<DOCUMENT>
<TYPE>N-2
<SEQUENCE>1
<FILENAME>a35431.txt
<DESCRIPTION>COHEN & STEERS REIT AND PREFERRED INCOME FUND
<TEXT>

<Page>

     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 2003

                                               SECURITIES ACT FILE NO. 333-
                                       INVESTMENT COMPANY ACT FILE NO. 811-21326
________________________________________________________________________________

                       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

[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x] AMENDMENT NO. 3
                              -------------------

                                 COHEN & STEERS
                      REIT AND PREFERRED INCOME 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 LLP
                              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. [ ]

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

        CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

<Table>
<Caption>
                                                         PROPOSED         PROPOSED
                                                         MAXIMUM           MAXIMUM
         TITLE OF SECURITIES            AMOUNT BEING  OFFERING PRICE      AGGREGATE      AMOUNT OF REGISTRATION
           BEING REGISTERED              REGISTERED    PER UNIT(1)    OFFERING PRICE(1)          FEE(1)
<S>                                     <C>           <C>             <C>                <C>
Series [ ] Preferred Shares, par
  value $0.001........................       20          $25,000          $500,000               $40.45
Series [ ] Preferred Shares, par
  value $0.001........................       20          $25,000          $500,000               $40.45
</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 REIT AND PREFERRED INCOME 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 Information................................  Report of Independent Accountants;
                                                                      Financial Information

                                     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 JUNE 20, 2003

PROSPECTUS


                                                  COHEN & STEERS
                              $                   REIT AND PREFERRED INCOME FUND
                                 COHEN & STEERS
                      REIT AND PREFERRED INCOME FUND, INC.
                         AUCTION RATE PREFERRED SHARES
                                    SHARES, SERIES
                                    SHARES, SERIES
                    LIQUIDATION PREFERENCE $25,000 PER SHARE

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

   Cohen & Steers REIT and Preferred Income Fund, Inc. (the 'Fund') is
simultaneously offering    Series    auction rate preferred shares and
     Series    auction rate preferred shares. The shares are referred to in this
prospectus as 'Preferred Shares.' The Fund is a recently organized,
non-diversified, closed-end management investment company. Our primary
investment objective is high current income and our secondary investment
objective is capital appreciation.

                                                   (continued on following page)

   INVESTING IN THE PREFERRED SHARES INVOLVES CERTAIN RISKS. SEE 'RISK FACTORS'
BEGINNING ON PAGE [32] OF THIS PROSPECTUS. THE MINIMUM PURCHASE AMOUNT OF THE
PREFERRED SHARES IS $25,000.

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

<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 Preferred Shares will be ready for delivery in book-entry form
only through the facilities of The Depository Trust Company, on or about
         , 2003.

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


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

                The date of this prospectus is          , 2003.



<Page>

    Under normal market conditions, the Fund will invest:

     at least 40%, but no more than 60%, of its total assets in common stocks
     issued by real estate companies, such as real estate investment trusts or
     'REITs';

     at least 40%, but no more than 60%, of its total assets in preferred
     securities of which up to 5% may be preferred securities of REITs;

     up to 20% of its total assets in debt securities other than preferred
     securities;

     up to 10% of its total assets in preferred or other debt securities that at
     the time of the investment are rated below investment grade or that are
     unrated but judged to be of comparable quality by the Fund's Investment
     Manager;

     a significant portion, but less than 25%, of its total assets in the
     securities of companies principally engaged in the financial services
     industry; this policy of investing in the financial services industry and
     the Fund's concentration of its investments in the real estate industry
     make the Fund more susceptible to adverse economic or regulatory
     occurrences affecting these sectors; and

     up to 20% of its total assets in U.S. dollar-denominated securities of
     foreign issuers traded or listed on a U.S. securities exchange or in the
     U.S. over-the-counter market.

    With respect to the preferred securities component of the portfolio, the
Fund expects that it will invest primarily in taxable preferred securities.

    Initially, the Fund will allocate approximately 50% of the Fund's total
assets to common stocks issued by REITs, approximately 40% to preferred
securities and approximately 10% to debt securities other than preferred
securities. Thereafter, the portion of the Fund's total assets invested in
common stock issued by real estate companies, including REITs, preferred
securities and other debt securities will vary from time to time, consistent
with the Fund's investment objectives and policies. At any time, under normal
circumstances at least 80% of the Fund's total assets will be invested in common
stocks issued by REITs and preferred securities. 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.

    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. The Preferred Shares have a liquidation preference of $25,000
per share, plus any accumulated, unpaid dividends. The 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           , 2003 for Series  and           ,
2003 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. Prospective purchasers should note: (1) a buy
order (called a 'bid order') or sell order is a commitment to buy or sell
Preferred Shares based on the results of an auction; and (2) purchases and sales
will be settled on the next business day after the auction. 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.'



<Page>

    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 'RNP.' 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........................................   20
The Fund....................................................   21
Use of Proceeds.............................................   21
Capitalization..............................................   22
Investment Objectives and Policies..........................   23
Risk Factors................................................   32
How the Fund Manages Risk...................................   43
Management of the Fund......................................   44
Description of Preferred Shares.............................   46
The Auction.................................................   54
Description of Common Shares................................   58
Certain Provisions of the Charter and By-Laws...............   58
Conversion to Open-End Fund.................................   60
U.S. Federal Taxation.......................................   60
Underwriting................................................   64
Custodian, Auction Agent, Transfer Agent, Dividend Paying
  Agent and Registrar.......................................   65
Legal Opinions..............................................   65
Independent Auditors........................................   65
Further Information.........................................   65
Table of Contents for the Statement of Additional
  Information...............................................   66
</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           , 2003 (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   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             , 2003 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 REIT and Preferred Income Fund,
                                               Inc. (the 'Fund') is a recently organized,
                                               non-diversified, closed-end management investment
                                               company. The Fund was organized as a Maryland
                                               corporation on March 25, 2003 and is registered
                                               under the Investment Company Act of 1940, as amended
                                               (the '1940 Act'). The Fund commenced investment
                                               operations on June   , 2003 upon the closing of an
                                               initial public offering of          common shares,
                                               par value $0.001 per share ('Common Shares'). As of
                                                        , 2003, 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, 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 7 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 ('DTC') 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.

                                               An investor may consider whether to invest in a
                                               particular series based on the series' rate of
                                               return, the investor's time horizon for investment,
                                               and the investor's liquidity preference. Investors
                                               can choose between two tranches. The
                                               Series    Preferred Shares have a seven-day dividend
                                               period. The Series    Preferred Shares have a 28-day
                                               dividend period. The Series    Preferred Shares, or
                                               28-day tranche, may be suited for investors with a
                                               longer investment time horizon. [Each seven-day
                                               tranche has approximately the same rate of return
                                               (except to the extent short-term rates may vary from
                                               day-to-day) but varies with respect to the day of the
                                               week the auction is conducted. Moreover, an investor
                                               may choose a particular seven-day tranche based on
                                               their liquidity needs at a particular time of the
                                               week.]

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'). These ratings are an assessment of the
                                               capacity and willingness of an issuer to pay
                                               preferred stock obligations. The ratings are not a
                                               recommendation to purchase, hold or sell those shares
                                               inasmuch as the rating does not comment as to market
                                               price or suitability for a particular investor. The
                                               ratings described above also do not address the
                                               likelihood that an owner of Preferred Shares will be
                                               able to sell such shares in an auction or otherwise.
                                               The ratings are based on current information
                                               furnished to Moody's and S&P by the Fund and the
                                               Investment Manager and information obtained from
                                               other sources. The ratings may be changed, suspended
                                               or withdrawn in the rating agencies' discretion as a
                                               result of changes in,
</Table>

                                       5



<Page>

<Table>
<S>                                            <C>
                                               or the unavailability of, such information. See
                                               'Description of Preferred Shares--Rating Agency
                                               Guidelines.'

USE OF PROCEEDS..............................  The net proceeds of Preferred Shares, together with
                                               the proceeds from our initial public offering, will
                                               be invested in accordance with the policies set forth
                                               under 'Investment Objectives and Policies.' We
                                               estimate that the net proceeds of both offerings will
                                               be fully invested in accordance with our investment
                                               objectives and policies within four months of the
                                               completion of this offering. We intend to invest in
                                               income producing common stocks issued by real estate
                                               companies, such as REITs, and preferred and other
                                               debt securities. Pending such investment, those
                                               proceeds may be invested in U.S. Government
                                               securities or high quality, short-term money market
                                               instruments.

INVESTMENT OBJECTIVES AND POLICIES...........  Our primary investment objective is high current
                                               income. Capital appreciation is our secondary
                                               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, the Fund seeks to
                                               achieve its objectives through a portfolio of income
                                               producing common stock issued by REITs and preferred
                                               and other debt securities. Initially, the Fund will
                                               allocate approximately 50% of the Fund's total assets
                                               to common stocks issued by REITs, approximately 40%
                                               to preferred securities and approximately 10% to debt
                                               securities other than preferred securities.
                                               Thereafter, the portion of the Fund's total assets
                                               invested in common stock issued by real estate
                                               companies, including REITs, preferred securities and
                                               other debt securities will vary from time to time,
                                               consistent with the Fund's investment objectives,
                                               although the Fund will normally invest at least 40%
                                               of its total assets in common stock issued by real
                                               estate companies, including REITs and at least 40% of
                                               its total assets in preferred securities. At any
                                               time, under normal circumstances at least 80% of the
                                               Fund's total assets will be invested in common stocks
                                               issued by REITs and preferred securities.
</Table>

                                       6



<Page>

<Table>
<S>                                            <C>
                                               Investment Strategies. In making investment decisions
                                               with respect to common stocks and other equity
                                               securities issued by real estate companies, including
                                               REITs, 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, and economic and market
                                               conditions. The Investment Manager evaluates a number
                                               of factors, including growth potential, earnings
                                               estimates and the quality of management.

