any
provision for mandatory redemption contained in Section 3(a)(ii) of Part I of
these Articles Supplementary.

    (f) For so long as the Preferred Shares are Outstanding, except as set forth
in the next sentence, the Corporation will not declare, pay or set apart for
payment on any series of stock of the Corporation ranking, as to the payment of
dividends, on a parity with the Preferred Shares for any period unless full
cumulative dividends have been or contemporaneously are declared and paid on
each Series through their most recent Dividend Payment Date. When dividends are
not paid in full upon the Preferred Shares through their most recent Dividend
Payment Dates or upon any other series of stock ranking on a parity as to the
payment of dividends with Preferred Shares through their most recent respective
Dividend Payment Dates, all dividends declared upon the Preferred Shares and any
other such series of stock ranking on a parity as to the payment of dividends
with the Preferred Shares shall be declared pro rata so that the amount of
dividends declared per share on the Preferred Shares and such other series of
preferred stock ranking on a parity therewith shall in all cases bear to each
other the same ratio that accumulated dividends per share on the Preferred
Shares and such other series of preferred stock ranking on a parity therewith
bear to each other.

    3. Redemption.

    (a) (i) After the initial Dividend Period, subject to the provisions of this
Section 3 and to the extent permitted under the 1940 Act and Maryland law, the
Corporation may, at its option, redeem in whole or in part out of funds legally
available therefor shares of any Series herein designated as (A) having a
Dividend Period of one year or less, on the Business Day after the last day of
such Dividend Period by delivering a notice of redemption not less than 15
calendar days and not more than 40 calendar days prior to the Redemption Date,
at a redemption price per share equal to $25,000, plus an amount equal to
accumulated but unpaid dividends thereon

                                      B-5




<Page>
(whether or not earned or declared) to the Redemption Date ('Redemption Price'),
or (B) having a Dividend Period of more than one year, on any Business Day prior
to the end of the relevant Dividend Period by delivering a notice of redemption
not less than 15 calendar days and not more than 40 calendar days prior to the
Redemption Date, at the Redemption Price, plus a redemption premium, if any,
determined by the Board of Directors after consultation with the Broker-Dealers
and set forth in any applicable Specific Redemption Provisions at the time of
the designation of such Dividend Period as set forth in Section 4 of Part I of
these Articles Supplementary; provided, however, that during a Dividend Period
of more than one year, no shares of any Series will be subject to optional
redemption except in accordance with any Specific Redemption Provisions approved
by the Board of Directors after consultation with the Broker-Dealers at the time
of the designation of such Dividend Period. Notwithstanding the foregoing, the
Corporation shall not give a notice of or effect any redemption pursuant to this
Section 3(a)(i) unless, on the date on which the Corporation gives such notice
and on the Redemption Date, (a) the Corporation has available Deposit Securities
with maturity or tender dates not later than the day preceding the applicable
Redemption Date and having a value not less than the amount (including any
applicable premium) due to Holders of each Series by reason of the redemption of
each Series on the Redemption Date and (b) the Corporation would have Eligible
Assets with an aggregate Discounted Value at least equal to the Preferred Shares
Basic Maintenance Amount immediately subsequent to such redemption, if such
redemption were to occur on such date, it being understood that the provisions
of paragraph (d) of this Section 3 shall be applicable in such circumstances in
the event the Corporation makes the deposit and takes the other action required
thereby.

    (ii) If the Corporation fails as of any Valuation Date to meet the Preferred
Shares Basic Maintenance Amount Test or, as of the last Business Day of any
month, the 1940 Act Preferred Shares Asset Coverage, and such failure is not
cured within ten Business Days following the relevant Valuation Date, in the
case of a failure to meet the Preferred Shares Basic Maintenance Amount Test, or
the last Business Day of the following month in the case of a failure to meet
the 1940 Act Preferred Shares Asset Coverage (each an 'Asset Coverage Cure
Date'), the Preferred Shares will be subject to mandatory redemption out of
funds legally available therefor. The number of Preferred Shares to be redeemed
in such circumstances will be equal to the lesser of (A) the minimum number of
Preferred Shares the redemption of which, if deemed to have occurred immediately
prior to the opening of business on the relevant Asset Coverage Cure Date, would
result in the Corporation meeting the Preferred Shares Basic Maintenance Amount
Test, and the 1940 Act Preferred Shares Asset Coverage, as the case may be, in
either case as of the relevant Asset Coverage Cure Date (provided that, if there
is no such minimum number of shares the redemption of which would have such
result, all Preferred Shares then Outstanding will be redeemed) and (B) the
maximum number of Preferred Shares that can be redeemed out of funds expected to
be available therefor on the Mandatory Redemption Date at the Mandatory
Redemption Price set forth in subparagraph (a)(iii) of this Section 3.

    (iii) In determining the Preferred Shares required to be redeemed in
accordance with the foregoing Section 3(a)(ii), the Corporation shall allocate
the number of shares required to be redeemed to satisfy the Preferred Shares
Basic Maintenance Amount Test or the 1940 Act Preferred Shares Asset Coverage,
as the case may be, pro rata or among the Holders of the Preferred Shares in
proportion to the number of shares they hold and shares of other preferred stock
subject to mandatory redemption provisions similar to those contained in this
Section 3, subject to the further provisions of this subparagraph (iii). The
Corporation shall effect any

                                      B-6




<Page>
required mandatory redemption pursuant to: (A) the Preferred Shares Basic
Maintenance Amount Test, as described in subparagraph (a)(ii) of this
Section 3, no later than 30 days after the Corporation last met the Preferred
Shares Basic Maintenance Amount Test, or (B) the 1940 Act Preferred Shares Asset
Coverage, as described in subparagraph (a)(ii) of this Section 3, no later than
30 days after the Asset Coverage Cure Date (the 'Mandatory Redemption Date'),
except that if the Corporation does not have funds legally available for the
redemption of, or is not otherwise legally permitted to redeem, the number of
Preferred Shares which would be required to be redeemed by the Corporation under
clause (A) of subparagraph (a)(ii) of this Section 3 if sufficient funds were
available, together with shares of other preferred stock which are subject to
mandatory redemption under provisions similar to those contained in this
Section 3, or the Corporation otherwise is unable to effect such redemption on
or prior to such Mandatory Redemption Date, the Corporation shall redeem those
Preferred Shares, and shares of other preferred stock which it was unable to
redeem, on the earliest practicable date on which the Corporation will have such
funds available, upon notice pursuant to Section 3(b) to record owners of
Preferred Shares to be redeemed and the Paying Agent. The Corporation will
deposit with the Paying Agent funds sufficient to redeem the specified number of
Preferred Shares with respect to a redemption required under subparagraph
(a)(ii) of this Section 3, by 1:00 P.M., New York City time, of the Business Day
immediately preceding the Mandatory Redemption Date. If fewer than all of the
Outstanding Preferred Shares are to be redeemed pursuant to this
Section 3(a)(iii), the number of shares to be redeemed shall be redeemed pro
rata from the Holders of such shares in proportion to the number of the
Preferred Shares held by such Holders, by lot or by such other method as the
Corporation shall deem fair and equitable, subject, however, to the terms of any
applicable Specific Redemption Provisions. 'Mandatory Redemption Price' means
the Redemption Price plus (in the case of a Dividend Period of one year or more
only) a redemption premium, if any, determined by the Board of Directors after
consultation with the Broker-Dealers and set forth in any applicable Specific
Redemption Provisions.

    (b) In the event of a redemption pursuant to the foregoing Section 3(a), the
Corporation will file a notice of its intention to redeem with the Securities
and Exchange Commission so as to provide at least the minimum notice required
under Rule 23c-2 under the 1940 Act or any successor provision. In addition, the
Corporation shall deliver a notice of redemption to the Auction Agent (the
'Notice of Redemption') containing the information set forth below (i) in the
case of an optional redemption pursuant to Section 3(a)(i) above, one Business
Day prior to the giving of notice to the Holders, (ii) in the case of a
mandatory redemption pursuant to Section 3(a)(ii) above, on or prior to the 10th
day preceding the Mandatory Redemption Date. The Auction Agent will use its
reasonable efforts to provide telephonic notice to each Holder of shares of any
Series called for redemption not later than the close of business on the
Business Day immediately following the day on which the Auction Agent determines
the shares to be redeemed (or, during a Default Period with respect to such
shares, not later than the close of business on the Business Day immediately
following the day on which the Auction Agent receives Notice of Redemption from
the Corporation). The Auction Agent shall confirm such telephonic notice in
writing not later than the close of business on the third Business Day preceding
the date fixed for redemption by providing the Notice of Redemption to each
Holder of shares called for redemption, the Paying Agent (if different from the
Auction Agent) and the Securities Depository. Notice of Redemption will be
addressed to the registered owners of shares of any Series at their addresses
appearing on the share records of the Corporation. Such Notice of Redemption
will set

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<Page>
forth (i) the date fixed for redemption, (ii) the number and identity of shares
of each Series to be redeemed, (iii) the redemption price (specifying the amount
of accumulated dividends to be included therein), (iv) that dividends on the
shares to be redeemed will cease to accumulate on such date fixed for
redemption, and (v) the provision under which redemption shall be made. No
defect in the Notice of Redemption or in the transmittal or mailing thereof will
affect the validity of the redemption proceedings, except as required by
applicable law. If fewer than all shares held by any Holder are to be redeemed,
the Notice of Redemption mailed to such Holder shall also specify the number of
shares to be redeemed from such Holder.

    (c) Notwithstanding the provisions of paragraph (a) of this Section 3, no
preferred stock, including the Preferred Shares, may be redeemed at the option
of the Corporation unless all dividends in arrears on the Outstanding Preferred
Shares and any other preferred stock have been or are being contemporaneously
paid or set aside for payment; provided, however, that the foregoing shall not
prevent the purchase or acquisition of outstanding shares of preferred stock
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to holders of all outstanding shares of
preferred stock.

    (d) Upon the deposit of funds sufficient to redeem shares of any Series with
the Paying Agent and the giving of the Notice of Redemption to the Auction Agent
under paragraph (b) of this Section 3, dividends on such shares shall cease to
accumulate and such shares shall no longer be deemed to be Outstanding for any
purpose (including, without limitation, for purposes of calculating whether the
Corporation has met the Preferred Shares Basic Maintenance Amount Test or the
1940 Act Preferred Shares Asset Coverage), and all rights of the Holders of the
shares so called for redemption shall cease and terminate, except the right of
such Holder to receive the redemption price specified herein, but without any
interest or other additional amount. Such redemption price shall be paid by the
Paying Agent to the nominee of the Securities Depository. The Corporation shall
be entitled to receive from the Paying Agent, promptly after the date fixed for
redemption, any cash deposited with the Paying Agent in excess of (i) the
aggregate redemption price of the shares of any Series called for redemption on
such date and (ii) such other amounts, if any, to which Holders of shares of any
Series called for redemption may be entitled. Any funds so deposited that are
unclaimed at the end of two years from such redemption date shall, to the extent
permitted by law, be paid to the Corporation, after which time the Holders of
shares of each Series so called for redemption may look only to the Corporation
for payment of the redemption price and all other amounts, if any, to which they
may be entitled; provided, however, that the Paying Agent shall notify all
Holders whose funds are unclaimed by placing a notice in The Wall Street Journal
concerning the availability of such funds for three consecutive weeks. The
Corporation shall be entitled to receive, from time to time after the date fixed
for redemption, any interest earned on the funds so deposited.

    (e) To the extent that any redemption for which Notice of Redemption has
been given is not made by reason of the absence of legally available funds
therefor, or is otherwise prohibited, such redemption shall be made as soon as
practicable to the extent such funds become legally available or such redemption
is no longer otherwise prohibited. Failure to redeem shares of any Series shall
be deemed to exist at any time after the date specified for redemption in a
Notice of Redemption when the Corporation shall have failed, for any reason
whatsoever, to deposit in trust with the Paying Agent the redemption price with
respect to any shares for which such Notice of Redemption has been given.
Notwithstanding the fact that the Corporation may not have redeemed shares of
each Series for which a Notice of Redemption has been given, dividends may

                                      B-8




<Page>
be declared and paid on shares of any Series and shall include those shares of
any Series for which Notice of Redemption has been given but for which deposit
of funds has not been made.

    (f) All moneys paid to the Paying Agent for payment of the redemption price
of shares of any Series called for redemption shall be held in trust by the
Paying Agent for the benefit of holders of shares so to be redeemed.

    (g) So long as any shares of any Series are held of record by the nominee of
the Securities Depository, the redemption price for such shares will be paid on
the date fixed for redemption to the nominee of the Securities Depository for
distribution to Agent Members for distribution to the persons for whom they are
acting as agent.

    (h) Except for the provisions described above, nothing contained in these
Articles Supplementary limits any right of the Corporation to purchase or
otherwise acquire any shares of each Series outside of an Auction at any price,
whether higher or lower than the price that would be paid in connection with an
optional or mandatory redemption, so long as, at the time of any such purchase,
there is no arrearage in the payment of dividends on, or the mandatory or
optional redemption price with respect to, any shares of each Series for which
Notice of Redemption has been given and the Corporation meets the 1940 Act
Preferred Shares Asset Coverage and the Preferred Shares Basic Maintenance
Amount Test after giving effect to such purchase or acquisition on the date
thereof. Any shares which are purchased, redeemed or otherwise acquired by the
Corporation shall have no voting rights. If fewer than all the Outstanding
shares of any Series are redeemed or otherwise acquired by the Corporation, the
Corporation shall give notice of such transaction to the Auction Agent, in
accordance with the procedures agreed upon by the Board of Directors.

    (i) In the case of any redemption pursuant to this Section 3, only whole
shares of each Series shall be redeemed, and in the event that any provision of
the Charter would require redemption of a fractional share, the Auction Agent
shall be authorized to round up so that only whole shares are redeemed.

    (j) Notwithstanding anything herein to the contrary, including, without
limitation, Section 6(k) of Part I of these Articles Supplementary, the Board of
Directors, upon notification to each Rating Agency, may authorize, create or
issue other series of preferred stock, including other series of Preferred
Shares, series of preferred stock ranking on a parity with the Preferred Shares
with respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Corporation, to the
extent permitted by the 1940 Act, if upon issuance of any such series, either
(A) the net proceeds from the sale of such stock (or such portion thereof needed
to redeem or repurchase the Outstanding Preferred Shares) are deposited with the
Auction Agent in accordance with Section 3(d) of Part I of these Articles
Supplementary, Notice of Redemption as contemplated by Section 3(b) of Part I of
these Articles Supplementary has been delivered prior thereto or is sent
promptly thereafter, and such proceeds are used to redeem all Outstanding
Preferred Shares or (B) the Corporation would meet the 1940 Act Preferred Shares
Asset Coverage, the Preferred Shares Basic Maintenance Amount Test and the
requirements of Section 12(b) of Part I of these Articles Supplementary.