                                               In making investment decisions with respect to
                                               preferred securities and debt securities, the
                                               Investment Manager seeks to select what it believes
                                               are superior securities (i.e., securities the
                                               Investment Manager views as undervalued on the basis
                                               of risk and return profiles). In making these
                                               determinations, the Investment Manager evaluates the
                                               fundamental characteristics of an issuer, including
                                               an issuer's creditworthiness, and also takes into
                                               account prevailing market factors. In analyzing
                                               credit quality, the Investment Manager considers not
                                               only fundamental analysis, but also an issuer's
                                               corporate and capital structure and the placement of
                                               the preferred or debt securities within that
                                               structure. The Investment Manager also takes into
                                               account other factors, such as call and other
                                               structural features, momentum and other exogenous
                                               signals (i.e., the likely directions of ratings) and
                                               relative value versus other income security classes.

                                               Common Stocks Issued by REITs. Under normal market
                                               conditions, at least 40%, but no more than 60%, of
                                               the Fund's total assets will be invested in common
                                               stocks issued by real estate companies, consisting
                                               primarily of REITs. Substantially all of the common
                                               stocks issued by REITs in which the Fund intends to
                                               invest are traded on a national securities exchange
                                               or in the over-the-counter market. A real estate
                                               company derives at least 50% of its revenue from real
                                               estate or has at least 50% of its assets in real
                                               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 taxable income (other than net capital
                                               gains) and
</Table>

                                       7



<Page>

<Table>
<S>                                            <C>
                                               otherwise comply with the requirements of the
                                               Internal Revenue Code of 1986, as amended (the
                                               'Code'). As a result, REITs generally pay relatively
                                               higher 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. It is the Fund's current intention to
                                               invest approximately 50% of its total assets in
                                               common stocks of real estate companies, consisting
                                               primarily of REITs, although the actual percentage in
                                               its portfolio may change.

                                               Preferred Securities. Under normal market conditions,
                                               at least 40%, but no more than 60%, of the Fund's
                                               total assets will be invested in preferred
                                               securities. Preferred securities pay fixed or
                                               floating dividends to investors and have '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 dividends on its common stock. Preferred
                                               stockholders usually have no right to vote for
                                               corporate directors or on other matters. The Fund
                                               expects that, under current market conditions, it
                                               will invest primarily in taxable preferred
                                               securities. The taxable preferred securities in which
                                               the Fund intends to invest do not qualify for the
                                               dividends received deduction (the 'DRD') under
                                               Section 243 of the Code and are not expected to
                                               provide significant benefits under the rules relating
                                               to 'qualified dividend income.' The DRD generally
                                               allows corporations to deduct from their income 70%
                                               of dividends received. Pursuant to recently enacted
                                               legislation, individuals will generally be taxed at
                                               long-term capital gain rates on qualified dividend
                                               income. Accordingly, any corporate shareholder who
                                               otherwise would qualify for the DRD, and any
                                               individual shareholder who otherwise would qualify to
                                               be taxed at long-term capital gain rates on qualified
                                               dividend income, should assume that none of the
                                               distributions it receives from the Fund will qualify
                                               for the DRD or provide significant benefits under the
                                               rules relating to qualified dividend income. The Fund
                                               may also invest up to 5% of its total assets in
                                               preferred securities issued by REITs. Under current
                                               market conditions, the Fund's investments in
                                               preferred securities are expected to consist
                                               primarily of fixed rate preferred securities. When
</Table>

                                       8



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<S>                                            <C>
                                               used in this prospectus, taxable preferred securities
                                               refer generally to hybrid-preferred securities as
                                               well as certain types of traditional preferred
                                               securities that are not eligible for the DRD (and are
                                               not expected to provide significant benefits under
                                               the rules relating to qualified dividend income),
                                               such as REIT preferred securities.

                                               The Fund also may invest up to 10% of its total
                                               assets in preferred or other debt securities that at
                                               the time of investment are rated below investment
                                               grade (Ba/BB or B) by Moody's Investors Service, Inc.
                                               ('Moody's'), Standard & Poor's Ratings Group, a
                                               division of The McGraw-Hill Companies, Inc. ('S&P')
                                               or Fitch Ratings ('Fitch') or that are unrated but
                                               judged to be of comparable quality by the Fund's
                                               Investment Manager. A security will not be considered
                                               to be below investment grade quality if it is rated
                                               within the four highest grades (Baa or BBB or better)
                                               by Moody's, S&P or Fitch, or is unrated but judged to
                                               be of comparable quality by the Fund's Investment
                                               Manager. These below investment grade quality
                                               securities are commonly referred to as 'junk bonds'
                                               and are regarded as having predominantly speculative
                                               characteristics with respect to the payment of
                                               interest and repayment of principal.

                                               While the Fund does not currently intend to invest in
                                               illiquid securities (i.e., securities that are not
                                               readily marketable), it may invest up to 10% of its
                                               total assets in illiquid securities.

                                               The Fund may invest up to 20% of its total assets in
                                               debt securities, including convertible debt
                                               securities and convertible preferred securities.
                                               Common stock acquired pursuant to a conversion
                                               feature will be subject to this 20% limitation.

                                               The Fund will invest a significant portion, but less
                                               than 25%, of its total assets in the securities of
                                               companies principally engaged in the financial
                                               services industry (which are prominent issuers of
                                               preferred securities). In addition, under normal
                                               market conditions the Fund will invest at least 40%
                                               of its total assets in common stock issued by real
                                               estate companies, consisting primarily of REITs. This
                                               policy of investing in the financial services
                                               industry and the Fund's concentration of its
                                               investments in the real estate industry make the Fund
                                               more
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<S>                                            <C>
                                               susceptible to adverse economic or regulatory
                                               occurrences affecting these sectors.

                                               The Fund also may invest up to 20% of its total
                                               assets in U.S. dollar-denominated securities of
                                               foreign issuers traded or listed on a U.S. securities
                                               exchange or the U.S. over-the-counter market.

                                               The Fund will generally not invest more than 10% of
                                               its total assets in the securities of one issuer. The
                                               Fund may engage in portfolio trading when considered
                                               appropriate, but short-term trading will not be used
                                               as the primary means of achieving the Fund's
                                               investment objectives.

                                               There are no limits on portfolio turnover, and
                                               investments may be sold without regard to length of
                                               time held when, in the opinion of the Investment
                                               Manager, investment considerations warrant such
                                               action. A higher portfolio turnover rate results in
                                               correspondingly greater brokerage commissions and
                                               other transactional expenses that are borne by the
                                               Fund. High portfolio turnover may result in the
                                               realization of net short-term capital gains by the
                                               Fund which, when distributed to shareholders, will be
                                               taxable as ordinary income.

                                               Although not intended to be a significant element in
                                               the Fund's investment strategy, from time to time the
                                               Fund may use various other investment management
                                               techniques that also involve certain risks and
                                               special considerations including: engaging in
                                               interest rate and credit derivatives transactions and
                                               using options and financial futures.

                                               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 May 31, 2003
                                               had approximately $  billion in assets under
                                               management, including approximately $  billion in
                                               REIT and corporate preferred securities. Its clients
                                               include pension plans, endowment funds and mutual
                                               funds, including
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<S>                                            <C>
                                               some of the largest open-end and closed-end real
                                               estate funds. The Investment Manager, whose principal
                                               business address is 757 Third Avenue, New York, New
                                               York 10017, is also 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 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, changes in interest rates could
                                                affect the price you would receive if you sold your
                                                shares in the secondary market. You may transfer
                                                your 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 person
                                                as the Fund permits;

                                                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;
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<S>                                            <C>
                                                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;

                                                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 at least 40% of the Fund's
                                               total assets normally will be concentrated in common
                                               stock of real estate companies, consisting primarily
                                               of REITs, your investment in the Fund will be
                                               significantly impacted by 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.

                                               Preferred Securities Risks. There are also special
                                               risks associated with investing in preferred
                                               securities. Preferred securities are more sensitive
                                               to changes in interest rates
</Table>

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<S>                                            <C>
                                               than common stocks. When interest rates rise, the
                                               value of preferred stocks may fall. Other risks
                                               include deferral or omission of distributions,
                                               greater credit risk than more senior debt securities,
                                               less liquidity than common stocks, limited voting
                                               rights and special redemption rights.

                                               Financial Services Risks. The Fund intends to invest
                                               a significant portion, but less than 25%, of its
                                               total assets in the securities of companies
                                               principally engaged in financial services, which are
                                               prominent issuers of preferred securities. Because
                                               the Fund may invest such amounts in this sector, the
                                               Fund may be more susceptible to adverse economic or
                                               regulatory occurrences affecting that sector.