    4. Designation of Dividend Period.

    (a) The initial Dividend Period for each Series shall be as determined in
the manner set forth under 'Designation' above. The Corporation will designate
the duration of subsequent Dividend

                                      B-9




<Page>
Periods of each Series; provided, however, that no such designation is necessary
for a Standard Dividend Period and, provided further, that any designation of a
Special Dividend Period shall be effective only if (i) notice thereof shall have
been given as provided herein, (ii) any failure to pay in a timely manner to the
Auction Agent the full amount of any dividend on, or the redemption price of,
each Series shall have been cured as provided above, (iii) Sufficient Clearing
Orders shall have existed in an Auction held on the Auction Date immediately
preceding the first day of such proposed Special Dividend Period, (iv) if the
Corporation shall have mailed a Notice of Redemption with respect to any shares,
the redemption price with respect to such shares shall have been deposited with
the Paying Agent, (v) in the case of the designation of a Special Dividend
Period, the Broker-Dealers shall have notified the Corporation in writing that
it believes the Auction for the Special Dividend Period will be successful, and
(vi) each Rating Agency shall have confirmed in writing to the Corporation that
such designation shall not adversely affect their respective then-current
ratings of the Preferred Shares.

    (b) If the Corporation proposes to designate any Special Dividend Period,
not fewer than seven Business Days (or two Business Days in the event the
duration of the Dividend Period prior to such Special Dividend Period is fewer
than eight days) nor more than 30 Business Days prior to the first day of such
Special Dividend Period, notice shall be (i) made by press release and
(ii) communicated by the Corporation by telephonic or other means to the Auction
Agent and each Broker-Dealer and confirmed in writing promptly thereafter. Each
such notice shall state (A) that the Corporation proposes to exercise its option
to designate a succeeding Special Dividend Period, specifying the first and last
days thereof and the Maximum Applicable Rate for such Special Dividend Period
and (B) that the Corporation will by 3:00 P.M., New York City time, on the
second Business Day next preceding the first day of such Special Dividend
Period, notify the Auction Agent, who will promptly notify the Broker-Dealers,
of either (x) its determination, subject to certain conditions, to proceed with
such Special Dividend Period, subject to the terms of any Specific Redemption
Provisions, or (y) its determination not to proceed with such Special Dividend
Period, in which latter event the succeeding Dividend Period shall be a Standard
Dividend Period. No later than 3:00 P.M., New York City time, on the second
Business Day next preceding the first day of any proposed Special Dividend
Period, the Corporation shall deliver to the Auction Agent, who will promptly
deliver to the Broker-Dealers and Existing Holders, either:

        (i) a notice stating (A) that the Corporation has determined to
    designate the next succeeding Dividend Period as a Special Dividend Period,
    specifying the first and last days thereof and (B) the terms of any Specific
    Redemption Provisions; or

        (ii) a notice stating that the Corporation has determined not to
    exercise its option to designate a Special Dividend Period.

    If the Corporation fails to deliver either such notice with respect to any
designation of any proposed Special Dividend Period to the Auction Agent or is
unable to make the confirmation provided in clause (v) of paragraph (a) of this
Section 4 by 3:00 P.M., New York City time, on the second Business Day next
preceding the first day of such proposed Special Dividend Period, the
Corporation shall be deemed to have delivered a notice to the Auction Agent with
respect to such Dividend Period to the effect set forth in clause (ii) above,
thereby resulting in a Standard Dividend Period.

    5. Restrictions on Transfer. Shares of each Series may be transferred only
(a) pursuant to an order placed in an Auction, (b) to or through a Broker-Dealer
or (c) to the Corporation or any

                                      B-10




<Page>
Affiliate. Notwithstanding the foregoing, a transfer other than pursuant to an
Auction will not be effective unless the selling Existing Holder or the Agent
Member of such Existing Holder, in the case of an Existing Holder whose shares
are listed in its own name on the books of the Auction Agent, or the
Broker-Dealer or Agent Member of such Broker-Dealer, in the case of a transfer
between persons holding shares of any Series through different Broker-Dealers,
advises the Auction Agent of such transfer. The certificates representing the
shares of each Series issued to the Securities Depository will bear legends with
respect to the restrictions described above and stop-transfer instructions will
be issued to the Transfer Agent and/or Registrar.

    6. Voting Rights.

    (a) Except as otherwise provided in the Charter or as otherwise required by
applicable law, (i) each Holder of shares of any Series shall be entitled to one
vote for each share of any Series held on each matter on which the Holders of
the Preferred Shares are entitled to vote, and (ii) the holders of the
Outstanding shares of preferred stock, including each Series, and holders of
shares of Common Shares shall vote together as a single class on all matters
submitted to the stockholders; provided, however, that, with respect to the
election of directors, the holders of the Outstanding shares of preferred stock,
including each Series, represented in person or by proxy at a meeting for the
election of directors, shall be entitled, as a class, to the exclusion of the
holders of all other securities and classes of capital stock, including the
Common Shares, to elect two directors of the Corporation, each share of
preferred stock, including each Series, entitling the holder thereof to one
vote. The identities of the nominees of such directorships may be fixed by the
Board of Directors. Subject to paragraph (b) of this Section 6, the holders of
outstanding shares of Common Shares and outstanding shares of preferred stock,
including each Series, voting together as a single class, shall be entitled to
elect the balance of the directors.

    (b) If at any time dividends on the Preferred Shares shall be unpaid in an
amount equal to two full years' dividends on the Preferred Shares (a 'Voting
Period'), the number of directors constituting the Board of Directors shall be
automatically increased by the smallest number of additional directors that,
when added to the number of directors then constituting the Board of Directors,
shall (together with the two directors elected by the holders of preferred
stock, including each Series, pursuant to paragraph (a) of this Section 6)
constitute a majority of such increased number, and the holders of any shares of
preferred stock, including each Series, shall be entitled, voting as a single
class on a one-vote-per-share basis (to the exclusion of the holders of all
other securities and classes of capital stock of the Corporation), to elect the
smallest number of such additional directors of the Corporation that shall
constitute a majority of the total number of directors of the Corporation so
increased. The Voting Period and the voting rights so created upon the
occurrence of the conditions set forth in this paragraph (b) of Section 6 shall
continue unless and until all dividends in arrears on each Series shall have
been paid or declared and sufficient cash or specified securities are set apart
for the payment of such dividends. Upon the termination of a Voting Period, the
voting rights described in this paragraph (b) of Section 6 shall cease, subject
always, however, to the revesting of such voting rights in the holders of
preferred stock, including each Series, upon the further occurrence of any of
the events described in this paragraph (b) of Section 6.

    (c) As soon as practicable after the accrual of any right of the holders of
shares of preferred stock, including each Series, to elect additional directors
as described in paragraph (b) of this Section 6, the Corporation shall notify
the Auction Agent, and the Auction Agent shall call a

                                      B-11




<Page>
special meeting of such holders, by mailing a notice of such special meeting to
such holders, such meeting to be held not less than ten nor more than 90 days
after the date of mailing of such notice. If the Corporation fails to send such
notice to the Auction Agent or if the Auction Agent does not call such a special
meeting, it may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such special
meeting shall be the close of business on the fifth Business Day preceding the
day on which such notice is mailed. At any such special meeting and at each
meeting of holders of preferred stock, including each Series, held during a
Voting Period at which directors are to be elected, such holders, voting
together as a class (to the exclusion of the holders of all other securities and
classes of capital stock of the Corporation), shall be entitled to elect the
number of directors prescribed in paragraph (b) of this Section 6 on a
one-vote-per-share basis. At any such meeting or adjournment thereof in the
absence of a quorum, a majority of the holders of shares of preferred stock,
including Holders of the Preferred Shares, present in person or by proxy shall
have the power to adjourn the meeting without notice, other than an announcement
at the meeting, until a quorum is present.

    (d) For purposes of determining any rights of the holders of the shares of
preferred stock, including each Series, to vote on any matter, whether such
right is created by these Articles Supplementary, by statute or otherwise, if
redemption of some or all of the shares of preferred stock, including each
Series, is required, no holder of shares of preferred stock, including each
Series, shall be entitled to vote and no share of preferred stock, including
each Series, shall be deemed to be 'outstanding' for the purpose of voting or
determining the number of shares required to constitute a quorum, if prior to or
concurrently with the time of determination, sufficient Deposit Securities for
the redemption of such shares have been deposited in the case of Preferred
Shares in trust with the Paying Agent for that purpose and the requisite Notice
of Redemption with respect to such shares shall have been given as provided in
Section 3(b) of Part I of these Articles Supplementary and in the case of other
preferred stock the Corporation has otherwise met the conditions for redemption
applicable to such shares.

    (e) The terms of office of all persons who are directors of the Corporation
at the time of a special meeting of Holders of the Preferred Shares and holders
of other shares of preferred stock to elect directors pursuant to paragraph (b)
of this Section 6 shall continue, notwithstanding the election at such meeting
by the holders of the number of directors that they are entitled to elect.

    (f) Simultaneously with the termination of a Voting Period, the terms of
office of the additional directors elected by the Holders of the Preferred
Shares and holders of shares of other preferred stock pursuant to paragraph (b)
of this Section 6 shall terminate, the remaining directors shall constitute the
directors of the Corporation and the voting rights of such holders to elect
additional directors pursuant to paragraph (b) of this Section 6 shall cease,
subject to the provisions of the last sentence of paragraph (b) of this
Section 6.

    (g) Unless otherwise required by law or in the Corporation's Charter, the
Holders of Preferred Shares shall not have any relative rights or preferences or
other special rights other than those specifically set forth herein. In the
event that the Corporation fails to pay any dividends on the Preferred Shares of
the Corporation or fails to redeem any Preferred Shares which it is required to
redeem, or any other event occurs which requires the mandatory redemption of
Preferred Shares and the required Notice of Redemption has not been given, other
than the rights set forth in paragraph (a) of Section 3 of Part I of these
Articles Supplementary, the exclusive remedy of

                                      B-12




<Page>
the Holders of Preferred Shares shall be the right to vote for directors
pursuant to the provisions of paragraph (b) of this Section 6. In no event shall
the Holders of Preferred Shares have any right to sue for, or bring a proceeding
with respect to, such dividends or redemptions or damages for the failure to
receive the same.

    (h) For so long as any shares of preferred stock, including each Series, are
outstanding, the Corporation will not, without the affirmative vote of the
Holders of a majority of the outstanding preferred stock, (i) institute any
proceedings to be adjudicated bankrupt or insolvent, or consent to the
institution of bankruptcy or insolvency proceedings against it, or file a
petition seeking or consenting to reorganization or relief under any applicable
federal or state law relating to bankruptcy or insolvency, or consent to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Corporation or a substantial part of its property, or
make any assignment for the benefit of creditors, or, except as may be required
by applicable law, admit in writing its inability to pay its debts generally as
they become due or take any corporate action in furtherance of any such action;
(ii) create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence or existence of any material
lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Corporation's assets as a whole, except (A) liens the validity of
which are being contested in good faith by appropriate proceedings, (B) liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (C) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness
senior to the Preferred Shares, (D) liens, pledges, charges, security interests,
security agreements or other encumbrances arising in connection with any
indebtedness permitted under clause (iii) below and (E) liens to secure payment
for services rendered including, without limitation, services rendered by the
Corporation's Paying Agent and the Auction Agent; or (iii) create, authorize,
issue, incur or suffer to exist any indebtedness for borrowed money or any
direct or indirect guarantee of such indebtedness for borrowed money or any
direct or indirect guarantee of such indebtedness, except the Corporation may
borrow as may be permitted by the Corporation's investment restrictions;
provided, however, that transfers of assets by the Corporation subject to an
obligation to repurchase shall not be deemed to be indebtedness for purposes of
this provision to the extent that after any such transaction the Corporation has
Eligible Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount as of the immediately preceding
Valuation Date.

    (i) The affirmative vote of the holders of a majority, as defined in the
1940 Act, of the outstanding shares of preferred stock, including each Series,
voting as a separate class, shall be required to approve any plan of
reorganization (as such term is used in the 1940 Act) adversely affecting such
shares or any action requiring a vote of security holders of the Corporation
under Section 13(a) of the 1940 Act. In the event a vote of holders of shares of
preferred stock is required pursuant to the provisions of Section 13(a) of the
1940 Act, the Corporation shall, not later than ten Business Days prior to the
date on which such vote is to be taken, notify each Rating Agency that such vote
is to be taken and the nature of the action with respect to which such vote is
to be taken and shall, not later than ten Business Days after the date on which
such vote is taken, notify each Rating Agency of the results of such vote.

    (j) The affirmative vote of the Holders of a majority, as defined in the
1940 Act, of the outstanding shares of preferred stock of any series, voting
separately from any other series, shall

                                      B-13




<Page>
be required with respect to any matter that materially and adversely affects the
rights, preferences, or powers of that series in a manner different from that of
other series or classes of the Corporation's shares of capital stock. For
purposes of the foregoing, no matter shall be deemed to adversely affect any
rights, preference or power unless such matter (i) alters or abolishes any
preferential right of such series; (ii) creates, alters or abolishes any right
in respect of redemption of such series; or (iii) creates or alters (other than
to abolish) any restriction on transfer applicable to such series. The vote of
holders of any series described in this Section (j) will in each case be in
addition to a separate vote of the requisite percentage of Common Shares and/or
preferred stock necessary to authorize the action in question.

    (k) The Board of Directors, without the vote or consent of any holder of
shares of preferred stock, including each Series, or any other stockholder of
the Corporation, may from time to time amend, alter or repeal any or all of the
definitions contained herein, add covenants and other obligations of the
Corporation, or confirm the applicability of covenants and other obligations set
forth herein, all in connection with obtaining or maintaining the rating of any
Rating Agency with respect to each Series, and any such amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of
Preferred Shares or the Holders thereof, provided that the Board of Directors
receives written confirmation from each relevant Rating Agency (with such
confirmation in no event being required to be obtained from a particular Rating
Agency with respect to definitions or other provisions relevant only to and
adopted in connection with another Rating Agency's rating of the any Series)
that any such amendment, alteration or repeal would not adversely affect the
rating then assigned by such Rating Agency.

    In addition, subject to compliance with applicable law, the Board of
Directors may amend the definition of Maximum Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of shares of preferred
stock, including each Series, or any other stockholder of the Corporation, but
only with confirmation from each Rating Agency, and after consultation with the
Broker-Dealers, provided that immediately following any such increase the
Corporation would meet the Preferred Shares Basic Maintenance Amount Test.

    7. Liquidation Rights.

    (a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the holders of
shares of preferred stock, including each Series, shall be entitled to receive
out of the assets of the Corporation available for distribution to stockholders,
after claims of creditors but before distribution or payment shall be made in
respect of the Common Shares or to any other shares of stock of the Corporation
ranking junior to the preferred stock, as to liquidation payments, a liquidation
distribution in the amount of $25,000 per share (the 'Liquidation Preference'),
plus an amount equal to all unpaid dividends accrued to and including the date
fixed for such distribution or payment (whether or not declared by the Board of
Directors, but excluding interest thereon), but such Holders shall be entitled
to no further participation in any distribution or payment in connection with
any such liquidation, dissolution or winding up. Each Series shall rank on a
parity with shares of any other series of preferred stock of the Corporation
(including each Series) as to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Corporation.

    (b) If, upon any such liquidation, dissolution or winding up of the affairs
of the Corporation, whether voluntary or involuntary, the assets of the
Corporation available for distribution among

                                      B-14




<Page>
the holders of all outstanding shares of preferred stock, including each Series,
shall be insufficient to permit the payment in full to such holders of the
amounts to which they are entitled, then such available assets shall be
distributed among the holders of all outstanding shares of preferred stock,
including each Series, ratably in any such distribution of assets according to
the respective amounts which would be payable on all such shares if all amounts
thereon were paid in full. Unless and until payment in full has been made to the
holders of all outstanding shares of preferred stock, including each Series, of
the liquidation distributions to which they are entitled, no dividends or
distributions will be made to holders of Common Shares or any stock of the
Corporation ranking junior to the preferred stock as to liquidation.

    (c) Neither the consolidation nor merger of the Corporation with or into any
other corporation or corporations, nor the sale, lease, exchange or transfer by
the Corporation of all or substantially all of its property and assets, shall be
deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this Section 7.

    (d) After the payment to Holders of Preferred Shares of the full
preferential amounts provided for in this Section 7, the Holders of the
Preferred Shares as such shall have no right or claim to any of the remaining
assets of the Corporation.

    (e) In the event the assets of the Corporation or proceeds thereof available
for distribution to the Holders of Preferred Shares, upon dissolution,
liquidation or winding up of the affairs of the Corporation, whether voluntary
or involuntary, shall be insufficient to pay in full all amounts to which such
Holders are entitled pursuant to paragraph (a) of this Section 7, no such
distribution shall be made on account of any shares of any other series of
preferred stock unless proportionate distributive amounts shall be paid on
account of the Preferred Shares, ratably, in proportion to the full
distributable amounts to which holders of all shares of preferred stock are
entitled upon such dissolution, liquidation or winding up.

    (f) Subject to the rights of the holders of shares of other preferred stock
or after payment shall have been made in full to the Holders of Preferred Shares
as provided in paragraph (a) of this Section 7, but not prior thereto, any other
series or class of shares ranking junior to the Preferred Shares with respect to
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Corporation shall, subject to any respective terms and provisions
(if any) applying thereto, be entitled to receive any and all assets remaining
to be paid or distributed, and the Holders of the Preferred Shares shall not be
entitled to share therein.

    8. Auction Agent. For so long as any Preferred Shares are Outstanding, the
Auction Agent, duly appointed by the Corporation to so act, shall be in each
case a commercial bank, trust company or other financial institution independent
of the Corporation and its Affiliates (which, however, may engage or have
engaged in business transactions with the Corporation or its Affiliates) and at
no time shall the Corporation or any of its Affiliates act as the Auction Agent
in connection with the Auction Procedures. If the Auction Agent resigns or for
any reason its appointment is terminated during any period that any shares of
any Series are Outstanding, the Corporation will use its best efforts to enter
into an agreement with a successor auction agent containing substantially the
same terms and conditions as the auction agency agreement. The Fund may remove
the auction agent provided that prior to such removal the Fund shall have
entered into such an agreement with a successor auction agent.

    9. 1940 Act Preferred Shares Asset Coverage. The Corporation shall maintain,
as of the last Business Day of each month in which any Preferred Shares are
Outstanding, the 1940 Act

                                      B-15




<Page>
Preferred Shares Asset Coverage; provided, however, that Section 3(a)(ii) shall
be the sole remedy in the event the Corporation fails to do so.

    10. Preferred Shares Basic Maintenance Amount. So long as any Preferred
Shares are Outstanding and any Rating Agency so requires, the Corporation shall
maintain, as of each Valuation Date, Moody's Eligible Assets and S&P Eligible
Assets, as applicable, having an aggregate Discounted Value equal to or greater
than the Preferred Shares Basic Maintenance Amount; provided, however, that
Section 3(a)(ii) shall be the sole remedy in the event the Corporation fails to
do so.

    11. Certain Other Restrictions. So long as any Preferred Shares are
Outstanding and S&P, Moody's or any Other Rating Agency that is rating such
shares so requires, the Corporation will not, unless it has received written
confirmation from S&P (if S&P is then rating the Preferred Shares), Moody's (if
Moody's is then rating the Preferred Shares) and (if applicable) such Other
Rating Agency, that any such action would not impair the rating then assigned by
such Rating Agency to the Preferred Shares, engage in any one or more of the
following transactions:

        (a) purchase or sell futures contracts or options thereon with respect
    to portfolio securities or write put or call options on portfolio
    securities;

        (b) except in connection with a refinancing of the Preferred Shares,
    issue additional shares of any series of preferred stock, including any
    Series or reissue any shares of preferred stock, including any Series
    previously purchased or redeemed by the Corporation;

        (c) engage in any short sales of securities;

        (d) lend portfolio securities;

        (e) merge or consolidate into or with any other fund; or

        (f) for purposes of valuation of Moody's Eligible Assets: (A) if the
    Corporation writes a call option, the underlying asset will be valued as
    follows: (1) if the option is exchange-traded and may be offset readily or
    if the option expires before the earliest possible redemption of the
    Preferred Shares, at the lower of the Discounted Value of the underlying
    security of the option and the exercise price of the option or
    (2) otherwise, it has no value; (B) if the Corporation writes a put option,
    the underlying asset will be valued as follows: the lesser of (1) exercise
    price and (2) the Discounted Value of the underlying security; and (C) call
    or put option contracts which the Corporation buys have no value. For so
    long as the Preferred Shares are rated by Moody's: (A) the Corporation will
    not engage in options transactions for leveraging or speculative purposes;
    (B) the Corporation will not write or sell any anticipatory contracts
    pursuant to which the Corporation hedges the anticipated purchase of an
    asset prior to completion of such purchase; (C) the Corporation will not
    enter into an option transaction with respect to portfolio securities
    unless, after giving effect thereto, the Corporation would continue to have
    Eligible Assets with an aggregate Discounted Value equal to or greater than
    the Preferred Shares Basic Maintenance Amount; (D) the Corporation will not
    enter into an option transaction with respect to portfolio securities unless
    after giving effect to such transaction the Corporation would continue to be
    in compliance with the provisions relating to the Preferred Shares Basic
    Maintenance Amount; (E) for purposes of the Preferred Shares Basic
    Maintenance Amount assets in margin accounts are not Eligible Assets;
    (F) the Corporation shall write only exchange-traded options on exchanges
    approved by Moody's (if Moody's is then rating the Preferred Shares);
    (G) where delivery may be made to the

                                      B-16




<Page>
    Corporation with any of a class of securities, the Corporation shall assume
    for purposes of the Preferred Shares Basic Maintenance Amount that it takes
    delivery of that security which yields it the least value; (H) the
    Corporation will not engage in forward contracts; and (I) there shall be a
    quarterly audit made of the Corporation's options transactions by the
    Corporation's independent auditors to confirm that the Corporation is in
    compliance with these standards.

        (g) For so long as any Preferred Shares are rated by S&P, the
    Corporation will not purchase or sell futures contracts, write, purchase or
    sell options on futures contracts or write put options (except covered put
    options) or call options (except covered call options) on portfolio
    securities unless it receives written confirmation from S&P that engaging in
    such transactions will not impair the ratings then assigned to the Preferred
    Shares by S&P.

    12. Compliance Procedures for Asset Maintenance Tests. For so long as any
Preferred Shares are Outstanding and any Rating Agency so requires:

        (a) As of each Valuation Date, the Corporation shall determine (i) the
    Market Value of each Eligible Asset owned by the Corporation on that date,
    (ii) the Discounted Value of each such Eligible Asset, (iii) whether the
    Preferred Shares Basic Maintenance Amount Test is met as of that date,
    (iv) the value (as used in the 1940 Act) of the total assets of the
    Corporation, less all liabilities, and (v) whether the 1940 Act Preferred
    Shares Asset Coverage is met as of that date.

        (b) Upon any failure to meet the Preferred Shares Basic Maintenance
    Amount Test or 1940 Act Preferred Shares Asset Coverage on any Valuation
    Date, the Corporation may use reasonable commercial efforts (including,
    without limitation, altering the composition of its portfolio, purchasing
    Preferred Shares outside of an Auction or, in the event of a failure to file
    a certificate on a timely basis, submitting the requisite certificate), to
    meet (or certify in the case of a failure to file a certificate on a timely
    basis, as the case may be) the Preferred Shares Basic Maintenance Amount
    Test or 1940 Act Preferred Shares Asset Coverage on or prior to the Asset
    Coverage Cure Date.

        (c) Compliance with the Preferred Shares Basic Maintenance Amount and
    1940 Act Asset Coverage Tests shall be determined with reference to those
    Preferred Shares which are deemed to be Outstanding hereunder.

        (d) The Corporation shall deliver to the Auction Agent and each Rating
    Agency a certificate which sets forth a determination of items (i)-(iii) of
    paragraph (a) of this Section 12 (a 'Preferred Shares Basic Maintenance
    Certificate') as of (A) the Date of Original Issue, (B) the last Valuation
    Date of each month, (C) any date requested by any Rating Agency, (D) a
    Business Day on or before any Asset Coverage Cure Date relating to the
    Corporation's cure of a failure to meet the Preferred Shares Basic
    Maintenance Amount Test, (E) any day that Common Shares or Preferred Shares
    are redeemed and (F) any day the S&P Eligible Assets have an aggregate
    discounted value less than or equal to 110% of the Preferred Shares Basic
    Maintenance Amount. Such Preferred Shares Basic Maintenance Certificate
    shall be delivered in the case of clause (i)(A) on the Date of Original
    Issue and in the case of all other clauses above on or before the seventh
    Business Day after the relevant Valuation Date or Asset Coverage Cure Date.

                                      B-17




<Page>
        (e) The Corporation shall deliver to the Auction Agent and each Rating
    Agency a certificate which sets forth a determination of items (iv) and (v)
    of paragraph (a) of this Section 12 (a '1940 Act Preferred Shares Asset
    Coverage Certificate') (i) as of the Date of Original Issue, and (ii) as of
    (A) the last Valuation Date of each quarter thereafter, and (B) as of a
    Business Day on or before any Asset Coverage Cure Date relating to the
    failure to meet the 1940 Act Preferred Shares Asset Coverage. Such 1940 Act
    Preferred Shares Asset Coverage Certificate shall be delivered in the case
    of clause (i) on the Date of Original Issue and in the case of clause (ii)
    on or before the seventh Business Day after the relevant Valuation Date or
    the Asset Coverage Cure Date. The certificates required by paragraphs (d)
    and (e) of this Section 12 may be combined into a single certificate.

        (f) Within ten Business Days of the Date of Original Issue, the
    Corporation shall deliver to the Auction Agent and each Rating Agency a
    letter prepared by the Corporation's independent auditors (an 'Auditor's
    Certificate') regarding the accuracy of the calculations made by the
    Corporation in the Preferred Shares Basic Maintenance Certificate and the
    1940 Act Preferred Shares Asset Coverage Certificate required to be
    delivered by the Corporation on the Date of Original Issue. Within ten
    Business Days after delivery of the Preferred Shares Basic Maintenance
    Certificate and the 1940 Act Preferred Shares Asset Coverage Certificate
    relating to the last Valuation Date of each fiscal quarter of the
    Corporation, the Corporation will deliver to the Auction Agent and each
    Rating Agency an Auditor's Certificate regarding the accuracy of the
    calculations made by the Corporation in such Certificates and in one other
    Preferred Shares Basic Maintenance Certificate randomly selected by the
    Corporation's independent auditors during such fiscal quarter. In addition,
    the Corporation will deliver to the persons specified in the preceding
    sentence an Auditor's Certificate regarding the accuracy of the calculations
    made by the Corporation on each Preferred Shares Basic Maintenance
    Certificate and 1940 Act Preferred Shares Asset Coverage Certificate
    delivered in relation to an Asset Coverage Cure Date within ten days after
    the relevant Asset Coverage Cure Date. If an Auditor's Certificate shows
    that an error was made in any such report, the calculation or determination
    made by the Corporation's independent auditors will be conclusive and
    binding on the Corporation.

        (g) The Auditor's Certificates referred to in paragraph (f) above will
    confirm, based upon the independent auditor's review of portfolio data
    provided by the Corporation, (i) the mathematical accuracy of the
    calculations reflected in the related Preferred Shares Basic Maintenance
    Amount Certificates and 1940 Act Preferred Shares Asset Coverage
    Certificates and (ii) that, based upon such calculations, the Corporation
    had, at such Valuation Date, met the Preferred Shares Basic Maintenance
    Amount Test.

        (h) In the event that a Preferred Shares Basic Maintenance Certificate
    or 1940 Act Preferred Shares Asset Coverage Certificate with respect to an
    applicable Valuation Date is not delivered within the time periods specified
    in this Section 12, the Corporation shall be deemed to have failed to meet
    the Preferred Shares Basic Maintenance Amount Test or the 1940 Act Preferred
    Shares Asset Coverage, as the case may be, on such Valuation Date for
    purposes of Section 12(b) of Part I of these Articles Supplementary. In the
    event that a Preferred Shares Basic Maintenance Certificate, a 1940 Act
    Preferred Shares Asset Coverage Certificate or an applicable Auditor's
    Certificate with respect to an Asset Coverage Cure Date is not delivered
    within the time periods specified herein, the Corporation shall be deemed to

                                      B-18




<Page>
    have failed to meet the Preferred Shares Basic Maintenance Amount Test or
    the 1940 Preferred Shares Asset Coverage, as the case may be, as of the
    related Valuation Date.

    13. Notice. All notices or communications hereunder, unless otherwise
specified in these Articles Supplementary, shall be sufficiently given if in
writing and delivered in person, by telecopier or mailed by first-class mail,
postage prepaid. Notices delivered pursuant to this Section 13 shall be deemed
given on the earlier of the date received or the date five days after which such
notice is mailed, except as otherwise provided in these Articles Supplementary
or by the MGCL for notices of stockholders' meetings.

    14. Waiver. To the extent permitted by Maryland Law, Holders of at least
two-thirds of the Outstanding Preferred Shares, acting collectively, or each
Series, acting as a separate series, may waive any provision hereof intended for
their respective benefit in accordance with such procedures as may from time to
time be established by the Board of Directors.

    15. Termination. In the event that no Preferred Shares are Outstanding, all
rights and preferences of such shares established and designated hereunder shall
cease and terminate, and all obligations of the Corporation under these Articles
Supplementary shall terminate.

    16. Amendment. Subject to the provisions of these Articles Supplementary,
the Board of Directors may, by resolution duly adopted without stockholder
approval (except as otherwise provided by these Articles Supplementary or
required by applicable law), amend these Articles Supplementary to reflect any
amendments hereto which the Board of Directors is entitled to adopt pursuant to
the terms of Section 6(k) of Part I of these Articles Supplementary without
stockholder approval. To the extent permitted by applicable law, the Board of
Directors may interpret, amend or adjust the provisions of these Articles
Supplementary to resolve any inconsistency or ambiguity or to remedy any patent
defect.