                                               Foreign Securities. Risks. Under normal market
                                               conditions, the Fund may invest up to 20% of its
                                               total assets in U.S. dollar-denominated securities of
                                               foreign issuers traded or listed on a U.S. securities
                                               exchange or in the U.S. over-the-counter market. Such
                                               investments involve certain risks not involved in
                                               domestic investments, including the risk of blockage
                                               of foreign currency exchanges by foreign countries,
                                               less rigorous disclosure or accounting standards and
                                               regulatory practices and adverse political and
                                               economic developments.

                                               Interest Rate Risks. Interest Rate risk is the risk
                                               that fixed-income securities such as preferred and
                                               debt securities, and to a lesser extent
                                               dividend-paying common stocks such as REIT common
                                               shares, will decline in value because of changes in
                                               market interest rates. When market interest rates
                                               rise, the market value of such securities generally
                                               will fall. The Fund's investment in such securities
                                               means that the net asset value and market price of
                                               the common shares may tend to decline if market
                                               interest rates rise.

                                               During periods of declining interest rates, an issuer
                                               may be able to exercise an option to prepay principal
                                               earlier than scheduled, which is generally known as
                                               call or prepayment rise. If this occurs, the Fund may
                                               be forced to reinvest in lower yielding securities.
                                               This is known as reinvestment rise. Preferred and
                                               debt securities frequently have call features that
                                               allow the issuer to repurchase the securities prior
                                               to its stated maturity. An issuer may
</Table>

                                       13



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<S>                                            <C>
                                               redeem an obligation if the issuer can refinance the
                                               debt at a lower cost due to declining interest rates
                                               or an improvement in the credit standing of the
                                               issuer. During periods of rising interest rates, the
                                               average life of certain types of securities may be
                                               extended because of slower than expected principal
                                               payments. This may lock in a below market interest
                                               rate, increase the security's duration and reduce the
                                               value of the security. This is known as extension
                                               rise.

                                               Market interest rates for investment grade
                                               fixed-income securities in which the Fund will invest
                                               have recently declined significantly below the recent
                                               historical average rates for such securities. This
                                               decline may have increased the risk that these rates
                                               will rise in the future (which would cause the value
                                               of the Fund's net assets to decline) and the degree
                                               to which asset values may decline in such events;
                                               however, historical interest rate levels are not
                                               necessarily predictive of future interest rate
                                               levels. See 'Principal Risks of the Fund--Interest
                                               Rate Risk.'

                                               Credit Risk and Lower-Rated Securities Risk. Credit
                                               risk is the risk that a security in the Fund's
                                               portfolio will decline in price or the issuer will
                                               fail to make dividend, interest or principal payments
                                               when due because the issuer of the security
                                               experiences a decline in its financial status.
                                               Preferred securities normally are subordinated to
                                               bonds and other debt instruments in a company's
                                               capital structure, in terms of priority to corporate
                                               income and claim to corporate assets, and therefore
                                               will be subject to greater credit risk than debt
                                               instruments. The Fund may invest up to 10% (measured
                                               at the time of investment) of its total assets in
                                               preferred securities and other debt securities that
                                               are rated below investment grade. Preferred stock or
                                               debt securities will be considered to be investment
                                               grade if, at the time of the 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 or,
                                               if unrated, such security is determined by the
                                               Investment Manager to be of comparable quality.
                                               Lower-rated preferred stock or other debt securities,
                                               or equivalent unrated securities, which are commonly
                                               known as 'junk bonds,' generally involve greater
                                               volatility of price and
</Table>

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<S>                                            <C>
                                               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 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.

                                               Market Disruption Risk. The terrorist attacks in the
                                               U.S. on September 11, 2001 had a disruptive effect on
                                               the securities markets. The war in Iraq and
                                               instability in the Middle East also has resulted in
                                               recent market volatility and may have long-term
                                               effects on the U.S. and worldwide financial markets
                                               and may cause further economic uncertainties in the
                                               U.S. and worldwide. The Fund does not know how long
                                               the securities markets will continue to be affected
                                               by these events and cannot predict the effects of the
                                               war or similar events in the future on the U.S.
                                               economy and securities markets.

                                               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 rate 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>

                                       15



<Page>

<Table>
<Caption>
                                                                                      DIVIDEND
                                                                       INITIAL      PAYMENT DATE         NUMBER OF
                                                                       DIVIDEND      FOR INITIAL      DAYS OF INITIAL
                                                                         RATE        RATE PERIOD        RATE PERIOD
                                                                         ----        -----------        -----------
                                                <S>                    <C>        <C>                 <C>
                                                Series  .............       %
                                                Series  .............       %
</Table>

<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 more than 28 days in the case of 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
</Table>

                                       16




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<S>                                            <C>
                                               intended to approximate the Fund's variable rate
                                               payment obligation on the Preferred Shares or any
                                               variable rate borrowing. The payment obligations
                                               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 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:
</Table>

                                       17



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<S>                                            <C>
                                                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.

                                               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          , 2003, 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 35% 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
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                                       18

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<S>                                            <C>
                                                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, 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 among its Common Shares,
                                               Series    and Series    Preferred Shares in
                                               proportion to the total dividends paid to each class
                                               during or with respect to such year. See 'U.S.
                                               Federal Taxation.'

CUSTODIAN, AUCTION AGENT, TRANSFER AGENT,
DIVIDEND PAYING AGENT AND REGISTRAR..........  State Street Bank serves as the Fund's custodian. The
                                               Bank of New York serves as auction agent, transfer
                                               agent, dividend paying agent and registrar for the
                                               Preferred Shares.
</Table>

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<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          , 2003 through          , 2003. Because the Fund was
recently organized and commenced investment operations on          , 2003, 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 common stocks issued by real estate companies and preferred and
other debt 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.

    The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the Fund's
Unaudited Financial Information included in the Statement of Additional
Information dated           , 2003. It should be read in conjunction with the
Unaudited Financial Information and notes thereto.

<Table>
<Caption>
                                                                    FOR THE PERIOD
                                                                           , 2003*
                                                                 THROUGH        , 2003
                                                                     (UNAUDITED)
                                                                     -----------
<S>                                                           <C>
PER SHARE OPERATING PERFORMANCE:
   Net asset value, beginning of period.....................
                                                                        ------
   Less: Offering costs charged to paid-in capital on common
          shares............................................
          Dilutive effect of common share offering..........
                                                                        ------
       Total offering and organization costs................
                                                                        ------
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.........................................
                                                                        ------
Total Investment Return on Market Value.....................
                                                                        ------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (In millions).....................
                                                                        ------
                                                                        ------
Ratio of expenses to average daily net assets (before
 expense reduction).........................................
                                                                        ------
                                                                        ------
Ratio of expenses to average daily net assets (net of
 expense reduction).........................................
                                                                        ------
                                                                        ------
Ratio of net investment income to average daily net assets
 (before expense reduction).................................
                                                                        ------
                                                                        ------
Ratio of net investment income to average daily net assets
 (net of expense reduction).................................
                                                                        ------
                                                                        ------
Portfolio turnover rate (%).................................
                                                                        ------
                                                                        ------
</Table>

---------
*   Commencement of operations.
**  Prior to        , 2003 (Commencement of Operations), 4,200 shares were sold
    to Cohen & Steers Capital Management, Inc. (the 'Investment Manager') for
    $100,275.
(1) Not annualized.
(2) Annualized.

           See accompanying notes to unaudited financial information

                                       20



<Page>

                                    THE FUND

    The Fund is a recently organized, non-diversified, closed-end management
investment company. We were organized as a Maryland corporation on March 25,
2003 and are registered as an investment company with the SEC under 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          , 2003.
On             , 2003 and           , 2003, the Fund issued        and
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 'RNP.' 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
         , 2003:

<Table>
<Caption>
                                                                AMOUNT HELD
                                                  AMOUNT      BY THE FUND OR      AMOUNT
TITLE OF CLASS                                  AUTHORIZED    FOR ITS ACCOUNT   OUTSTANDING
--------------                                  ----------    ---------------   -----------
<S>                                             <C>           <C>               <C>
Common........................................  100,000,000         -0-
Preferred
    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 of this offering, together with the proceeds from our initial public
offering, will be invested in accordance with the policies set forth under
'Investment Objectives and Policies.' We estimate that the net proceeds of both
offerings 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.'

                                       21



<Page>

                           CAPITALIZATION (UNAUDITED)

    The following table sets forth the unaudited capitalization of the Fund as
of          , 2003, and as adjusted to give effect to the issuance of the
Preferred Shares offered in this Prospectus.