    17. Definitions. As used in Part I and Part II of these Articles
Supplementary, the following terms shall have the following meanings (with terms
defined in the singular having comparable meanings when used in the plural and
vice versa), unless the context otherwise requires:

        '`AA' Composite Commercial Paper Rate' on any date means
    (i) the interest equivalent of the 7-day rate, in the case of a Dividend
    Period which is a Standard Dividend Period or shorter; for Dividend Periods
    greater than 7 days but fewer than or equal to 31 days, the 30-day rate; for
    Dividend Periods greater than 31 days but fewer than or equal to 61 days,
    the 60-day rate; for Dividend Periods greater than 61 days but fewer than or
    equal to 91 days, the 90 day rate; for Dividend Periods greater than 91 days
    but fewer than or equal to 270 days, the rate described in clause
    (ii) below; for Dividend Periods greater than 270 days, the Treasury Index
    Rate; on commercial paper on behalf of issuers whose corporate bonds are
    rated 'AA' by S&P, or the equivalent of such rating by another nationally
    recognized rating agency, as announced by the Federal Reserve Bank of New
    York for the close of business on the Business Day immediately preceding
    such date; or (ii) if the Federal Reserve Bank of New York does not make
    available such a rate, then the arithmetic average of the interest
    equivalent of such rates on commercial paper placed on behalf of such
    issuers, as quoted on a discount basis or otherwise by the Commercial Paper
    Dealers to the Auction Agent for the close of business on the Business Day
    immediately preceding such date (rounded to the next highest .001 of 1%). If
    any Commercial Paper Dealer does not quote a rate required to determine the
    'AA' Composite Commercial Paper Rate, such rate shall be determined on the
    basis of the quotations (or quotation) furnished by the remaining

                                      B-19




<Page>
    Commercial Paper Dealers (or Dealer), if any, or, if there are no such
    Commercial Paper Dealers, by the Auction Agent. For purposes of this
    definition, (A) 'Commercial Paper Dealers' shall mean
    (1) ________________________; (2) in lieu of any thereof, its respective
    Affiliate or successor; and (3) in the event that any of the foregoing shall
    cease to quote rates for commercial paper of issuers of the sort described
    above, in substitution therefor, a nationally recognized dealer in
    commercial paper of such issuers then making such quotations selected by the
    Corporation, and (B) 'interest equivalent' of a rate stated on a discount
    basis for commercial paper of a given number of days' maturity shall mean a
    number equal to the quotient (rounded upward to the next higher
    one-thousandth of 1%) of (1) such rate expressed as a decimal, divided by
    (2) the difference between (x) 1.00 and (y) a fraction, the numerator of
    which shall be the product of such rate expressed as a decimal, multiplied
    by the number of days in which such commercial paper shall mature and the
    denominator of which shall be 360.

        'Affiliate' means any person known to the Auction Agent to be controlled
    by, in control of or under common control with the Corporation; provided,
    however, that no Broker-Dealer controlled by, in control of or under common
    control with the Corporation shall be deemed to be an Affiliate nor shall
    any corporation or any Person controlled by, in control of or under common
    control with such corporation, one of the directors or executive officers of
    which is a director of the Corporation be deemed to be an Affiliate solely
    because such director or executive officer is also a director of the
    Corporation.

        'Agent Member' means a member of or a participant in the Securities
    Depository that will act on behalf of a Bidder.

        'All Hold Rate' means the 7-day 'AA' Composite Commercial Paper Rate in
    the case of the Series [__] Preferred Shares and the 30-day 'AA' Composite
    Commercial Paper Rate in the case of the Series [__] Preferred Shares;

        'Applicable Rate' means, with respect to each Series for each Dividend
    Period (i) if Sufficient Clearing Orders exist for the Auction in respect
    thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do not
    exist for the Auction in respect thereof, the Maximum Rate, and (iii) in the
    case of any Dividend Period if all the shares of a Series are the subject of
    Submitted Hold Orders for the Auction in respect thereof, the All Hold Rate
    corresponding to that Series.

        'Approved Price' means the 'fair value' as determined by the Corporation
    in accordance with the valuation procedures adopted from time to time by the
    Board of Directors and for which the Corporation receives a mark-to-market
    price (which, for the purpose of clarity, does not mean a Market Value
    Price) from an independent source at least semi-annually.

        'Asset Coverage Cure Date' has the meaning set forth in
    Section 3(a)(ii) of these Articles Supplementary.

        'Auction' means each periodic operation of the Auction Procedures.

        'Auction Agent' means ___________________ unless and until another
    commercial bank, trust company, or other financial institution appointed by
    a resolution of the Board of Directors enters into an agreement with the
    Corporation to follow the Auction Procedures for the purpose of determining
    the Applicable Rate.

                                      B-20




<Page>
        'Auction Date' means the first Business Day next preceding the first day
    of a Dividend Period for each Series.

        'Auction Procedures' means the procedures for conducting Auctions as set
    forth in Part II of these Articles Supplementary.

        'Auditor's Certificate' has the meaning set forth in Section 12(f) of
    Part I of these Articles Supplementary.

        'Beneficial Owner,' with respect to shares of each Series, means a
    customer of a Broker-Dealer who is listed on the records of that
    Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares
    of such series.

        'Bid' has the meaning set forth in Section 2(a)(ii) of Part II of these
    Articles Supplementary.

        'Bidder' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary, provided however that neither the Corporation
    nor any Affiliate shall be permitted to be Bidder in an Auction.

        'Board of Directors' or 'Board' means the Board of Directors of the
    Corporation or any duly authorized committee thereof as permitted by
    applicable law.

        'Broker-Dealer' means any broker-dealer or broker-dealers, or other
    entity permitted by law to perform the functions required of a Broker-Dealer
    by the Auction Procedures, that has been selected by the Corporation and has
    entered into a Broker-Dealer Agreement that remains effective.

        'Broker-Dealer Agreement' means an agreement between the Auction Agent
    and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow
    the Auction Procedures.

        'Business Day' means a day on which the New York Stock Exchange is open
    for trading and which is not a Saturday, Sunday or other day on which banks
    in The City of New York, New York are authorized or obligated by law to
    close.

        'Charter' has the meaning set forth in the preamble to these Articles
    Supplementary.

        'Code' means the Internal Revenue Code of 1986, as amended.

        'Commission' means the Securities and Exchange Commission.

        'Common Shares' means the shares of the Corporation's Common Stock, par
    value $.001 per share.

        'Corporation' has the meaning set forth in the preamble to these
    Articles Supplementary.

        'Date of Original Issue' means the date on which a Series is originally
    issued by the Corporation.

        'Default' has the meaning set forth in Section 2(c)(ii) of Part I of
    these Articles Supplementary.

        'Default Period' has the meaning set forth in Sections 2(c)(ii) or (iii)
    of Part I of these Articles Supplementary.

        'Default Rate' has the meaning set forth in Sections 2(c)(iii) of
    Part I of these Articles Supplementary.

                                      B-21




<Page>
        'Deposit Securities' means cash and any obligations or securities,
    including Short Term Money Market Instruments that are Eligible Assets,
    rated at least AAA or A-1 by S&P, except that, for purposes of optional
    redemption, such obligations or securities will be considered 'Deposit
    Securities' only if they also are rated at least P-1 by Moody's.

        'Discount Factor' means the S&P Discount Factor (if S&P is then rating
    the Preferred Shares), the Moody's Discount Factor (if Moody's is then
    rating the Preferred Shares) or the discount factor established by any Other
    Rating Agency which is then rating the Preferred Shares and which so
    requires, whichever is applicable.

        'Discounted Value' means the quotient of the Market Value of an Eligible
    Asset divided by the applicable Discount Factor, provided that with respect
    to an Eligible Asset that is currently callable, Discounted Value will be
    equal to the quotient as calculated above or the call price, whichever is
    lower, and that with respect to an Eligible Asset that is prepayable,
    Discounted Value will be equal to the quotient as calculated above or the
    par value, whichever is lower.

        'Dividend Default' has the meaning set forth in Section 2(c)(iii) of
    Part I of these Articles Supplementary.

        'Dividend Payment Date' with respect to the Preferred Shares means any
    date on which dividends are payable pursuant to Section 2(b) of Part I
    hereof.

        'Dividend Period' means, with respect to each Series, the initial period
    determined in the manner set forth under 'Designation' above, and
    thereafter, as to such Series, the period commencing on the day following
    each Dividend Period for such Series and ending on the day established for
    such Series by the Corporation.

        'Eligible Assets' means Moody's Eligible Assets (if Moody's is then
    rating the Preferred Shares), S&P Eligible Assets (if S&P is then rating the
    Preferred Shares), and/or Other Rating Agency Eligible Assets if any Other
    Rating Agency is then rating the Preferred Shares, whichever is applicable.

        'Existing Holder' has the meaning set forth in Section 1(d) of Part II
    of these Articles Supplementary.

        'Hold Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Holder' means, with respect to the Preferred Shares, the registered
    holder of shares of each Series as the same appears on the stock ledger or
    stock records of the Corporation.

        'Investment Manager' means Cohen & Steers Capital Management, Inc.

        'Liquidation Preference' means $25,000 per Preferred Share.

        'Mandatory Redemption Date' has meaning set forth in Section 3(a)(iv) of
    Part I of these Articles Supplementary.

        'Mandatory Redemption Price' has the meaning set forth in
    Section 3(a)(iv) of Part I of these Articles Supplementary.

        'Market Value' means the fair market value of an asset of the
    Corporation as computed as follows: Securities listed on the New York Stock
    Exchange at the last sale price reflected on the consolidated tape at the
    close of the New York Stock Exchange on the business day as

                                      B-22




<Page>
    of which such value is being determined provided that, if there has been no
    sale on such day, the securities are valued at the closing bid prices on
    such day and provided further that, if no bid prices are quoted on such day,
    then the security is valued by such method as the Board of Directors shall
    determine in good faith to reflect its fair market value. Readily marketable
    securities not listed on the New York Stock Exchange but listed on other
    domestic or foreign securities exchanges or admitted to trading on the
    National Association of Securities Dealers Automated Quotations, Inc.
    ('NASDAQ') National List are valued in a like manner. Portfolio securities
    traded on more than one securities exchange are valued at the last sale
    price on the business day as of which such value is being determined as
    reflected on the tape at the close of the exchange representing the
    principal market for such securities. Readily marketable securities traded
    in the over-the-counter market, including listed securities whose primary
    market is believed by the Investment Manager to be over-the-counter, but
    excluding securities admitted to trading on the NASDAQ National List, are
    valued at the current bid prices as reported by NASDAQ or, in the case of
    securities not quoted by NASDAQ, the National Quotation Bureau or such other
    comparable source as the directors deem appropriate to reflect their fair
    market value. The fair market value of certain fixed-income securities is
    computed based upon (i) the basis of prices provided by a Pricing Service or
    (ii) the lower of the value set forth in bids from two independent dealers
    in securities, one of which bids will be in writing, in each case with
    interest accrued added to such computation for those assets of the
    Corporation where such computation does not include interest accrued. The
    independent dealers from whom bids are sought shall be either (a) market
    makers in the securities being valued or (b) members of the National
    Association of Securities Dealers, Inc. Where securities are traded on more
    than one exchange and also over-the-counter, the securities will generally
    be valued using the quotations the Board of Directors believes reflect most
    closely the value of such securities.

        'Maximum Rate' means, on any date on which the Applicable Rate is
    determined, the applicable percentage of the 'AA' Composite Commercial
    Paper Rate on the date of such Auction determined as set forth
    below based on the lower of the credit ratings assigned to the Preferred
    Shares by Moody's and S&P subject to upward but not downward adjustment in
    the discretion of the Board of Directors after consultation with the Broker-
    Dealers; provided that immediately following any such increase the
    Corporation would be in compliance with the Preferred Shares Basic
    Maintenance Amount.

<Table>
<Caption>
   MOODY'S                  S&P                APPLICABLE
CREDIT RATING          CREDIT RATING           PERCENTAGE
- -------------          -------------           ----------
<S>                   <C>                      <C>
aa3 or Above          AA - or Above               [150%]
a3 or a1              A - to A+                   [200%]
baa3 to baa1          BBB - to BBB+               [225%]
Below baa3            Below BBB -                 [275%]
</Table>

        'Moody's' means Moody's Investors Service, Inc. and its successors at
    law.

        'Moody's Discount Factor' means, for purposes of determining the
    Discounted Value of any Moody's Eligible Asset, the percentage determined as
    follows. The Moody's Discount Factor for any Moody's Eligible Asset other
    than the securities set forth below will be the percentage provided in
    writing by Moody's.

                                      B-23




<Page>
    (a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:

<Table>
<Caption>
                                                          DISCOUNT FACTOR(1)(2)(3)
                                                          ------------------------
<S>                                                       <C>
common stock of REITs                                               154%
preferred stock of REITs
    with Senior Implied Moody's (or S&P) rating:                    154%
    without Senior Implied Moody's (or S&P) rating:                 208%

<Caption>
                                                          DISCOUNT FACTOR(1)(2)(3)
                                                          ------------------------
<S>                                                       <C>
preferred stock of Other Real Estate Companies
    with Senior Implied Moody's (or S&P) rating:                    208%
    without Senior Implied Moody's (or S&P) rating:                 250%
</Table>

- ---------

(1) A Discount Factor of 250% will be applied to those assets in a single
    Moody's Real Estate Industry/Property Sector Classification which exceed 30%
    of Moody's Eligible Assets but are not greater than 35% of Moody's Eligible
    Assets.

(2) A Discount Factor of 250% will be applied if dividends on such securities
    have not been paid consistently (either quarterly or annually) over the
    previous three years, or for such shorter time period that such securities
    have been outstanding.

(3) A Discount Factor of 250% will be applied if the market capitalization
    (including common stock and preferred stock) of an issuer is below $500
    million.

    (b) Debt Securities of REITs and Other Real Estate Companies(1):

<Table>
<Caption>
MATURITY
IN YEARS    AAA     AA     A     BAA     BA     B     CAA    NR(2)
- --------    ---     --     -     ---     --     -     ---    -----
<S>         <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>
    1       109%   112%   115%   118%   119%   125%   225%   250%
    2       115%   118%   122%   125%   127%   133%   225%   250%
    3       120%   123%   127%   131%   133%   140%   225%   250%
    4       126%   129%   133%   138%   140%   147%   225%   250%
    5       132%   135%   139%   144%   146%   154%   225%   250%
    7       139%   143%   147%   152%   156%   164%   225%   250%
   10       145%   150%   155%   160%   164%   173%   225%   250%
   15       150%   155%   160%   165%   170%   180%   225%   250%
   20       150%   155%   160%   165%   170%   190%   225%   250%
   30       150%   155%   160%   165%   170%   191%   225%   250%
</Table>

- ---------

(1) The Moody's Discount Factors for debt securities shall also be applied to
    any interest rate swap or cap, in which case the rating of the counterparty
    shall determine the appropriate rating category.

(2) Unrated debt securities are limited to 10% of discounted Eligible Assets. If
    a security is unrated by Moody's but is rated by S&P, a rating two numeric
    ratings below the S&P rating will be used, e.g., where the S&P rating is
    AAA, a Moody's rating of Aa2 will be used; where the S&P rating is AA+, a
    Moody's rating of Aa3 will be used. If a security is unrated by either
    Moody's or S&P, the percentage set forth under 'NR' in this table will be
    used.

                                      B-24




<Page>
    (c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):

<Table>
<Caption>
                                                 U.S. TREASURY SECURITIES   U.S. TREASURY STRIPS
REMAINING TERM TO MATURITY                           DISCOUNT FACTOR          DISCOUNT FACTOR
- --------------------------                           ---------------          ---------------
<S>                                              <C>                        <C>
1 year or less                                             107%                     107%
2 years or less (but longer than 1 year)                   113%                     114%
3 years or less (but longer than 2 year)                   118%                     120%
4 years or less (but longer than 3 year)                   123%                     127%
5 years or less (but longer than 4 year)                   128%                     133%
7 years or less (but longer than 5 year                    135%                     145%
10 years or less (but longer than 7 year)                  141%                     159%
15 years or less (but longer than 10 year)                 146%                     184%
20 years or less (but longer than 15 year)                 154%                     211%
30 years or less (but longer than 20 year)                 154%                     236%
</Table>

    (d) Short-Term Instruments and Cash. The Moody's Discount Factor applied to
Moody's Eligible Assets that are short term money instruments (as defined by
Moody's) will be (i) 100%, so long as such portfolio securities mature or have a
demand feature at par exercisable within 49 days of the relevant valuation date,
(ii) 102%, so long as such portfolio securities mature or have a demand feature
at par not exercisable within 49 days of the relevant valuation date, and
(iii) 125%, if such securities are not rated by Moody's, so long as such
portfolio securities are rated at least A-1+/AA or SP- 1+/AA by S&P and mature
or have a demand feature at par exercisable within 49 days of the relevant
valuation date. A Moody's Discount Factor of 100% will be applied to cash.