<Table>
<Caption>
                                                                AS OF        , 2003
                                                              ACTUAL      AS ADJUSTED
                                                              ------      -----------
                                                                   (UNAUDITED)
<S>                                                        <C>            <C>
AS OF          , 2003:
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)....  $         --   $
                                                           ------------   ------------
Shareholders' Equity Applicable to Common Shares
    Common Shares, $.001 par value per share;
      shares authorized,         shares outstanding......  $              $
    Paid-in surplus......................................  $              $
    Undistributed net investment income..................  $              $
    Accumulated net realized gain (loss) from investment
      transactions.......................................  $         --   $         --
    Net unrealized appreciation (depreciation)...........  $              $
                                                           ------------   ------------
    Net assets applicable to common shareholders.........  $              $
                                                           ------------   ------------

Net assets, plus liquidation preference of Preferred
  Shares.................................................  $              $
                                                           ------------   ------------
                                                           ------------   ------------
</Table>

    As used in this Prospectus, unless otherwise noted, the Fund's 'managed
assets' include assets of the Fund attributable to any outstanding Preferred
Shares, with no deduction for the liquidation preference of such shares. For
financial reporting purposes, however, the Fund is required to deduct the
liquidation preference of its outstanding Preferred Shares from 'managed assets'
so long as the Preferred Shares have redemption features that are not solely
within the control of the Fund. In connection with the rating of the Preferred
Shares, the Fund has established various portfolio covenants to meet third-party
rating agency guidelines in its Articles of Incorporation. These covenants
include, among other things, investment diversification requirements and
requirements that investments included in the Fund's portfolio meet specific
industry and credit quality criteria. Market factors outside the Fund's control
may affect its ability to meet the criteria of third-party rating agencies set
forth in the Fund's portfolio covenants. If the Fund violates these covenants,
it may be required to cure the violation by redeeming all or a portion of the
Preferred Shares. For all regulatory purposes, the Fund's Preferred Shares will
be treated as stock (rather than indebtedness).

                                       22



<Page>

                       INVESTMENT OBJECTIVES AND POLICIES

GENERAL

    The Fund's primary investment objective is to seek high current income.
Capital appreciation is our secondary objective. The Fund is not intended as a
complete investment program. There can be no assurance that the Fund will
achieve its investment objectives.

    Under normal market conditions, the Fund will invest:

     at least 40%, but no more than 60%, of its total assets in common stocks
     issued by real estate companies such as REITs. A real estate company
     derives at least 50% of its revenue from real estate or has at least 50% of
     its assets in real estate. A REIT is a company dedicated to owning, and
     usually operating, income producing real estate, or to financing real
     estate;

     at least 40%, but no more than 60%, of its total assets in preferred
     securities; up to 5% of the Fund's total assets may be invested in
     preferred securities issued by REITs;

     up to 10% of its total assets in preferred or other securities that at the
     time of investment are rated below investment grade (Ba/BB or B by Moody's,
     S&P or Fitch) or that are unrated but judged to be of comparable quality by
     the Fund's Investment Manager;

     up to 20% of its total assets in debt securities, including convertible
     debt securities and convertible preferred securities;

     a significant portion, but less than 25%, of its total assets in the
     securities of companies principally engaged in the financial services
     industry (which are prominent issuers of preferred securities); and

     up to 20% of its total assets in U.S. dollar-denominated securities of
     foreign issuers traded or listed on a U.S. securities exchange or the U.S.
     over-the-counter market.

    The policy referred to above of investing in the financial services industry
and the Fund's concentration of its investments in the real estate industry make
the Fund more susceptible to adverse economic or regulatory occurrences
affecting these sectors. See 'Principal Risks of the Fund--Special Risks of
Securities Linked to the Real Estate Market' and '--General Risks of
Securities Linked to the Financial Services Industry.'

    Although the Fund does not currently intend to invest in illiquid securities
(i.e., securities that are not readily marketable), it may invest up to 10% of
its total assets in illiquid securities. Similarly, although the Fund does not
intend to invest in convertible securities, it may invest up to 20% of its total
assets in securities convertible into common or preferred securities where the
conversion feature represents, in the Investment Manager's view, a significant
element of the securities' value. Common stock acquired pursuant to a conversion
feature will be subject to this 20% limitation.

    Under normal conditions, the Fund intends to invest in income producing
common stock issued by real estate companies, consisting primiarly of REITs, and
preferred and other debt securities. Substantially all of the common stocks
issued by REITs in which the Fund intends to invest are traded on a national
securities exchange or in the over-the-counter market. 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 Code. As a result, REITs generally pay relatively high
dividends (as compared to other types of

                                       23



<Page>

companies) and the Fund intends to use these REIT dividends in an effort to meet
its objective of high current income. It is the Fund's current intention to
invest approximately 50% of its total assets in common stocks of REITs, although
the actual percentage of REIT common stocks in its portfolio may change.

    With respect to the preferred securities component of the portfolio, under
current market conditions the Fund expects that it will invest primarily in
taxable preferred securities. Under current market conditions, the Fund's
portfolio of preferred securities is expected to consist primarily of fixed rate
preferred securities.

    A security will be considered investment grade quality if it is rated 'BBB'
or higher by S&P, 'Baa' or higher by Moody's or an equivalent rating by a
nationally recognized statistical rating agency, or is unrated but judged to be
of comparable quality by the Investment Manager. Bonds of below investment grade
quality (BB/Ba or below) are commonly referred to as 'junk bonds.' Securities of
below investment grade quality are regarded as having predominantly speculative
characteristics with respect to the issuer's capacity to pay interest and repay
principal. The Fund's credit quality policies apply only at the time a security
is purchased, and the Fund is not required to dispose of a security if a rating
agency downgrades its assessment of the credit characteristics of a particular
issue. In determining whether to retain or sell a security that a rating agency
has downgraded, the Investment Manager may consider such factors as its
assessment of the credit quality of the issuer of the security, the price at
which the security could be sold and the rating, if any, assigned to the
security by other rating agencies. Appendix A to the SAI contains a general
description of Moody's and S&P's ratings of securities.

    The Fund's investment objectives and certain other policies are fundamental
and may not be changed without the approval of the holders of a 'majority of the
outstanding' Common Shares and Preferred Shares voting together as a single
class, and of the holders of a 'majority of the outstanding' Preferred Shares
voting as a separate class. When used with respect to particular shares of the
Fund, a 'majority of the outstanding' shares means (i) 67% or more of the shares
present at a meeting, if the holders of more than 50% of the shares are present
or represented by proxy, or (ii) more than 50% of the shares, whichever is less.
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.

INVESTMENT STRATEGIES

    In making investment decisions with respect to common stocks and other
equity securities issued by real estate companies, including REITs, 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, and
economic and market conditions. The Investment Manager evaluates a number of
factors, including growth potential, earnings estimates and the quality of
management.

    In making investment decisions with respect to preferred securities and debt
securities, the Investment Manager seeks to select what it believes are superior
securities, (i.e., securities the Investment Manager views as undervalued on the
basis of risk and return profiles). In making these determinations, the
Investment Manager evaluates the fundamental characteristics of an issuer,
including an issuer's creditworthiness, and also takes into account prevailing
market factors. In analyzing credit quality, the Investment Manager considers
not only fundamental analysis, but

                                       24



<Page>

also an issuer's corporate and capital structure and the placement of the
preferred or debt securities within that structure. The Investment Manager also
takes into account other factors, such as call and other structural features,
momentum and other exogenous signals (i.e., the likely directions of ratings)
and relative value versus other income security classes.

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.

    Initial Portfolio Composition. Initially, the Fund intends to allocate
approximately 50% of the Fund's total assets to common stocks issued by real
estate companies, consisting primarily of REITs, approximately 40% to preferred
securities and approximately 10% to debt securities other than preferred
securities. Thereafter, the portion of the Fund's total assets invested in
common stock issued by REITs, preferred securities and other debt securities
will vary from time to time, consistent with the Fund's investment objectives,
although the Fund will normally invest at least 40% of its total assets in
common stock issued by REITs and at least 40% of its total assets in preferred
securities. At any time, under normal circumstances at least 80% of the Fund's
total assets will be invested in common stocks issued by REITs and preferred
securities.

    Common Stocks Issued By Real Estate Companies and REITs. 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 40%, but no more
than 60%, of our total assets in the common stocks of real estate companies,
consisting primarily 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. REITs are generally not taxed
on income distributed to shareholders provided, among other things, they
distribute to their shareholders substantially all of their 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 the Fund
intends to use these REIT dividends in an effort to meet the current income goal
of its 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. The Fund
does not currently intend to invest more than 10% of its total assets in
Mortgage REITs or Hybrid REITs.

    Preferred Securities. Under normal market conditions, the Fund will invest
at least 40%, but no more than 60%, of its total assets in preferred securities.
There are two basic types of preferred securities. The first, sometimes referred
to in this prospectus as traditional preferred securities, consists of preferred
stock issued by an entity taxable as a corporation. The second is

                                       25



<Page>

referred to in this prospectus as hybrid-preferred securities. Hybrid-preferred
securities are usually issued by a trust or limited partnership and often
represent preferred interests in deeply subordinated debt instruments issued by
the corporation for whose benefit the trust or partnership was established.
Initially, the preferred securities component of the Fund will be comprised
primarily of taxable preferred securities.