        'Moody's Eligible Assets' means the following:

           (a) Common Stock, Preferred Stock and any debt security of REITs and
       Other Real Estate Companies. (i) Common stock of REITs and preferred
       stock and any debt security of REITs and Other Real Estate Companies: (A)
       which comprise at least 7 of the 14 Moody's Real Estate Industry/
       Property Sector Classifications ('Moody's Sector Classifications') listed
       below and of which no more than 35% may constitute a single such
       classification; (B) which in the aggregate constitute at least 40
       separate classes of common stock, preferred stock, and debt securities,
       issued by at least 30 issuers; (C) issued by a single issuer which in the
       aggregate constitute no more than 7.0% of the Market Value of Moody's
       Eligible Assets, and (D) issued by a single issuer which, with respect to
       50% of the Market Value of Moody's Eligible Assets, constitute in the
       aggregate no more than 5% of Market Value of Moody's Eligible Assets; and

           (ii) Unrated debt securities issued by an issuer which: (A) has not
       filed for bankruptcy within the past three years; (B) is current on all
       principal and interest on its fixed income obligations; (C) is current on
       all preferred stock dividends; (D) possesses a current, unqualified
       auditor's report without qualified, explanatory language and (E) in the
       aggregate do not exceed 10% of the discounted Moody's Eligible Assets;

           (b) Interest rate swaps entered into according to International Swap
       Dealers Association ('ISDA') standards if (i) the counterparty to the
       swap transaction has a short-term rating of not less than P-1 or, if the
       counterparty does not have a short-term rating, the counterparty's senior
       unsecured long-term debt rating is Aa3 or higher and

                                      B-25




<Page>
       (ii) the original aggregate notional amount of the interest rate swap
       transaction or transactions is not to be greater than the liquidation
       preference of the Preferred Shares originally issued. The interest rate
       swap transaction will be marked-to-market daily;

           (c) U.S. Treasury Securities and Treasury Strips (as defined by
       Moody's);

           (d) Short-Term Money Market Instruments so long as (A) such
       securities are rated at least P-1, (B) in the case of demand deposits,
       time deposits and overnight funds, the supporting entity is rated at
       least A2, or (C) in all other cases, the supporting entity (1) is rated
       A2 and the security matures within one month, (2) is rated A1 and the
       security matures within three months or (3) is rated at least Aa3 and the
       security matures within six months; provided, however, that for purposes
       of this definition, such instruments (other than commercial paper rated
       by S&P and not rated by Moody's) need not meet any otherwise applicable
       Moody's rating criteria; and

           (e) Cash (including, for this purpose, interest and dividends due on
       assets rated (A) Baa3 or higher by Moody's if the payment date is within
       five Business Days of the Valuation Date, (B) A2 or higher if the payment
       date is within thirty days of the Valuation Date, and (C) A1 or higher if
       the payment date is within 49 days of the relevant valuation date) and
       receivables for Moody's Eligible Assets sold if the receivable is due
       within five Business Days of the Valuation Date, and if the trades which
       generated such receivables are (A) settled through clearing house firms
       with respect to which the Corporation has received prior written
       authorization from Moody's or (B) (1) with counterparties having a
       Moody's long-term debt rating of at least Baa3 or (2) with counterparties
       having a Moody's Short-Term Money Market Instrument rating of at least
       P-1.

        'Moody's Real Estate Industry/ Property Sector Classification' means,
    for the purposes of determining Moody's Eligible Assets, each of the
    following Industry Classifications (as defined by the National Association
    of Real Estate Investment Trusts, 'NAREIT'):

           1. Office

           2. Industrial

           3. Mixed

           4. Shopping Centers

           5. Regional Malls

           6. Free Standing

           7. Apartments

           8. Manufactured Homes

           9. Diversified

           10. Lodging/Resorts

           11. Health Care

           12. Home Financing

           13. Commercial Financing

           14. Self Storage

                                      B-26




<Page>
        The Corporation will use its discretion in determining which NAREIT
    Industry Classification is applicable to a particular investment in
    consultation with the independent auditor and/or Moody's, as necessary.

        '1933 Act' means the Securities Act of 1933, as amended.

        '1940 Act' means the Investment Company Act of 1940, as amended.

        '1940 Act Preferred Shares Asset Coverage' means asset coverage, as
    determined in accordance with Section 18(h) of the 1940 Act, of at least
    200% with respect to all outstanding senior securities of the Corporation
    which are stock, including all Outstanding Preferred Shares (or such other
    asset coverage as may in the future be specified in or under the 1940 Act as
    the minimum asset coverage for senior securities which are stock of a
    closed-end investment company as a condition of declaring dividends on its
    common shares), determined on the basis of values calculated as of a time
    within 48 hours (not including Sundays or holidays) next preceding the time
    of such determination.

        '1940 Act Preferred Shares Asset Coverage Certificate' means the
    certificate required to be delivered by the Corporation pursuant to
    Section 12(e) of these Articles Supplementary.

        'Notice of Redemption' means any notice with respect to the redemption
    of Preferred Shares pursuant to Section 3 of Part I of these Articles
    Supplementary.

        'Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Other Rating Agency' means any rating agency other than S&P or Moody's
    then providing a rating for the Preferred Shares pursuant to the request of
    the Corporation.

        'Other Rating Agency Eligible Assets' means assets of the Corporation
    designated by any Other Rating Agency as eligible for inclusion in
    calculating the discounted value of the Corporation's assets in connection
    with such Other Rating Agency's rating of the Preferred Shares.

        'Other Real Estate Companies' companies which generally derive at least
    50% of their revenue from real estate or has at least 50% of its assets in
    real estate , but not including REITs.

        'Outstanding' means, as of any date, Preferred Shares theretofore issued
    by the Corporation except, without duplication, (i) any Preferred Shares
    theretofore canceled, redeemed or repurchased by the Corporation, or
    delivered to the Auction Agent for cancellation or with respect to which the
    Corporation has given notice of redemption and irrevocably deposited with
    the Paying Agent sufficient funds to redeem such shares and (ii) any
    Preferred Shares represented by any certificate in lieu of which a new
    certificate has been executed and delivered by the Corporation.
    Notwithstanding the foregoing, (A) for purposes of voting rights (including
    the determination of the number of shares required to constitute a quorum),
    any Preferred Shares as to which the Corporation or any Affiliate is the
    Existing Holder will be disregarded and not deemed Outstanding; (B) in
    connection with any Auction, any Preferred Shares as to which the
    Corporation or any person known to the Auction Agent to be an Affiliate is
    the Existing Holder will be disregarded and not deemed Outstanding; and
    (C) for purposes of determining the Preferred Shares Basic Maintenance

                                      B-27




<Page>
    Amount, Preferred Shares held by the Corporation will be disregarded and not
    deemed Outstanding, but shares held by any Affiliate will be deemed
    Outstanding.

        'Paying Agent' means ___________________ unless and until another entity
    appointed by a resolution of the Board of Directors enters into an agreement
    with the Corporation to serve as paying agent, which paying agent may be the
    same as the Auction Agent.

        'Person' or 'Person' means and includes an individual, a partnership,
    the corporation, a trust, a corporation, a limited liability company, an
    unincorporated association, a joint venture or other entity or a government
    or any agency or political subdivision thereof.

        'Potential Beneficial Owner or Holder' has the meaning set forth in
    Section 1 of Part II of these Articles Supplementary.

        'Preferred Shares' has the meaning set forth in paragraph FIRST of
    Part I of these Articles Supplementary.

        'Preferred Shares Basic Maintenance Amount' means as of any Valuation
    Date as the dollar amount equal to the sum of:

           (i)(A) the sum of the products resulting from multiplying the number
       of Outstanding Preferred Shares on such date by the Liquidation
       Preference (and redemption premium, if any) per share; (B) the aggregate
       amount of dividends that will have accumulated at the Applicable Rate
       (whether or not earned or declared) for each Outstanding Preferred Share
       to the 30th day after such Valuation Date; (C) the amount of anticipated
       Corporation non-interest expenses for the 90 days subsequent to such
       Valuation Date; (D) the amount of the current outstanding balances of any
       indebtedness which is senior to the Preferred Shares plus interest
       actually accrued together with 30 days additional interest on the current
       outstanding balances calculated at the current rate; and (E) any other
       current liabilities payable during the 30 days subsequent to such
       Valuation Date, including, without limitation, indebtedness due within
       one year and any redemption premium due with respect to Preferred Shares
       for which a Notice of Redemption has been given, as of such Valuation
       Date, to the extent not reflected in any of (i)(A) through (i)(D): less

           (ii) the sum of any cash plus the value of any of the Corporation's
       assets irrevocably deposited by the Corporation for the payment of any
       (i)(B) through (i)(F) ('value,' for purposes of this clause (ii), means
       the Discounted Value of the security, except that if the security matures
       prior to the relevant redemption payment date and is either fully
       guaranteed by the U.S. Government or is rated at least P-1 by Moody's and
       A-1 by S&P, it will be valued at its face value).

        'Preferred Shares Basic Maintenance Amount Test' means a test which is
    met if the lower of the aggregate Discounted Values of the Moody's Eligible
    Assets or the S&P Eligible Assets meets or exceeds the Preferred Shares
    Basic Maintenance Amount.

        'Preferred Shares Basic Maintenance Certificate' has the meaning set
    forth in Section 12(d) of Part I of these Articles Supplementary.

        'Pricing Service' means any of the following: Bloomberg, Bridge
    Information Services, Data Resources Inc., Interactive Data, International
    Securities Market Association, Merrill

                                      B-28




<Page>
    Lynch Securities Pricing Service, Muller Data Corp., Reuters, Standard &
    Poors/J.J. Kenny, Telerate, Trepp Pricing and Wood Gundy.

        'Rating Agency' means Moody's and S&P as long as such rating agency is
    then rating the Preferred Shares.

        'Redemption Date' has the meaning set forth in Section 2(c)(ii) of
    Part II of these Articles Supplementary.

        'Redemption Default' has the meaning set forth in Section 2(c)(ii) of
    Part I of these Articles Supplementary.

        'Redemption Price' has the meaning set forth in Section 3(a)(i) of
    Part I of these Articles Supplementary.

        'Reference Rate' means, with respect to the determination of the Default
    Rate, the applicable 'AA' Composite Commercial Paper Rate (for a
    Dividend Period of fewer than 184 days) or the applicable Treasury Index
    Rate (for a Dividend Period of 184 days or more).

        'Registrar' means ___________________, unless and until another entity
    appointed by a resolution of the Board of Directors enters into an agreement
    with the Corporation to serve as transfer agent.

        'REIT' or real estate investment trust, means a company dedicated to
    owning, and usually operating, income producing real estate, or to financing
    real estate.

        'S&P' means Standard & Poor's, a division of The McGraw-Hill Companies,
    Inc., or its successors at law.

        'S&P Discount Factor' means, for purposes of determining the Discounted
    Value of any S&P Eligible Asset, the percentage determined as follows. The
    S&P Discount Factor for any S&P Eligible Asset other than the securities set
    forth below will be the percentage provided in writing by S&P:

    (a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:

<Table>
<Caption>
                                                            DIVERSIFICATION STANDARD
                                                      -------------------------------------
                                                      LEVEL 1   LEVEL 2   LEVEL 3   LEVEL 4
                                                      -------   -------   -------   -------
<S>                                                   <C>       <C>       <C>       <C>
MINIMUM NUMBER OF:
Issuers(1)                                               44        40        44        30
Real Estate Industry/Property Sectors(2)                 10         8         7         7

PERCENT OF ASSETS IN:
Largest Real Estate Industry/Property Sector            17%       25%       30%       30%
2nd Largest Real Estate Industry/Property Sector        15%       20%       25%       25%
3rd Largest Real Estate Industry/Property Sector        12%       15%       15%       15%
4th Largest Real Estate Industry/Property Sector        12%       12%       12%       12%

S&P DISCOUNT FACTOR:
common stock                                           190%      208%      223%      231%
preferred stock(3)                                     157%      167%      174%      178%
</Table>

                                                        (footnotes on next page)

                                      B-29




<Page>
(footnotes from previous page)

(1) Three issuers may each constitute 6% of assets and four issuers may each
    constitute 5% of assets.

(2) As defined by NAREIT.

(3) Applies to preferred stock of real estate companies, subject to
    diversification guidelines whereby at least 34% of the preferred assets are
    rated BB (or Moody's equivalent) or greater; at least 33% are rated B (or
    Moody's equivalent) or greater; and the balance of the preferred assets is
    rated B- (or Moody's equivalent) or is unrated. The Discount Factor for
    common stock will apply to preferred stock which is not in compliance with
    the diversification standard.

    (b) Debt Securities:

<Table>
<Caption>
                                                    DIVERSIFICATION STANDARD
                                              -------------------------------------
BOND RATING(1)                                LEVEL 1   LEVEL 2   LEVEL 3   LEVEL 4
- --------------                                -------   -------   -------   -------
<S>                                           <C>       <C>       <C>       <C>
A                                              116%      117%      119%      118%
A -                                            117%      119%      120%      120%
BBB+                                           119%      121%      122%      122%
BBB                                            121%      122%      124%      124%
BBB -                                          122%      124%      126%      126%
BB+                                            127%      130%      133%      132%
BB                                             133%      137%      141%      139%
BB -                                           139%      144%      149%      147%
B+                                             152%      159%      166%      164%
B                                              163%      172%      182%      179%
B -                                            176%      188%      202%      197%
CCC+                                           198%      212%      230%      224%
CCC                                            236%      262%      295%      284%
</Table>

- ---------

(1) The S&P Discount Factors for debt securities shall also be applied to any
    interest rate swap or cap, in which case the rating of the counterparty
    shall determine the appropriate rating category.

(2) If a security is unrated by S&P but is rated by Moody's, the conversion
    chart under S&P OC Test Rating Chart will apply.

    (c) U.S. Treasury Securities, including Treasury interest-only Strips and
Treasury principal-only Strips, as set forth below:

<Table>
<S>                                                           <C>
52-week Treasury Bills*                                       102%
Two-Year Treasury Notes                                       104%
Three-Year Treasury Notes                                     108%
Five-Year Treasury Notes                                      109%
10-Year Treasury Notes                                        115%
30-Year Treasury Bonds                                        126%
</Table>

- ---------

        * Treasury Bills with maturities of less than 52 weeks will be
          discounted at the appropriate Short-Term Money Market Instrument
          levels. Treasury Bills that mature the next day are considered cash
          equivalents and are valued at 100%.

                                      B-30




<Page>
   Treasury Strips: Treasury interest-only Strips will apply the discount factor
   for the Treasury category set forth above following the maturity of the
   Treasury Strip, e.g., a Treasury interest-only Strip with a maturity of seven
   years will apply the discount factor for the U.S. Treasury securities with a
   10-year maturity. Treasury principal-only Strips will apply the discount
   factor that is two categories greater than its maturity, e.g., a Treasury
   principal-only Strip with a maturity of seven years will apply the discount
   factor for U.S. Treasury securities with a 30-year maturity.