    Traditional Preferred Securities. Traditional preferred securities generally
pay fixed or adjustable rate dividends to investors and generally 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. In order to be payable,
distributions on such preferred securities must be declared by the issuer's
board of directors. Income payments on typical preferred securities currently
outstanding are cumulative, causing dividends and distributions to accumulate
even if not declared by the board of directors or otherwise made payable. In
such a case, all accumulated dividends must be paid before any dividend on the
common stock can be paid. However, some traditional preferred stocks are non-
cumulative, in which case dividends do not accumulate and need not ever be paid.
A portion of the portfolio may include investments in non-cumulative preferred
securities, whereby the issuer does not have an obligation to make up any
arrearages to its shareholders. Should an issuer of a non-cumulative preferred
stock held by the Fund determine not to pay dividends on such stock, the amount
of dividends the Fund pays may be adversely affected. There is no assurance that
dividends or distributions on the traditional preferred securities in which the
Fund invests will be declared or otherwise made payable. Preferred stockholders
usually have no right to vote for corporate directors or on other matters.
Shares of traditional preferred securities have a liquidation value that
generally equals the original purchase price at the date of issuance. The market
value of preferred securities may be affected by favorable and unfavorable
changes impacting companies in the utilities and financial services sectors,
which are prominent issuers of preferred securities, and by actual and
anticipated changes in tax laws, such as changes in corporate income tax rates.
Because the claim on an issuer's earnings represented by traditional preferred
securities may become onerous when interest rates fall below the rate payable on
such securities, the issuer may redeem the securities. Thus, in declining
interest rate environments in particular, the Fund's holdings of higher
rate-paying fixed rate preferred securities may be reduced and the Fund may be
unable to acquire securities of comparable credit quality paying comparable
rates with the redemption proceeds.

    Pursuant to the DRD, corporations may generally deduct 70% of the income
they receive from dividends on traditional preferred securities that are paid
out of earnings and profits of the issuer. Corporate shareholders of a regulated
investment company like the Fund generally are permitted to claim a deduction
with respect to that portion of their distributions attributable to amounts
received by the regulated investment company that qualify for the DRD. However,
not all traditional preferred securities pay dividends that are eligible for the
DRD, including preferred securities issued by REITs described below. Under
current market conditions, it is expected that few, if any, of the preferred
securities in which the Fund intends to invest will qualify for the DRD.

    Pursuant to recently enacted legislation, individuals will generally be
taxed at long-term capital gain rates on qualified dividend income for taxable
years beginning on or before December 31, 2008. Individual shareholders of a
regulated investment company like the Fund generally are permitted to treat as
qualified dividend income that portion of their distributions attributable to

                                       26



<Page>

qualified dividend income received by the regulated investment company. However,
not all traditional preferred securities will provide significant benefits under
the rules relating to qualified dividend income, including preferred securities
issued by REITs described below. Under current market conditions, it is expected
that few, if any, of the preferred securities in which the Fund intends to
invest will provide significant benefits under the rules relating to qualified
dividend income.

    Within the category of traditional preferred securities, the Fund may invest
up to 5% of its total assets in traditional preferred securities issued by real
estate companies, including REITs. REIT preferred securities are generally
perpetual in nature, although REITs often have the ability to redeem the
preferred securities after a specified period of time. The market value of REIT
preferred securities may be affected by favorable and unfavorable changes
impacting a particular REIT. While sharing characteristics that make them
similar to traditional preferred securities, dividends from REIT preferred
securities do not provide any DRD benefit (and generally do not provide
significant benefits under the rules relating to qualified dividend income).

    Hybrid-Preferred Securities. Hybrid-preferred securities are a comparatively
new asset class. Hybrid-preferred securities are typically issued by
corporations, generally in the form of interest-bearing notes with preferred
securities characteristics, or by an affiliated business trust of a corporation,
generally in the form of beneficial interests in subordinated debentures or
similarly structured securities. The hybrid-preferred securities market consists
of both fixed and adjustable coupon rate securities that are either perpetual in
nature or have stated maturity dates.

    Hybrid-preferred securities are typically junior and fully subordinated
liabilities of an issuer or the beneficiary of a guarantee that is junior and
fully subordinated to the other liabilities of the guarantor. In addition,
hybrid-preferred securities typically permit an issuer to defer the payment of
income for eighteen months or more without triggering an event of default.
Generally, the maximum deferral period is five years. Because of their
subordinated position in the capital structure of an issuer, the ability to
defer payments for extended periods of time without default consequences to the
issuer, and certain other features (such as restrictions on common dividend
payments by the issuer or ultimate guarantor when full cumulative payments on
the trust preferred securities have not been made), these hybrid-preferred
securities are often treated as close substitutes for traditional preferred
securities, both by issuers and investors. Hybrid-preferred securities have many
of the key characteristics of equity due to their subordinated position in an
issuer's capital structure and because their quality and value are heavily
dependent on the profitability of the issuer rather than on any legal claims to
specific assets or cash flows. Hybrid preferred securities include, but are not
limited to, trust originated preferred securities ('TOPRS'r''); monthly income
preferred securities ('MIPS'r''); quarterly income bond securities ('QUIBS'r'');
quarterly income debt securities ('QUIDS'r''); quarterly income preferred
securities ('QUIPS('sm')'); corporate trust securities ('CORTS'r''); public
income notes ('PINES'r''); and other hybrid-preferred securities.*

---------
* TOPRS is a registered service mark owned by Merrill Lynch & Co., Inc. MIPS and
  QUIDS are registered service marks and QUIPS is a service mark owned by
  Goldman, Sachs & Co. QUIBS is a registered service mark owned by Morgan
  Stanley. CORTS and PINES are registered service marks owned by Salomon Smith
  Barney Inc.

                                       27



<Page>

    Hybrid-preferred securities are typically issued with a final maturity date,
although some are perpetual in nature. In certain instances, a final maturity
date may be extended and/or the final payment of principal may be deferred at
the issuer's option for a specified time without default. No redemption can
typically take place unless all cumulative payment obligations have been met,
although issuers may be able to engage in open-market repurchases without regard
to whether all payments have been paid.

    Many hybrid-preferred securities are issued by trusts or other special
purpose entities established by operating companies and are not a direct
obligation of an operating company. At the time the trust or special purpose
entity sells such preferred securities to investors, it purchases debt of the
operating company (with terms comparable to those of the trust or special
purpose entity securities), which enables the operating company to deduct for
tax purposes the interest paid on the debt held by the trust or special purpose
entity. The trust or special purpose entity is generally required to be treated
as transparent for Federal income tax purposes such that the holders of the
trust preferred securities are treated as owning beneficial interests in the
underlying debt of the operating company. Accordingly, payments on the
hybrid-preferred securities are treated as interest rather than dividends for
Federal income tax purposes and, as such, are not eligible for the DRD or the
reduced rates of tax that apply to qualified dividend income. The trust or
special purpose entity in turn would be a holder of the operating company's debt
and would have priority with respect to the operating company's earnings and
profits over the operating company's common shareholders, but would typically be
subordinated to other classes of the operating company's debt. Typically a
preferred share has a rating that is slightly below that of its corresponding
operating company's senior debt securities.

    Within the category of hybrid-preferred securities are senior debt
instruments that trade in the broader preferred securities market. These debt
instruments, which are sources of long-term capital for the issuers, have
structural features similar to preferred stock such as maturities ranging from
30 years to perpetuity, call features, exchange listings and the inclusion of
accrued interest in the trading price. Similar to other hybrid-preferred
securities, these debt instruments usually do not offer equity capital
treatment. CORTS'r' and PINES'r' are two examples of senior debt instruments
which are structured and trade as hybrid-preferred securities.

    Lower-Rated Securities. The Fund may invest up to 10% (measured at the time
of purchase) of its total assets in securities rated below investment grade.
These lower grade securities are commonly known as 'junk bonds.' Securities
rated below investment grade are judged to have speculative characteristics with
respect to their interest and principal payments. Such securities may face major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. Lower grade securities, though high yielding, are
characterized by high risk. They may be subject to certain risks with respect to
the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated securities. The retail secondary market for lower grade
securities may be less liquid than that of higher rated securities; adverse
conditions could make it difficult at times for the Fund to sell certain of
these securities or could result in lower prices than those used in calculating
the Fund's net asset value. 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, or, if
unrated, such security is determined by the Investment Manager to be of
comparable quality.

                                       28



<Page>

    Financial Services Company Securities. The Fund intends to invest a
significant portion, but less than 25%, of its total assets in securities issued
by companies 'principally engaged' in the financial services industry (which are
prominent issuers of preferred securities). A company is 'principally engaged'
in financial services if it derives at least 50% of its consolidated revenues
from providing financial services. Companies in the financial services sector
include commercial banks, industrial banks, savings institutions, finance
companies, diversified financial services companies, investment banking firms,
securities brokerage houses, investment advisory companies, leasing companies,
insurance companies and companies providing similar services.

    Foreign Securities. The Fund may invest up to 20% of its total assets in
U.S. dollar-denominated securities of non-U.S. issuers traded or listed on a
U.S. securities exchange or the U.S. over-the-counter market. The Fund may
invest in any region of the world and invests in companies operating in
developed countries such as Canada, Japan, Australia, New Zealand and most
Western European countries. The Fund does not intend to invest in companies
based in emerging markets such as the Far East, Latin America and Eastern
Europe. The World Bank and other international agencies define emerging markets
based on such factors as trade initiatives, per capita income and level of
industrialization. For purposes of this 20% limitation, non-U.S. securities
include securities represented by American Depository Receipts.

    Debt Securities. The Fund may invest up to 20% of its total assets in debt
securities, including convertible debt securities and convertible preferred
securities. Convertible securities are debt securities or preferred stock that
are exchangeable for common stock of the issuer at a predetermined price (the
'conversion price'). Depending upon the relationship of the conversion price to
the market value of the underlying securities, convertible securities may trade
more like common stock than debt instruments. Common stock acquired pursuant to
a conversion feature will be subject to this 20% limitation. As a result of
conversion, the Fund may hold common stocks issued by companies other than real
estate companies or REITs, such holdings not normally to exceed 5% of total
assets. In addition, keeping with the income objective of the Fund, the Fund
expects to sell any common stock holdings of issuers other than real estate
companies or REITs as soon as practicable after conversion of a convertible
security. The Fund's investments in debt securities may include investments in
U.S. dollar-denominated corporate debt securities issued by domestic and
non-U.S. corporations (subject to the requirements noted above) and U.S. dollar-
denominated government debt securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or a non-U.S. Government or its
agencies or instrumentalities (subject to the requirements noted above).

    Common Stocks. The Fund will normally invest at least 40%, but will not
invest more than 60%, of its total assets in common stocks issued by real estate
companies or REITs. Common stocks represent the residual ownership interest in
the issuer and holders of common stock are entitled to the income and increase
in the value of the assets and business of the issuer after all of its debt
obligations and obligations to preferred stockholders are satisfied. Common
stocks generally have voting rights. Common stocks fluctuate in price in
response to many factors including historical and prospective earnings of the
issuer, the value of its assets, general economic conditions, interest rates,
investor perceptions and market liquidity.

    Other Investment Companies. The Fund may invest up to 10% of its total
assets in securities of other open- or closed-end investment companies,
including exchange traded funds, that invest primarily in securities of the
types in which the Fund may invest directly. The Fund generally expects to
invest in other investment companies either during periods when it has large
amounts

                                       29



<Page>

of uninvested cash, such as the period shortly after the Fund receives the
proceeds of the offering of its common shares, or during periods when there is a
shortage of attractive opportunities in the market. As a shareholder in an
investment company, the Fund would bear its ratable share of that investment
company's expenses, and would remain subject to payment of the Fund's advisory
and other fees and expenses with respect to assets so invested. Holders of
common shares would therefore be subject to duplicative expenses to the extent
the Fund invests in other investment companies. The Investment Manager will take
expenses into account when evaluating the investment merits of an investment in
an investment company relative to available bond investments. The securities of
other investment companies may also be leveraged and will therefore be subject
to the same leverage risks to which the Fund is subject. As described in the
sections entitled 'Use of Leverage' and 'Use of Leverage--Leverage Risks,' the
net asset value and market value of leveraged shares will be more volatile and
the yield to shareholders will tend to fluctuate more than the yield generated
by unleveraged shares. Investment companies may have investment policies that
differ from those of the Fund. In addition, to the extent the Fund invests in
other investment companies, the Fund will be dependent upon the investment and
research abilities of persons other than the Investment Manager.

    Illiquid Securities. While the Fund does not currently intend to invest in
illiquid securities (i.e., securities that are not readily marketable), it may
invest up to 10% of its total assets in illiquid securities. For this purpose,
illiquid securities include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the Federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act but that are deemed to be illiquid, and repurchase agreements
with maturities in excess of seven days. The Board of Directors or its delegate
has the ultimate authority to determine, to the extent permissible under the
Federal securities laws, which securities are liquid or illiquid for purposes of
this 10% limitation. The Board of Directors has delegated to the Investment
Manager the day-to-day determination of the illiquidity of any security held by
the Fund, although it has retained oversight and ultimate responsibility for
such determinations. Although no definitive liquidity criteria are used, the
Board and/or the Investment Manager will consider factors such as (i) the nature
of the market for a security (including the institutional private resale market;
the frequency of trades and quotes for the security; the number of dealers
willing to purchase or sell the security; the amount of time normally needed to
dispose of the security; and the method of soliciting offers and the mechanics
of transfer), (ii) the terms of certain securities or other instruments allowing
for the disposition to a third party or the issuer thereof (e.g., certain
repurchase obligations and demand instruments) and (iii) other permissible
relevant factors.

    Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than that which prevailed when it decided to
sell. Illiquid securities will be priced at fair value as determined in good
faith by the Board of Directors or its delegate. If, through changes in the
market value of its portfolio securities, the Fund should be in a position where
more than 10% of the value of its total assets is invested in illiquid
securities, including restricted securities that are

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<Page>

not readily marketable, the Fund will take such steps as the Board and/or the
Investment Manager deem advisable, if any, to protect liquidity.

    Strategic Transactions. The Fund may, but is not required to, use various
strategic transactions described below to mitigate risks and to facilitate
portfolio management. Such strategic transactions are generally accepted under
modern portfolio management and are regularly used by many closed-end funds and
other institutional investors. Although the Investment Manager seeks to use the
practices to further the Fund's investment objective, no assurance can be given
that these practices will achieve this result.

    The Fund may purchase and sell derivative instruments such as
exchange-listed and over-the-counter put and call options on securities,
financial futures, equity, fixed-income and interest rate indices, and other
financial instruments, purchase and sell financial futures contracts and options
thereon, enter into various interest rate transactions such as swaps, caps,
floors or collars or credit transactions and credit default swaps. The Fund also
may purchase derivative instruments that combine features of these instruments.
Collectively, all of the above are referred to as 'Strategic Transactions.' The
Fund generally seeks to use Strategic Transactions as a portfolio management or
hedging technique to seek to protect against possible adverse changes in the
market value of securities held in or to be purchased for the Fund's portfolio,
protect the value of the Fund's portfolio, facilitate the sale of certain
securities for investment purposes, manage the effective interest rate exposure
of the Fund, manage the effective maturity or duration of the Fund's portfolio,
or establish positions in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. There is no limit on the amount of
credit derivative transactions that may be entered into by the Fund.

    Strategic Transactions have risks, including the imperfect correlation
between the value of such instruments and the underlying assets, the possible
default of the other party to the transaction or illiquidity of the derivative
instruments. Furthermore, the ability to successfully use Strategic Transactions
depends on the Investment Manager's ability to predict pertinent market
movements, which cannot be assured. Thus, the use of Strategic Transactions may
result in losses greater than if they had not been used, may require the Fund to
sell or purchase portfolio securities at inopportune times or for prices other
than current market values, may limit the amount of appreciation the Fund can
realize on an investment, or may cause the Fund to hold a security that it might
otherwise sell. Additionally, amounts paid by the Fund as premiums and cash or
other assets held in margin accounts with respect to Strategic Transactions are
not otherwise available to the Fund for investment purposes. A more complete
discussion of Strategic Transactions and their risks is contained in the Fund's
SAI.

    The Fund also may enter into certain interest rate transactions that are
designed to reduce the risks inherent in the Fund's issuance of the Preferred
Shares. See 'How the Fund Manages Risk--Interest Rate Transactions.'

    When-Issued and Delayed Delivery Transactions. The Fund may buy and sell
securities on a when-issued or delayed delivery basis, making payment or taking
delivery at a later date, normally within 15 to 45 days of the trade date. This
type of transaction may involve an element of risk because no interest accrues
on the securities prior to settlement and, because securities are subject to
market fluctuations, the value of the securities at time of delivery may be less
(or more) than cost. A separate account of the Fund will be established with its
custodian consisting of cash

                                       31



<Page>

equivalents or liquid securities having a market value at all times at least
equal to the amount of the commitment.

    Portfolio Turnover. The Fund may engage in portfolio trading when considered
appropriate, but short-term trading will not be used as the primary means of
achieving the Fund's investment objectives. However, there are no limits on the
rate of portfolio turnover, and investments may be sold without regard to length
of time held when, in the opinion of the Investment Manager, investment
considerations warrant such action. A higher portfolio turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses
that are borne by the Fund. High portfolio turnover may result in the
realization of net short-term capital gains by the Fund which, when distributed
to shareholders, will be taxable as ordinary income.

    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 or REIT. 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 which are subject to repurchase agreements and commercial paper. See
'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 35% 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.

    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 debt securities that pay

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<Page>

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 shareholders 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. 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 person as the Fund permits. The Fund does not
anticipate imposing significant restrictions on transfers to other persons.
However, unless any such other person has entered into a relationship with a
broker-dealer that has entered into a broker-dealer agreement with the Auction
Agent, that person will not be able to submit bids at auctions with respect to
Preferred Shares. 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 listed 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.

                                       33



<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 10% 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 'U.S. Federal
Taxation.'

    In addition, investors should note that the Fund is not expected to generate
significant income that qualifies for the DRD or the reduced rates of tax that
apply to qualified dividend income. See 'U.S. 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.

                                       34



<Page>

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

    Investment Risk. An investment in the Fund is subject to investment risk,
including the possible loss of the entire principal amount that you invest.

    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.

    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

                                       35



<Page>

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 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 noncompetitive. 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

                                       36



<Page>

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 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

                                       37



<Page>

and cash flow of any such portfolio company and, as a result, the amount
available to make distributions on the shares could be reduced.

    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.