    (d) Cash and Cash Equivalents: The S&P Discount Factor applied to Cash and
Cash Equivalents will be (A) 100% and (B) 102% for those portfolio securities
which mature in 181 to 360 calendar days.

        'S&P Eligible Assets' means the following:

           (a) Common Stock, Preferred Stock and any debt securities of REITs
       and Real Estate Companies;

           (b) Interest rate swaps entered into according to International Swap
       Dealers Association ('ISDA') standards if (i) the counterparty to the
       swap transaction has a short-term rating of not less than A-1 or, if the
       counterparty does not have a short-term rating, the counterparty's senior
       unsecured long-term debt rating is AA - or higher and (ii) the original
       aggregate notional amount of the interest rate swap transaction or
       transactions is not to be greater than the liquidation preference of the
       Preferred Shares originally issued. The interest rate swap transaction
       will be marked-to-market daily;

           (c) U.S. Treasury Securities and Treasury Strips (as defined by S&P);

           (d) Short-Term Money Market Instruments so long as (A) such
       securities are issued by an institution, which, at the time of
       investment, is a permitted bank (including commercial paper issued by a
       corporation which complies with the applicable assumptions that follow)
       ('permitted bank' means any bank, domestic or foreign, whose commercial
       paper is rated A-1+) provided, however, that Short-Term Money Market
       Instruments with maturities of 30 days of less, invested in an
       institution rated A-1 may comprise up to 20% of eligible portfolio
       assets; and

           (e) Cash, which is any immediately available funds in U.S. dollars or
       any currency other than U.S. dollars which is a freely convertible
       currency, and Cash Equivalents, which means investments (other than Cash)
       that are one or more of the following obligations or securities:
       (i) U.S. Government Securities; (ii) certificates of deposits of,
       banker's acceptances issued by or money market accounts in any depository
       institution or trust company incorporated under the laws of the United
       States of America or any state thereof and subject to supervision and
       examination by Federal and/ or state banking authorities, so long as the
       deposits offered by such depository institution or trust company at the
       time of such investments are rated and have a rating of at least 'P-1' by
       Moody's and 'A-1+' by S&P (or, in the case of the principal depository
       institution in a holding company system whose deposits are not so rated,
       the long term debt obligations of such holding company are rated and such
       rating is at least 'A-1' by Moody's and 'A+' by S&P); (iii) commercial
       paper issued by any depositary institution or trust company incorporated
       under the laws of the United States of America or any state thereof and
       subject to supervision and examination by Federal and/or state banking
       authorities, or any

                                      B-31




<Page>
       corporation incorporated under the laws of the United States of America
       or any state thereof, so long as the commercial paper of such issuer is
       rated and has at the time of such investment a short term rating of at
       least 'P-1' by Moody's and 'A-1+' by S&P on its commercial paper;
       (iv) securities bearing interest or sold at a discount issued by any
       corporation incorporated under the laws of the United States of America
       or any state thereof the obligations of which at the time of such
       investment are rated and that have a credit rating of at least 'P-1' by
       Moody's and 'A-1+' by S&P either at the time of such investment or the
       making of a contractual commitment providing for such investment;
       (v) shares of any money market fund organized under the laws of a
       jurisdiction other than the United States, so long as such money market
       fund is rated and has at the time of such investment a short-term rating
       of at least 'AAAm' or 'AAAg' by S&P and 'Aaa' by Moody's and ownership of
       such investments will not cause the issuer to become engaged in a trade
       or business within the United States for U.S. Federal income tax purposes
       or subject the issuer to tax on a net income basis; and (vi) unleveraged
       overnight repurchase obligations on customary terms with respect to
       investments described in clauses (i) through (iv) above entered into a
       depository institution, trust company or corporation that has a
       short-term rating of at least 'A-1+' by S&P; provided, that (i) in no
       event shall Cash Equivalents include any obligation that provides for
       payment of interest alone; (ii) Cash Equivalents referred to in clauses
       (ii) and (iii) above shall mature within 183 days of issuance;
       (iii) either Moody's or S&P changes its rating system, then any ratings
       included in this definition shall be deemed to be an equivalent rating in
       a successor rating category of Moody's or S&P, as the case may be; (iv)
       if either Moody's or S&P is not in the business of rating securities,
       then any ratings included in this definition shall be deemed to be an
       equivalent rating from another Rating Agency; (v) Cash Equivalents (other
       than U.S. Government Securities or money market funds maintained by the
       Custodian) shall not include any such investment of more than $100
       million in any single issuer; and (vi) in no event shall Cash Equivalents
       include any obligation that is not denominated in Dollars, any synthetic
       securities, any Securities with ratings containing an 'r' subscript, and
       IOs or any POs (other than commercial paper with a maturity within 183
       days of issuance).

                                      B-32




<Page>
        'S&P OC Test Rating Chart' means the chart set forth below:

<Table>
<Caption>
MOODY'S RATING          MAPPED S&P RATING
- --------------          -----------------
<S>                     <C>
Aaa                         AA+
Aa1                         AA
Aa2                         AA -
Aa3                         A+
A1                          A
A2                          A -
A3                          BBB+
Baa1                        BBB
Baa2                        BBB -
Baa3                        BB+
Ba1                         BB -
Ba2                         B+
Ba3                         B
B1                          B -
B2                          CCC+
B3                          CCC
Caa                         CCC -
NR or below Caa             NR
</Table>

        'S&P Real Estate Industry/Property Sector Classification' means, for the
    purposes of determining S&P Eligible Assets, each of the following Industry
    Classifications (as defined by NAREIT):

           1. Office

           2. Industrial

           3. Mixed

           4. Shopping Centers

           5. Regional Malls

           6. Free Standing

           7. Apartments

           8. Manufactured Homes

           9. Diversified

           10. Lodging/Resorts

           11. Health Care

           12. Home Financing

           13. Commercial Financing

           14. Self Storage

                                      B-33




<Page>
        The Corporation will use its discretion in determining which NAREIT
    Industry Classification is applicable to a particular investment, and, when
    necessary will consult with the independent auditor and/or S&P, as
    necessary.

        'Securities Depository' means The Depository Trust Company and its
    successors and assigns or any successor securities depository selected by
    the Corporation that agrees to follow the procedures required to be followed
    by such securities depository in connection with the Preferred Shares.

        'Sell Order' has the meaning set forth in Section 2(b) of Part II of
    these Articles Supplementary.

        'Short-Term Money Market Instrument' means the following types of
    instruments if, on the date of purchase or other acquisition thereof by the
    Corporation, the remaining term to maturity thereof is not in excess of 180
    days:

           (i) commercial paper rated A-1 if such commercial paper matures in 30
       days or A-1+ if such commercial paper matures in over 30 days;

           (ii) demand or time deposits in, and banker's acceptances and
       certificates of deposit of (A) a depository institution or trust company
       incorporated under the laws of the United States of America or any state
       thereof or the District of Columbia or (B) a United States branch office
       or agency of a foreign depository institution (provided that such branch
       office or agency is subject to banking regulation under the laws of the
       United States, any state thereof or the District of Columbia);

           (iii) overnight funds; and

           (iv) U.S. Government Securities.

        'Special Dividend Period' means a Dividend Period that is not a Standard
    Dividend Period.

        'Specific Redemption Provisions' means, with respect to any Special
    Dividend Period of more than one year, either, or any combination of (i) a
    period (a 'Non-Call Period') determined by the Board of Directors after
    consultation with the Broker-Dealers, during which the shares subject to
    such Special Dividend Period are not subject to redemption at the option of
    the Corporation and (ii) a period (a 'Premium Call Period'), consisting of a
    number of whole years as determined by the Board of Directors after
    consultation with the Broker-Dealers, during each year of which the shares
    subject to such Special Dividend Period will be redeemable at the
    Corporation's option at a price per share equal to the Liquidation
    Preference plus accumulated but unpaid dividends (whether or not earned or
    declared) plus a premium expressed as a percentage or percentages of the
    Liquidation Preference or expressed as a formula using specified variables
    as determined by the Board of Directors after consultation with the
    Broker-Dealers.

        'Standard Dividend Period' means a Dividend Period of [seven]days in the
    case of Series [__] Preferred Shares unless such 7th day is not a Business
    Day, then the number of days ending on the Business Day next preceding such
    7th day, or [28] days in the case of the Series [__] Preferred Shares,
    unless such day is not a Business Day, then the number of days ending on the
    Business Day next preceding such 28th day.

                                      B-34




<Page>
        'Submission Deadline' means 1:00 p.m., New York City time, on any
    Auction Date or such other time on any Auction Date by which Broker-Dealers
    are required to submit Orders to the Auction Agent as specified by the
    Auction Agent from time to time.

        'Transfer Agent' means ___________________, unless and until another
    entity appointed by a resolution of the Board of Directors enters into an
    agreement with the Corporation to serve as Transfer Agent.

        'Treasury Index Rate' means the average yield to maturity for actively
    traded marketable U.S. Treasury fixed interest rate securities having the
    same number of 30-day periods to maturity as the length of the applicable
    Dividend Period, determined, to the extent necessary, by linear
    interpolation based upon the yield for such securities having the next
    shorter and next longer number of 30-day periods to maturity treating all
    Dividend Periods with a length greater than the longest maturity for such
    securities as having a length equal to such longest maturity, in all cases
    based upon data set forth in the most recent weekly statistical release
    published by the Board of Governors of the Federal Reserve System (currently
    in H.15 (519)); provided, however, if the most recent such statistical
    release shall not have been published during the 15 days preceding the date
    of computation, the foregoing computations shall be based upon the average
    of comparable data as quoted to the Corporation by at least three recognized
    dealers in U.S. Government Securities selected by the Corporation.

        'U.S. Government Securities' means direct obligations of the United
    States or by its agencies or instrumentalities that are entitled to the full
    faith and credit of the United States and that, other than United States
    Treasury Bills, provide for the periodic payment of interest and the full
    payment of principal at maturity or call for redemption.

        'Valuation Date' means the last Business Day of each week, or such other
    date as the Corporation and Rating Agencies may agree to for purposes of
    determining the Preferred Shares Basic Maintenance Amount.

        'Voting Period' has the meaning set forth in Section 6(b) of Part I of
    these Articles Supplementary.

        'Winning Bid Rate' has the meaning set forth in Section 4(a)(iii) of
    Part II of these Articles Supplementary.

    18. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.

                          PART II: AUCTION PROCEDURES

    1. Certain Definitions. As used in Part II of these Articles Supplementary,
the following terms shall have the following meanings, unless the context
otherwise requires and all section references below are to Part II of these
Articles Supplementary except as otherwise indicated: Capitalized terms not
defined in Section 1 of Part II of these Articles Supplementary shall have the
respective meanings specified in Part I of these Articles Supplementary.

        'Agent Member' means a member of or participant in the Securities
    Depository that will act on behalf of existing or potential holders of
    Preferred Shares.

                                      B-35




<Page>
        'Available Preferred Shares' has the meaning set forth in
    Section 4(a)(i) of Part II of these Articles Supplementary.

        'Existing Holder' means (a) a person who beneficially owns those
    Preferred Shares listed in that person's name in the records of the Auction
    Agent or (b) the beneficial owner of those Preferred Shares which are listed
    under such person's Broker-Dealer's name in the records of the Auction
    Agent, which Broker-Dealer shall have signed a Master Purchaser's Letter.

        'Hold Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Master Purchaser's Letter' means the letter which is required to be
    executed by each prospective purchaser of Preferred Shares or the
    Broker-Dealer through whom the shares will be held.

        'Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Potential Holder,' means (a) any Existing Holder who may be interested
    in acquiring additional Preferred Shares or (b) any other person who may be
    interested in acquiring Preferred Shares and who has signed a Master
    Purchaser's Letter or whose shares will be listed under such person's
    Broker-Dealer's name on the records of the Auction Agent which Broker-Dealer
    shall have executed a Master Purchaser's Letter.

        'Sell Order' has the meaning set forth in Section 2(b) of Part II of
    these Articles Supplementary.

        'Submitted Bid Order' has the meaning set forth in Section 4(a) of
    Part II of these Articles Supplementary.

        'Submitted Hold Order' has the meaning set forth in Section 4(a) of
    Part II of these Articles Supplementary.

        'Submitted Order' has the meaning set forth in Section 4(a) of Part II
    of these Articles Supplementary.

        'Submitted Sell Order' has the meaning set forth in Section 4(a) of
    Part II of these Articles Supplementary.

        'Sufficient Clearing Orders' means that all Preferred Shares are the
    subject of Submitted Hold Orders or that the number of Preferred Shares that
    are the subject of Submitted Buy Orders by Potential Holders specifying one
    or more rates equal to or less than the Maximum Rate exceeds or equals the
    sum of (A) the number of Preferred Shares that are subject of Submitted
    Hold/Sell Orders by Existing Holders specifying one or more rates higher
    than the Maximum Applicable Rate and (B) the number of Preferred Shares that
    are subject to Submitted Sell Orders.

        'Winning Bid Rate' means the lowest rate specified in the Submitted
    Orders which, if (A) each Submitted Hold/Sell Order from Existing Holders
    specifying such lowest rate and all other Submitted Hold/Sell Orders from
    Existing Holders specifying lower rates were accepted and (B) each Submitted
    Buy Order from Potential Holders specifying such lowest rate and all other
    Submitted Buy Orders from Potential Holders specifying lower rates were
    accepted, would result in the Existing Holders described in clause (A) above
    continuing to hold an

                                      B-36




<Page>
    aggregate number of Preferred Shares which, when added to the number of
    Preferred Shares to be purchased by the Potential Holders described in
    clause (B) above and the number of Preferred Shares subject to Submitted
    Hold Orders, would be equal to the number of Preferred Shares.

    2. Orders.

    (a) On or prior to the Submission Deadline on each Auction Date for shares
of a series of Preferred Shares:

        (i) each Beneficial Owner of shares of such Series may submit to its
    Broker-Dealer by telephone or otherwise information as to:

           (A) the number of Outstanding shares, if any, of such series held by
       such Beneficial Owner which such Beneficial Owner desires to continue to
       hold without regard to the Applicable Rate for shares of such series for
       the next succeeding Dividend Period of such shares;

           (B) the number of Outstanding shares, if any, of such series held by
       such Beneficial Owner which such Beneficial Owner offers to sell if the
       Applicable Rate for shares of such series for the next succeeding
       Dividend Period of shares of such series shall be less than the rate per
       annum specified by such Beneficial Owner; and/or

           (C) the number of Outstanding shares, if any, of such series held by
       such Beneficial Owner which such Beneficial Owner offers to sell without
       regard to the Applicable Rate for shares of such series for the next
       succeeding Dividend Period of shares of such series; and

        (ii) each Broker-Dealer, using lists of Potential Beneficial Owners,
    shall in good faith for the purpose of conducting a competitive Auction in a
    commercially reasonable manner, contact Potential Beneficial Owners (by
    telephone or otherwise), including Persons that are not Beneficial Owners,
    on such lists to determine the number of shares, if any, of such series
    which each such Potential Beneficial Owner offers to purchase if the
    Applicable Rate for shares of such series for the next succeeding Dividend
    Period of shares of such series shall not be less than the rate per annum
    specified by such Potential Beneficial Owner.

        For the purposes hereof, the communication by a Beneficial Owner or
    Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
    Auction Agent, of information referred to in clause (i)(A), (i)(B), (i)(C)
    or (ii) of this paragraph (a) is hereinafter referred to as an 'Order' and
    collectively as 'Orders' and each Beneficial Owner and each Potential
    Beneficial Owner placing an Order with a Broker-Dealer, and such
    Broker-Dealer placing an Order with the Auction Agent, is hereinafter
    referred to as a 'Bidder' and collectively as 'Bidders'; an Order containing
    the information referred to in clause (i)(A) of this paragraph (a) is
    hereinafter referred to as a 'Hold Order' and collectively as 'Hold Orders';
    an Order containing the information referred to in clause (i)(B) or (ii) of
    this paragraph (a) is hereinafter referred to as a 'Bid' and collectively as
    'Bids'; and an Order containing the information referred to in clause (i)(C)
    of this paragraph (a) is hereinafter referred to as a 'Sell Order' and
    collectively as 'Sell Orders.'

    (b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of a
series of Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:

                                      B-37




<Page>
        (A) the number of Outstanding shares of such series specified in such
    Bid if the Applicable Rate for shares of such series determined on such
    Auction Date shall be less than the rate specified therein;

        (B) such number or a lesser number of Outstanding shares of such series
    to be determined as set forth in clause (iv) of paragraph (a) of Section 5
    of this Part II if the Applicable Rate for shares of such series determined
    on such Auction Date shall be equal to the rate specified therein; or

        (C) the number of Outstanding shares of such series specified in such
    Bid if the rate specified therein shall be higher than the Maximum Rate for
    shares of such series, or such number or a lesser number of Outstanding
    shares of such series to be determined as set forth in clause (iii) of
    paragraph (b) of Section 5 of this Part II if the rate specified therein
    shall be higher than the Maximum Rate for shares of such series and
    Sufficient Clearing Bids for shares of such series do not exist.

    (ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares of a
series of Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:

        (A) the number of Outstanding shares of such series specified in such
    Sell Order; or

        (B) such number or a lesser number of Outstanding shares of such series
    as set forth in clause (iii) of paragraph (b) of Section 5 of this Part II
    if Sufficient Clearing Bids for shares of such series do not exist;

provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of Preferred Shares shall not be liable to any Person for
failing to sell such shares pursuant to a Sell Order described in the proviso to
paragraph (c) of Section 3 of this Part II if (1) such shares were transferred
by the Beneficial Owner thereof without compliance by such Beneficial Owner or
its transferee Broker-Dealer (or other transferee person, if permitted by the
Corporation) with the provisions of Section 6 of this Part II or (2) such
Broker-Dealer has informed the Auction Agent pursuant to the terms of its
Broker-Dealer Agreement that, according to such Broker-Dealer's records, such
Broker-Dealer believes it is not the Existing Holder of such shares.

    (iii) A Bid by a Potential Holder of shares of a series of Preferred Shares
subject to an Auction on any Auction Date shall constitute an irrevocable offer
to purchase:

        (A) the number of Outstanding shares of such series specified in such
    Bid if the Applicable Rate for shares of such series determined on such
    Auction Date shall be higher than the rate specified therein; or (B) such
    number or a lesser number of Outstanding shares of such series as set forth
    in clause (v) of paragraph (a) of Section 5 of this Part II if the
    Applicable Rate for shares of such series determined on such Auction Date
    shall be equal to the rate specified therein.

    (c) No Order for any number of Preferred Shares other than whole shares
shall be valid.

    3. Submission of Orders by Broker-Dealers to Auction Agent.

    (a) Each Broker-Dealer shall submit in writing to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders for Preferred Shares of
a series subject to an Auction on such Auction Date obtained by such
Broker-Dealer, designating itself (unless otherwise

                                      B-38




<Page>
permitted by the Corporation) as an Existing Holder in respect of shares subject
to Orders submitted or deemed submitted to it by Beneficial Owners and as a
Potential Holder in respect of shares subject to Orders submitted to it by
Potential Beneficial Owners, and shall specify with respect to each Order for
such shares:

        (i) the name of the Bidder placing such Order (which shall be the
    Broker-Dealer unless otherwise permitted by the Corporation);

        (ii) the aggregate number of shares of such series that are the subject
    of such Order;

        (iii) to the extent that such Bidder is an Existing Holder of shares of
    such series:

           (A) the number of shares, if any, of such series subject to any Hold
       Order of such Existing Holder;

           (B) the number of shares, if any, of such series subject to any Bid
       of such Existing Holder and the rate specified in such Bid; and

           (C) the number of shares, if any, of such series subject to any Sell
       Order of such Existing Holder; and

        (iv) to the extent such Bidder is a Potential Holder of shares of such
    series, the rate and number of shares of such series specified in such
    Potential Holder's Bid.

    (b) If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent shall round such rate up to the
next highest one thousandth (.001) of 1%.

    (c) If an Order or Orders covering all of the Outstanding Preferred Shares
of a series held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to
have been submitted by or on behalf of such Existing Holder covering the number
of Outstanding shares of such series held by such Existing Holder and not
subject to Orders submitted to the Auction Agent; provided, however, that if an
Order or Orders covering all of the Outstanding shares of such series held by
any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline for an Auction relating to a Special Dividend Period
consisting of more than [91] Dividend Period days, the Auction Agent shall deem
a Sell Order to have been submitted by or on behalf of such Existing Holder
covering the number of outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent.

    (d) If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding Preferred
Shares of a series subject to an Auction held by such Existing Holder, such
Orders shall be considered valid in the following order of priority:

        (i) all Hold Orders for shares of such series shall be considered valid,
    but only up to and including in the aggregate the number of Outstanding
    shares of such series held by such Existing Holder, and if the number of
    shares of such series subject to such Hold Orders exceeds the number of
    Outstanding shares of such series held by such Existing Holder, the number
    of shares subject to each such Hold Order shall be reduced pro rata to cover
    the number of Outstanding shares of such series held by such Existing
    Holder;

        (ii) (A) any Bid for shares of such series shall be considered valid up
    to and including the excess of the number of Outstanding shares of such
    series held by such Existing Holder

                                      B-39




<Page>
    over the number of shares of such series subject to any Hold Orders referred
    to in clause (i) above;

        (B) subject to subclause (A), if more than one Bid of an Existing Holder
    for shares of such series is submitted to the Auction Agent with the same
    rate and the number of Outstanding shares of such series subject to such
    Bids is greater than such excess, such Bids shall be considered valid up to
    and including the amount of such excess, and the number of shares of such
    series subject to each Bid with the same rate shall be reduced pro rata to
    cover the number of shares of such series equal to such excess;

        (C) subject to subclauses (A) and (B), if more than one Bid of an
    Existing Holder for shares of such series is submitted to the Auction Agent
    with different rates, such Bids shall be considered valid in the ascending
    order of their respective rates up to and including the amount of such
    excess; and

        (D) in any such event, the number, if any, of such Outstanding shares of
    such series subject to any portion of Bids considered not valid in whole or
    in part under this clause (ii) shall be treated as the subject of a Bid for
    shares of such series by or on behalf of a Potential Holder at the rate
    therein specified; and

        (iii) all Sell Orders for shares of such series shall be considered
    valid up to and including the excess of the number of Outstanding shares of
    such series held by such Existing Holder over the sum of shares of such
    series subject to valid Hold Orders referred to in clause (i) above and
    valid Bids referred to in clause (ii) above.

    (e) If more than one Bid for one or more shares of a series of Preferred
Shares is submitted to the Auction Agent by or on behalf of any Potential
Holder, each such Bid submitted shall be a separate Bid with the rate and number
of shares therein specified.

    (f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.

    4. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.

    (a) Not earlier than the Submission Deadline on each Auction Date for shares
of a series of Preferred Shares, the Auction Agent shall assemble all valid
Orders submitted or deemed submitted to it by the Broker-Dealers in respect of
shares of such series (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a 'Submitted Hold
Order,' a 'Submitted Bid' or a 'Submitted Sell Order,' as the case may be, or as
a 'Submitted Order' and collectively as 'Submitted Hold Orders,' 'Submitted
Bids' or 'Submitted Sell Orders,' as the case may be, or as 'Submitted Orders')
and shall determine for such series:

        (i) the excess of the number of Outstanding shares of such series over
    the number of Outstanding shares of such series subject to Submitted Hold
    Orders (such excess being hereinafter referred to as the 'Available
    Preferred Shares' of such series);

        (ii) from the Submitted Orders for shares of such series whether:

           (A) the number of Outstanding shares of such series subject to
       Submitted Bids of Potential Holders specifying one or more rates equal to
       or lower than the Maximum Rate (for all Dividend Periods) for shares of
       such series; exceeds or is equal to the sum of

                                      B-40




<Page>
           (B) the number of Outstanding shares of such series subject to
       Submitted Bids of Existing Holders specifying one or more rates higher
       than the Maximum Rate (for all Dividend Periods) for shares of such
       series; and

           (C) the number of Outstanding shares of such series subject to
       Submitted Sell Orders (in the event such excess or such equality exists
       (other than because the number of shares of such series in subclauses (B)
       and (C) above is zero because all of the Outstanding shares of such
       series are subject to Submitted Hold Orders), such Submitted Bids in
       subclause (A) above being hereinafter referred to collectively as
       'Sufficient Clearing Bids' for shares of such series); and

        (iii) if Sufficient Clearing Bids for shares of such series exist, the
    lowest rate specified in such Submitted Bids (the 'Winning Bid Rate' for
    shares of such series) which if:

           (A) (I) each such Submitted Bid of Existing Holders specifying such
       lowest rate and (II) all other such Submitted Bids of Existing Holders
       specifying lower rates were rejected, thus entitling such Existing
       Holders to continue to hold the shares of such series that are subject to
       such Submitted Bids; and

           (B) (I) each such Submitted Bid of Potential Holders specifying such
       lowest rate and (II) all other such Submitted Bids of Potential Holders
       specifying lower rates were accepted; would result in such Existing
       Holders described in subclause (A) above continuing to hold an aggregate
       number of Outstanding shares of such series which, when added to the
       number of Outstanding shares of such series to be purchased by such
       Potential Holders described in subclause (B) above, would equal not less
       than the Available Preferred Shares of such series.

    (b) Promptly after the Auction Agent has made the determinations pursuant to
paragraph (a) of this Section 4, the Auction Agent shall advise the Corporation
of the Maximum Rate for shares of the series of Preferred Shares for which an
Auction is being held on the Auction Date and, based on such determination, the
Applicable Rate for shares of such series for the next succeeding Dividend
Period thereof as follows:

        (i) if Sufficient Clearing Bids for shares of such series exist, that
    the Applicable Rate for all shares of such series for the next succeeding
    Dividend Period thereof shall be equal to the Winning Bid Rate for shares of
    such series so determined;

        (ii) if Sufficient Clearing Bids for shares of such series do not exist
    (other than because all of the Outstanding shares of such series are subject
    to Submitted Hold Orders), that the Applicable Rate for all shares of such
    series for the next succeeding Dividend Period thereof shall be equal to the
    Maximum Rate for shares of such series; or

        (iii) if all of the Outstanding shares of such series are subject to
    Submitted Hold Orders, that the Applicable Rate for all shares of such
    series for the next succeeding Dividend Period thereof shall be the All Hold
    Rate.

    5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation. Existing Holders shall continue to hold the Preferred Shares that
are subject to Submitted Hold Orders, and, based on the determinations made
pursuant to paragraph (a) of Section 4 of this Part II, the Submitted Bids and
Submitted Sell Orders shall be accepted or rejected by the Auction Agent and the
Auction Agent shall take such other action as set forth below:

                                      B-41




<Page>
        (a) If Sufficient Clearing Bids for shares of a series of Preferred
    Shares have been made, all Submitted Sell Orders with respect to shares of
    such series shall be accepted and, subject to the provisions of paragraphs
    (d) and (e) of this Section 5, Submitted Bids with respect to shares of such
    series shall be accepted or rejected as follows in the following order of
    priority and all other Submitted Bids with respect to shares of such series
    shall be rejected:

           (i) Existing Holders' Submitted Bids for shares of such series
       specifying any rate that is higher than the Winning Bid Rate for shares
       of such series shall be accepted, thus requiring each such Existing
       Holder to sell the Preferred Shares subject to such Submitted Bids;

           (ii) Existing Holders' Submitted Bids for shares of such series
       specifying any rate that is lower than the Winning Bid Rate for shares of
       such series shall be rejected, thus entitling each such Existing Holder
       to continue to hold the Preferred Shares subject to such Submitted Bids;

           (iii) Potential Holders' Submitted Bids for shares of such series
       specifying any rate that is lower than the Winning Bid Rate for shares of
       such series shall be accepted;

           (iv) each Existing Holder's Submitted Bid for shares of such series
       specifying a rate that is equal to the Winning Bid Rate for shares of
       such series shall be rejected, thus entitling such Existing Holder to
       continue to hold the Preferred Shares subject to such Submitted Bid,
       unless the number of Outstanding Preferred Shares subject to all such
       Submitted Bids shall be greater than the number of Preferred Shares
       ('remaining shares') in the excess of the Available Preferred Shares of
       such series over the number of Preferred Shares subject to Submitted Bids
       described in clauses (ii) and (iii) of this paragraph (a), in which event
       such Submitted Bid of such Existing Holder shall be rejected in part, and
       such Existing Holder shall be entitled to continue to hold Preferred
       Shares subject to such Submitted Bid, but only in an amount equal to the
       Preferred Shares of such series obtained by multiplying the number of
       remaining shares by a fraction, the numerator of which shall be the
       number of Outstanding Preferred Shares held by such Existing Holder
       subject to such Submitted Bid and the denominator of which shall be the
       aggregate number of Outstanding Preferred Shares subject to such
       Submitted Bids made by all such Existing Holders that specified a rate
       equal to the Winning Bid Rate for shares of such series; and

           (v) each Potential Holder's Submitted Bid for shares of such series
       specifying a rate that is equal to the Winning Bid Rate for shares of
       such series shall be accepted but only in an amount equal to the number
       of shares of such series obtained by multiplying the number of shares in
       the excess of the Available Preferred Shares of such series over the
       number of Preferred Shares subject to Submitted Bids described in clauses
       (ii) through (iv) of this paragraph (a) by a fraction, the numerator of
       which shall be the number of Outstanding Preferred Shares subject to such
       Submitted Bid and the denominator of which shall be the aggregate number
       of Outstanding Preferred Shares subject to such Submitted Bids made by
       all such Potential Holders that specified a rate equal to the Winning Bid
       Rate for shares of such series.

        (b) If Sufficient Clearing Bids for shares of a series of Preferred
    Shares have not been made (other than because all of the Outstanding shares
    of such series are subject to Submitted Hold Orders), subject to the
    provisions of paragraph (d) of this Section 5,

                                      B-42




<Page>
    Submitted Orders for shares of such series shall be accepted or rejected as
    follows in the following order of priority and all other Submitted Bids for
    shares of such series shall be rejected:

           (i) Existing Holders' Submitted Bids for shares of such series
       specifying any rate that is equal to or lower than the Maximum Rate for
       shares of such series shall be rejected, thus entitling such Existing
       Holders to continue to hold the Preferred Shares subject to such
       Submitted Bids;

           (ii) Potential Holders' Submitted Bids for shares of such series
       specifying any rate that is equal to or lower than the Maximum Rate for
       shares of such series shall be accepted; and

           (iii) Each Existing Holder's Submitted Bid for shares of such series
       specifying any rate that is higher than the Maximum Rate for shares of
       such series and the Submitted Sell Orders for shares of such series of
       each Existing Holder shall be accepted, thus entitling each Existing
       Holder that submitted or on whose behalf was submitted any such Submitted
       Bid or Submitted Sell Order to sell the shares of such series subject to
       such Submitted Bid or Submitted Sell Order, but in both cases only in an
       amount equal to the number of shares of such series obtained by
       multiplying the number of shares of such series subject to Submitted Bids
       described in clause (ii) of this paragraph (b) by a fraction, the
       numerator of which shall be the number of Outstanding shares of such
       series held by such Existing Holder subject to such Submitted Bid or
       Submitted Sell Order and the denominator of which shall be the aggregate
       number of Outstanding shares of such series subject to all such Submitted
       Bids and Submitted Sell Orders.