SPECIAL RISKS RELATED TO PREFERRED SECURITIES

    There are special risks associated with investing in preferred securities,
including:

    Deferral and Omission. Preferred securities may include provisions that
permit the issuer, at its discretion, to defer or omit distributions for a
stated period without any adverse consequences to the issuer. If the Fund owns a
preferred security that is deferring or omitting its distributions, the Fund may
be required to report income for tax purposes although it has not yet received
such income.

    Subordination. Preferred securities are subordinated to bonds and other debt
instruments in a company's capital structure in terms of priority to corporate
income and liquidation payments, and therefore will be subject to greater credit
risk than more senior debt instruments.

    Liquidity. Preferred securities may be substantially less liquid than many
other securities, such as common stocks or U.S. Government securities.

    Limited Voting Rights. Generally, traditional preferred securities offer no
voting rights with respect to the issuing company unless preferred dividends
have been in arrears for a specified number of periods, at which time the
preferred security holders may elect a number of directors to the issuer's
board. Generally, once all the arrearages have been paid, the preferred security
holders no longer have voting rights. Hybrid-preferred security holders
generally have no voting rights.

    Special Redemption Rights. In certain varying circumstances, an issuer of
preferred securities may redeem the securities prior to a specified date. For
instance, for certain types of preferred securities, a redemption may be
triggered by a change in Federal income tax or securities laws. As

                                       38



<Page>

with call provisions, a redemption by the issuer may negatively impact the
return of the security held by the Fund.

    Supply of Hybrid-Preferred Securities. The Financial Accounting Standards
Board currently is reviewing accounting guidelines relating to hybrid-preferred
securities. To the extent that a change in the guidelines could adversely affect
the market for, and availability of, these securities, the Fund may be adversely
affected. The adoption of the Bush Administration's proposal to eliminate the
Federal income tax on dividends may also adversely impact the market and supply
of hybrid-preferred securities if the issuance of such securities becomes less
attractive to issuers.

    New Types of Securities. From time to time, preferred securities, including
hybrid-preferred securities, have been, and may in the future be, offered having
features other than those described herein. The Fund reserves the right to
invest in these securities if the Investment Manager believes that doing so
would be consistent with the Fund's investment objectives and policies. Since
the market for these instruments would be new, the Fund may have difficulty
disposing of them at a suitable price and time. In addition to limited
liquidity, these instruments may present other risks, such as high price
volatility.

GENERAL RISKS OF SECURITIES LINKED TO THE FINANCIAL SERVICES INDUSTRY

    The Fund intends to invest a significant portion, but less than 25%, of its
total assets in securities of companies principally engaged in the financial
services industry, which are prominent issuers of preferred securities. Because
the Fund may invest such amounts in this sector, the Fund may be susceptible to
adverse economic or regulatory occurrences affecting that sector.

    Investing in the financial services sector includes the following risks:

     regulatory actions--financial services companies may suffer a setback if
     regulators change the rules under which they operate;

     changes in interest rates--unstable interest rates can have a
     disproportionate effect on the financial services sector;

     concentration of loans--financial services companies whose securities the
     Fund may purchase may themselves have concentrated portfolios, such as a
     high level of loans to real estate developers, which makes them vulnerable
     to economic conditions that affect that sector; and

     competition--financial services companies have been affected by increased
     competition, which could adversely affect the profitability or viability of
     such companies.

FOREIGN SECURITIES RISKS

    Under normal market conditions, the Fund may invest up to 20% of its total
assets in U.S. dollar-denominated securities of foreign issuers traded or listed
on a U.S. securities exchange or the U.S. over-the-counter market ('Foreign
Securities'). Typically, the Fund will not hold any Foreign Securities of
issuers in so-called 'emerging markets' (or lesser developed countries), but to
the extent it does, the Fund will not invest more than 10% of its total assets
in such securities. Investments in such securities are particularly speculative.
Investing in Foreign Securities involves certain risks not involved in domestic
investments, including, but not limited to:

     future foreign economic, financial, political and social developments;

     different legal systems;

     the possible imposition of exchange controls or other foreign governmental
     laws or restrictions;

                                       39



<Page>

     less governmental supervision;

     regulation changes;

     changes in currency exchange rates;

     less publicly available information about companies due to less rigorous
     disclosure or accounting standards or regulatory practices;

     high and volatile rates of inflation;

     fluctuating interest rates;

     less publicly available information; and

     different accounting, auditing and financial record-keeping standards and
     requirements.

    Investments in Foreign Securities, especially in emerging market countries,
will expose the Fund to the direct or indirect consequences of political, social
or economic changes in the countries that issue the securities or in which the
issuers are located. Certain countries in which the Fund may invest, especially
emerging market countries, have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty and instability. The cost of
servicing external debt will generally be adversely affected by rising
international interest rates because many external debt obligations bear
interest at rates which are adjusted based upon international interest rates. In
addition, with respect to certain foreign countries, there is a risk of:

     the possibility of expropriation of assets;

     confiscatory taxation;

     difficulty in obtaining or enforcing a court judgment;

     economic, political or social instability; and

     diplomatic developments that could affect investments in those countries.

    In addition, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as:

     growth of gross domestic product;

     rates of inflation;

     capital reinvestment;

     resources;

     self-sufficiency; and

     balance of payments position.

    In addition, certain investments in Foreign Securities also may be subject
to foreign withholding taxes.

    Investing in securities of companies in emerging markets may entail special
risks relating to potential political and economic instability and the risks of
expropriation, nationalization, confiscation or the imposition of restrictions
on foreign investment, the lack of hedging instruments, and on repatriation of
capital invested. Emerging securities markets are substantially smaller, less
developed, less liquid and more volatile than the major securities markets. The
limited size of emerging securities markets and limited trading value compared
to the volume of trading in U.S. securities could cause prices to be erratic for
reasons apart from factors that affect the quality

                                       40



<Page>

of the securities. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on fundamental analysis, may
decrease the value and liquidity of portfolio securities, especially in these
markets. Many emerging market countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates and corresponding currency devaluations
have had and may continue to have negative effects on the economies and
securities markets of certain emerging market countries. Typically, the Fund
will not hold any Foreign Securities of emerging market issuers, and, if it
does, such securities will not comprise more than 10% of the Fund's total
assets.

    As a result of these potential risks, the Investment Manager may determine
that, notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. The Fund may
invest in countries in which foreign investors, including the Investment
Manager, have had no or limited prior experience.

INTEREST RATE RISK

    Interest rate risk is the risk that fixed-income securities such as
preferred and debt securities, and to a lessor extent dividend-paying common
stocks and shares such as REIT common shares, will decline in value because of
changes in market interest rates. When market interest rates rise, the market
value of such securities generally will fall. The Fund's investment in such
securities means that the net asset value and market price of common shares may
tend to decline if market interest rates rise. Because investors generally look
to REITs for a stream of income, the prices of REIT shares may be more sensitive
to changes in interest rates than are other equity securities.

    During periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled which is
generally known as call or prepayment risk. If this occurs, the Fund may be
forced to reinvest in lower yielding securities. This is known as reinvestment
risk. Preferred and debt securities frequently have call features that allow the
issuer to repurchase the security prior to its stated maturity. An issuer may
redeem an obligation if the issuer can refinance the debt at a lower cost due to
declining interest rates or an improvement in the credit standing of the issuer.
During periods of rising interest rates, the average life of certain types of
securities may be extended because of slower than expected principal payments.
This may lock in a below market interest rate, increase the security's duration
and reduce the value of the security. This is known as extension risk. Market
interest rates for investment grade fixed-income securities in which the Fund
will invest have recently declined significantly below the recent historical
average rates for such securities. This decline may have increased the risk that
these rates will rise in the future (which would cause the value of the Fund's
net assets to decline) and the degree to which asset values may decline in such
events; however, historical interest rate levels are not necessarily predictive
of future interest rate levels.

CREDIT RISK AND LOWER-RATED SECURITIES RISK

    Credit risk is the risk that a preferred or debt security in the Fund's
portfolio will decline in price or fail to make dividend, interest or principal
payments when due because the issuer of the security experiences a decline in
its financial status. Preferred securities are subordinated to bonds and other
debt instruments in a company's capital structure, in terms of priority to
corporate income, and therefore will be subject to greater credit risk than debt
instruments. The Fund may invest up to 10% (measured at the time of purchase) of
its total assets in preferred or other debt

                                       41



<Page>

securities that are rated below investment grade. Securities rated below
investment grade are regarded as having predominately speculative
characteristics with respect to the issuer's capacity to pay interest and repay
principal, and these bonds are commonly referred to as 'junk bonds.' These
securities are subject to a greater risk of default. The prices of these lower
grade securities are more sensitive to negative developments, such as a decline
in the issuer's revenues or a general economic downturn, than are the prices of
higher grade securities. Lower grade securities tend to be less liquid than
investment grade securities. The market values of lower grade securities tend to
be more volatile than investment grade securities. 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, or, if unrated, such security is determined by the Investment
Manager to be of comparable quality.

    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
securities, be more dependent upon such creditworthiness analysis than would be
the case if we were investing in higher quality securities. An issuer of these
securities has a currently identifiable vulnerability to default and the issuer
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
creditworthiness of the issuer, and could adversely affect and cause large
fluctuations in the net asset value 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.