        (c) If all of the Outstanding shares of a series of Preferred Shares are
    subject to Submitted Hold Orders, all Submitted Bids for shares of such
    series shall be rejected.

        (d) If, as a result of the procedures described in clause (iv) or (v) of
    paragraph (a) or clause (iii) of paragraph (b) of this Section 5, any
    Existing Holder would be entitled or required to sell, or any Potential
    Holder would be entitled or required to purchase, a fraction of a share of a
    series of Preferred Shares on any Auction Date, the Auction Agent shall, in
    such manner as it shall determine in its sole discretion, round up or down
    the number of Preferred Shares of such series to be purchased or sold by any
    Existing Holder or Potential Holder on such Auction Date as a result of such
    procedures so that the number of shares so purchased or sold by each
    Existing Holder or Potential Holder on such Auction Date shall be whole
    shares of a series of Preferred Shares.

        (e) If, as a result of the procedures described in clause (v) of
    paragraph (a) of this Section 5 any Potential Holder would be entitled or
    required to purchase less than a whole share of a series of Preferred Shares
    on any Auction Date, the Auction Agent shall, in such manner as it shall
    determine in its sole discretion, allocate Preferred Shares of such series
    for purchase among Potential Holders so that only whole Preferred Shares of
    such series are purchased on such Auction Date as a result of such
    procedures by any Potential Holder, even if such allocation results in one
    or more Potential Holders not purchasing Preferred Shares of such series on
    such Auction Date.

        (f) Based on the results of each Auction for shares of a series of
    Preferred Shares, the Auction Agent shall determine the aggregate number of
    shares of such series to be purchased

                                      B-43




<Page>
    and the aggregate number of shares of such series to be sold by Potential
    Holders and Existing Holders and, with respect to each Potential Holder and
    Existing Holder, to the extent that such aggregate number of shares to be
    purchased and such aggregate number of shares to be sold differ, determine
    to which other Potential Holder(s) or Existing Holder(s) they shall deliver,
    or from which other Potential Holder(s) or Existing Holder(s) they shall
    receive, as the case may be, Preferred Shares of such series.
    Notwithstanding any provision of the Auction Procedures or the Settlement
    Procedures to the contrary, in the event an Existing Holder or Beneficial
    Owner of shares of a series of Preferred Shares with respect to whom a
    Broker-Dealer submitted a Bid to the Auction Agent for such shares that was
    accepted in whole or in part, or submitted or is deemed to have submitted a
    Sell Order for such shares that was accepted in whole or in part, fails to
    instruct its Agent Member to deliver such shares against payment therefor,
    partial deliveries of Preferred Shares that have been made in respect of
    Potential Holders' or Potential Beneficial Owners' Submitted Bids for shares
    of such series that have been accepted in whole or in part shall constitute
    good delivery to such Potential Holders and Potential Beneficial Owners.

        (g) Neither the Corporation nor the Auction Agent nor any affiliate of
    either shall have any responsibility or liability with respect to the
    failure of an Existing Holder, a Potential Holder, a Beneficial Owner, a
    Potential Beneficial Owner or its respective Agent Member to deliver
    Preferred Shares of any series or to pay for Preferred Shares of any series
    sold or purchased pursuant to the Auction Procedures or otherwise.

    6. Transfer of Preferred Shares. Unless otherwise permitted by the
Corporation, a Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of Preferred Shares only in whole shares and only pursuant to
a Bid or Sell Order placed with the Auction Agent in accordance with the
procedures described in this Part II or to a Broker-Dealer; provided, however,
that (a) a sale, transfer or other disposition of Preferred Shares from a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
as the holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
for purposes of this Section 6 if such Broker-Dealer remains the Existing Holder
of the shares so sold, transferred or disposed of immediately after such sale,
transfer or disposition and (b) in the case of all transfers other than pursuant
to Auctions, the Broker-Dealer (or other Person, if permitted by the
Corporation) to whom such transfer is made shall advise the Auction Agent of
such transfer.

                           [Remainder of page left blank]

                                      B-44




<Page>
    IN WITNESS WHEREOF, COHEN & STEERS QUALITY INCOME REALTY FUND, INC. has
caused these presents to be signed in its name and on its behalf by its
President and witnessed by its Secretary on this __ day of __________, 2002.

WITNESS:

By:  .....................................
Name: Robert H. Steers
Title: Secretary

                                          COHEN & STEERS QUALITY
                                          INCOME REALTY FUND, INC.

                                         By:...................................
                                            Name: Martin Cohen
                                            Title: President

    THE UNDERSIGNED, President of the COHEN & STEERS QUALITY INCOME REALTY FUND,
INC., who executed on behalf of the Corporation the foregoing Articles
Supplementary hereby acknowledges the foregoing Articles Supplementary to be the
corporate act of the Corporation and hereby certifies to the best of his
knowledge, information, and belief that the matters and facts set forth herein
with respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.

                                          .....................................
                                          Name: Martin Cohen
                                          Title: President

                                      B-45






<PAGE>

                                     PART C

                               OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(1) Financial Statements:

    Part A -- None

     -- Statement of Assets and Liabilities,                 , 2002 (audited)

    Part B -- Statement of Operations,                 , 2002 (audited)

          -- Statement of Assets and Liabilities,                 , 2002
         (unaudited)

          -- Statement of Operations,                 , 2002 (unaudited)

          -- Statement of Changes in Net Assets,                 , 2002
         (unaudited)

          -- Report of Independent Accountants*

         All other financial statements, schedules and historical financial
         information are omitted because the conditions requiring their filing
         do not exist.

(2) Exhibits:

<Table>
<S>  <C>
(a)  -- Articles of Incorporation.'D'
        Articles of Amendment'D'D'
(b)  -- By-Laws. Incorporated by reference to the Registration
        Statement.'D'
(c)  -- Not applicable.
(d)  -- (i) Form of Articles Supplementary Creating Preferred
        Shares.*
     -- (ii) Specimen Certificate for Preferred Shares.*
(e)  -- Dividend Reinvestment Plan.'D'D'
(f)  -- Not applicable.
(g)  -- Investment Management Agreement.'D'D'
(h)  -- Form of Purchase Agreement.*
(i)  -- Not applicable.
(j)  -- Form of Master Custodian Agreement.'D'D'
(k)  -- (i) Form of Transfer Agency, Registrar and Dividend
        Disbursing Agreement.'D'D'
     -- (ii) Form of Administration Agreement between the Fund
        and the Investment Manager.'D'D'
     -- (iii) Form of Administration Agreement between the Fund
        and State Street Bank and Trust Company.'D'D'
     -- (iv) Form of Auction Agency Agreement between the Fund
        and _______________________.*
     -- (v) Form of Broker-Dealer Agreement.*
(l)  -- (i) Opinion and Consent of Simpson Thacher & Bartlett.*
     -- (ii) Opinion and Consent of Venable, Baetjer and Howard,
        LLP.*
(m)  -- Not applicable.
(n)  -- Consent of Independent Auditors.*
(o)  -- Not applicable.
(p)  -- Not applicable.
(q)  -- Not applicable.
(r)  -- (i) Code of Ethics of the Fund.'D'D'
     -- (ii) Code of Ethics of Investment Manager.'D'D'
</Table>

                                      C-1





<PAGE>

<Table>
<S>  <C>
(s)  -- Power of Attorney.'D'D'
</Table>

- ---------

 *    To be filed by Amendment.

 'D'  Incorporated by reference to the Fund's Registration Statement on
      Form N-2, (File Nos. 333-68150 and 811-10481) filed on August 22, 2001.

'D'D' Incorporated by reference to Amendment No. 1 to the Fund's Registration
      Statement, filed January 23, 2002.

ITEM 25. MARKETING ARRANGEMENTS

    See Exhibit 2(h).

ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

    The approximate expenses in connection with the Offering, all of which are
being borne by the Registrant, are as follows:

<Table>
<S>                                                           <C>
SEC Registration Fees.......................................  $
Rating Agency Fees..........................................  $
Printing and Engraving Expenses.............................  $
Accounting Fees and Expenses................................  $
Legal Fees and Expenses.....................................  $
Miscellaneous...............................................  $
                                                              -------
    Total...................................................  $
                                                              -------
                                                              -------
</Table>

ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL

    None.

ITEM 28. NUMBER OF HOLDERS OF SECURITIES

    Set forth below is the number of record holders as of                 , 2002
of each class of securities of the Registrant:

<Table>
<Caption>
                                                                NUMBER OF
                       TITLE OF CLASS                         RECORD HOLDERS
                       --------------                         --------------
<S>                                                           <C>
Common Shares, par value $.01 per share.
Series __ Preferred Shares, par value $.001 per share.........       -0-
Series __ Preferred Shares, par value $.001 per share.........       -0-
</Table>

ITEM 29. INDEMNIFICATION

    It is the Registrant's policy to indemnify its directors, officers,
employees and other agents to the maximum extent permitted by Section 2-418 of
the General Corporation Law of the State of Maryland as set forth in Article
NINTH of Registrant's Charter (the 'Charter'), and Article VIII, of the
Registrant's By-Laws. The liability of the Registrant's directors and officers
is dealt with in Article NINTH of Registrant's Charter. The liability of Cohen &
Steers Capital Management, Inc., the Registrant's investment manager (the
'Investment Manager'), for any loss suffered by the Registrant or its
shareholders is set forth in Section 5 of the Investment Management Agreement.

    Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Securities Act'), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described in this Item 29, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the

                                      C-2





<PAGE>
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER

    The description of the Investment Manager under the caption 'Management of
the Fund' in the Prospectus and in the Statement of Additional Information,
respectively, constituting Parts A and B, respectively, of this Registration
Statement are incorporated by reference herein.

    The following is a list of the Directors and Officers of the Investment
Manager. None of the persons listed below has had other business connections of
a substantial nature during the past two fiscal years.

<Table>
<Caption>
                      NAME                                               TITLE
                      ----                                               -----
<S>                                               <C>
Robert H. Steers................................  Chairman, Director
Martin Cohen....................................  President, Director
Joseph M. Harvey................................  Senior Vice President and Director of Research
James S. Corl...................................  Senior Vice President and Director of Investment
                                                    Strategy
John J. McCombe.................................  Senior Vice President
Adam M. Derechin................................  Senior Vice President
Lawrence B. Stoller.............................  Senior Vice President and General Counsel
Michael J. Kozoriz..............................  Vice President
Greg E. Brooks..................................  Vice President
Jay J. Chen.....................................  Vice President
Terrance R. Ober................................  Vice President
Victor M. Gomez.................................  Vice President -- Finance and Treasurer
</Table>

    Cohen & Steers Capital Management, Inc. acts as Investment Manager of, in
addition to the Registrant, the following registered investment companies:

    Cohen & Steers Advantage Income Realty Fund, Inc.

    Cohen & Steers Institutional Realty Shares, Inc.

    Cohen & Steers Equity Income Fund, Inc.

    Cohen & Steers Realty Shares, Inc.

    Cohen & Steers Total Return Realty Fund, Inc.

    Cohen & Steers Special Equity Fund, Inc.

    Frank Russell Investment Management Company -- Real Estate Securities Fund

    Russell Insurance Funds -- Real Estate Securities Fund

    American Skandia Trust -- AST Cohen & Steers Realty Portfolio

    Manufacturers Investment Trust -- Real Estate Securities Portfolio

ITEM 31. LOCATION OF ACCOUNTS AND RECORDS

    The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940, as amended
and the Rules thereunder will be maintained as follows: journals, ledgers,
securities records and other original records will be maintained principally at
the offices of the Registrant's Administrator and Custodian, State Street Bank
and Trust Company. All other records so required to be maintained will be
maintained at the offices of Cohen & Steers Capital Management, Inc., 757 Third
Avenue, New York, New York 10017.

                                      C-3





<PAGE>
ITEM 32. MANAGEMENT SERVICES

    Not applicable.

ITEM 33. UNDERTAKINGS

    (1) The Registrant undertakes to suspend the offering of Preferred Shares
until the prospectus is amended if (1) subsequent to the effective date of this
Registration Statement, the net asset value declines more than ten percent from
its net asset value as of the effective date of this Registration Statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.

    (2) Not applicable.

    (3) Not applicable.

    (4) Not applicable.

    (5) The Registrant undertakes that:

        a. for the purpose of determining any liability under the Securities
           Act, the information omitted from the form of prospectus filed as
           part of this Registration Statement in reliance upon Rule 430A and
           contained in the form of prospectus filed by the Registrant pursuant
           to 497(h) under the 1933 Act shall be deemed to be part of the
           Registration Statement as of the time it was declared effective; and

        b. for the purpose of determining any liability under the Securities
           Act, each post-effective amendment that contains a form of prospectus
           shall be deemed to be a new registration statement relating to the
           securities offered therein, and the offering of such securities at
           that time shall be deemed to be the initial bona fide offering
           thereof.

    (6) The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of an oral or written request, its Statement of Additional Information.

                                      C-4










<PAGE>
                                   SIGNATURES

    Pursuant to requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of New York and the State of New York, on the 8th day of February 2002.

                                          COHEN & STEERS QUALITY INCOME
                                          REALTY FUND, INC.

                                          By:          /s/ MARTIN COHEN
                                              ..................................
                                                        MARTIN COHEN
                                               PRESIDENT, TREASURER (PRINCIPAL
                                                        FINANCIAL
                                                 AND ACCOUNTING OFFICER) AND
                                                         DIRECTOR

    Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<Table>
<Caption>
               SIGNATURE                                    TITLE                        DATE
               ---------                                    -----                        ----
<S>                                         <C>                                   <C>

                    *                       Chairman of the Board (principal       February 8, 2002
 .........................................    executive officer), Secretary and
            (ROBERT H. STEERS)                Director

                    *                       Director                               February 8, 2002
 .........................................
            (GREGORY C. CLARK)

                    *                       Director                               February 8, 2002
 .........................................
              (BONNIE COHEN)

                                            Director                               February 8, 2002
 .........................................
              (MARTIN COHEN)

                    *                       Director                               February 8, 2002
 .........................................
            (GEORGE GROSSMAN)

                    *                       Director                               February 8, 2002
 .........................................
           (RICHARD J. NORMAN)

                    *                       Director                               February 8, 2002
 .........................................
          (WILLARD H. SMITH JR.)

        *By      /s/ MARTIN COHEN
 .........................................
              MARTIN COHEN,
            ATTORNEY-IN-FACT**
</Table>

** Powers of Attorney were previously filed.

                                      C-5


                          STATEMENT OF DIFFERENCES
                          ------------------------
The dagger symbol shall be expressed as................................. 'D'
Characters normally expressed as superscript shall be preceded by....... 'pp'






</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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