    Market Disruption Risk. The terrorist attacks in the U.S. on September 11,
2001 had a disruptive effect on the securities markets. The war in Iraq also has
resulted in recent market volatility and may have long-term effects on the U.S.
and worldwide financial markets and may cause further economic uncertainties in
the U.S. and worldwide. The Fund does not know how long the securities markets
will continue to be affected by these events and cannot predict the effects of
the war or similar events in the future on the U.S. economy and securities
markets.

                                       42



<Page>

                           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. Among other restrictions, the Fund may not
invest more than 25% of its managed assets in securities of issuers in any one
industry except for the real estate industry. 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, Moody's or another
nationally recognized rating agency on the Preferred Shares. The Fund does not
anticipate that such guidelines would have a material adverse effect on the
Fund's ability to achieve its investment objectives. 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 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

                                       43



<Page>

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 business and affairs of the Fund are managed under the direction of 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
investments primarily in REITs and had approximately $  billion of assets under
management as of             , 2003, including approximately $  billion in REIT
and corporate preferred securities. Its current clients include pension plans,
endowment funds and registered investment companies, including the Fund,
Cohen & Steers Quality Income Realty Fund, Inc., Cohen & Steers Advantage Income
Realty Fund, Inc., Cohen & Steers Total Return Realty Fund, Inc. and Cohen &
Steers Premium Income 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.

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

                                       44



<Page>

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
.65% of the average daily managed assets of the Fund. Managed assets are 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 shareholder
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 their inception, President of Cohen & Steers
    Capital Management, Inc., the Fund's Investment Manager, and Vice President
    of Cohen & Steers Securities, Inc., a registered broker-dealer. 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, and
    President of Cohen & Steers Securities, Inc., a registered broker-dealer.
    Mr. Steers is a 'controlling person' of the Investment Manager on the basis
    of his ownership of the Investment Manager's stock.

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

        William F. Scapell--Mr. Scapell joined Cohen & Steers Capital
    Management, Inc., the Fund's Investment Manager, as a Senior Vice President
    in February 2003. Prior to joining Cohen & Steers, Mr. Scapell was a
    director in the fixed income research department of Merrill Lynch & Co.,
    Inc., where he was also its chief strategist for preferred securities.
    Before joining Merrill Lynch's research department, Mr. Scapell worked in
    Merrill Lynch Treasury with a focus on balance sheet management. Prior to
    working for Merrill Lynch, Mr. Scapell was employed at the Federal Reserve
    Bank of New York in both bank supervision and monetary policy roles.
    Mr. Scapell is a Chartered Financial Analyst.

                                       45



<Page>

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 .06% of the Fund's average daily total net
assets up to $1 billion, .04% of the Fund's average daily total net assets in
excess of $1 billion up to $1.5 billion and .02% of the Fund's average daily
total net assets in excess of $1.5 billion. 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 (including the liquidation value of Preferred Shares) in
the Fund at an annual rate equal to .03% of the first $200 million in assets,
.02% of the next $200 million, and .01% 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 .04%, 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 The Bank of New York 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 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

                                       46



<Page>

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
will be     days for the Series   Preferred Shares, and   days in the case of
Series   Preferred Shares, and the dividend rate 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 business 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 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 dividends per share
payable on shares of Preferred Shares 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           , 2003. For each dividend payment period
after the initial rate period, the dividend will 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

                                       47



<Page>

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>
              CREDIT RATINGS                   APPLICABLE
              --------------                   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;

     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

                                       48



<Page>

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,
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
Merrill Lynch, Pierce, Fenner & Smith Incorporated, 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.

    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.

                                       49



<Page>

    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 trust 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, 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 will 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, will 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 Fund's shares of
capital stock. For purposes of the foregoing, no matter will 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.

                                       50



<Page>

    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 Preferred Shares is not entitled to vote and the Preferred Shares 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').
S&P and Moody's have agreed that the auditors must certify once per quarter the
asset coverage test on a date randomly selected by the auditor. Based on the
Fund's assets and liabilities as of          , 2003 and assuming the issuance of
all Preferred Shares offered hereby 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>
<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

                                       51



<Page>

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 shareholder 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 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, (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

                                       52



<Page>

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, and any other 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 is made
on the Common Shares, an amount equal to the liquidation preference with respect
to such shares ($25,000 per 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 will 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 entity
nor the merger or consolidation of any other entity into or with the Fund, will
be a liquidation, whether voluntary or involuntary, for the purposes of the
foregoing paragraph.

                                       53

<Page>
                                  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, The Bank of New York) 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 60 days after 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 liquidation preference ($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.

    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.

                                       54

<Page>
    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 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

                                       55

<Page>
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 financial 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 a
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 seven days for
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           ,
2003, the business day preceding the dividend payment date for the initial
dividend period. Thereafter, except during the 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
            , 2003, 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.

    The following is a simplified example of how a typical auction works. Assume
that the Fund has 1,000 outstanding Preferred Shares of any 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%
</Table>

                                       56

<Page>
<Table>
<S>                     <C>                             <C>
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 (i) 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 (ii) 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.

                                       57



<Page>
                          DESCRIPTION OF COMMON SHARES

    The Fund is authorized to issue 100,000,000 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

                                       58

<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 shareholder proposal as to specific investment decisions made or
    to be made with respect to the Fund's assets as to which shareholder
    approval is required under federal or Maryland law.

    However, the shareholder 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 shareholder approval, the affirmative vote
of a majority of votes entitled to be cast thereon shall be required and if
Maryland law does not require shareholder approval, no shareholder 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
shareholders' 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 shareholders 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 shareholders 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.

                                       59

<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
New York Stock Exchange. Conversion to open-end status could also require the
Fund to modify certain investment restrictions and policies. Shareholders 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.

                             U.S. FEDERAL TAXATION

    The following discussion offers only a brief outline of the U.S. federal
income tax consequences of investing in the Fund and is based on the U.S.
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.

U.S. 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 (a 'RIC') under Subchapter M of the Code. 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,
securities or foreign currencies, or other income derived from its business of
investing in stock, 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%

                                       60

<Page>
of the value of the Fund's total assets and that does not represent more than
10% of the issuer's 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,
similar or related trades or businesses.

    For each taxable year that the Fund otherwise qualifies 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 shareholders, if it distributes at least 90% of the sum of its investment
company taxable income and any net tax-exempt interest 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 shareholders, and (b) its shareholders 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. Such distributions generally would be eligible
(i) for the DRD available to corporate shareholders and (ii) for treatment as
qualified dividend income in the case of individual shareholders.

    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 shareholders, 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 U.S. federal income tax liabilities. For U.S. federal
income tax purposes, the tax basis of shares owned by a Fund shareholder will be
increased by an amount equal to 65% of the amount of undistributed capital gains
included in the shareholder'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 shareholders on December 31 if it is declared by the Fund in
October, November or December of such year, made payable to shareholders 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 shareholders 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.

                                       61

<Page>
U.S. 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 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 U.S. federal income tax purposes. Such dividends
generally will be taxable as ordinary income to holders (other than capital gain
dividends, as described below) 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 shareholders, if properly
designated, may qualify for the DRD. In addition, for taxable years beginning on
or before December 31, 2008, distributions of investment income designated by
the Fund as derived from qualified dividend income will be taxed in the hands of
individuals at the rates applicable to long-term capital gain, provided holding
period and other requirements are met. The Fund does not expect a significant
portion of Fund distributions to be eligible for the DRD or derived from
qualified dividend income. The foregoing discussion 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 shareholder'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,
capital gains, dividends qualifying for the DRD and qualified dividend income)
based upon the percentage of total dividends paid out of current or accumulated
earnings and profits to each class for the tax year. Accordingly, the Fund
intends each year to allocate capital gain dividends, dividends qualifying for
the DRD and dividends derived from qualified dividend income, if any, between
its Common Shares, Series [  ] and Series [  ] Preferred Shares in proportion to
the total dividends paid out of current or accumulated earnings and 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 [  ] 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. Shareholders will be notified annually as to the U.S. federal tax
status of distributions.

                                       62

<Page>
SALE OF SHARES

    The sale or other disposition of Preferred Shares generally will be a
taxable transaction for U.S. 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 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 15% for taxable years beginning on
or before December 31, 2008 (after which time the maximum rate will increase to
20%). 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 shareholders
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
Series shareholder has been notified by the IRS that such shareholder is subject
to backup withholding. Corporate shareholders and other shareholders 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
shareholder's federal income tax liability if the appropriate information is
provided to the IRS.

OTHER TAXATION

    Foreign shareholders, including shareholders 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 shareholders and may qualify the considerations discussed
herein.

                                       63

<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 below.

<Table>
<Caption>
                                                               NUMBER OF SHARES
                                                               ----------------
UNDERWRITER                                                    SERIES     SERIES
-----------                                                    ------     ------
<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 certain other conditions, including without
limitation, the receipt by the Underwriters of customary closing certificates,
opinions and other documents and the receipt by the Fund of Aaa and AAA ratings
on the Preferred Shares by Moody's and S&P, respectively, as of the time of the
offering. 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 to
payments 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 $250 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
          , 2003.

    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
                   .

    The settlement date for the purchase of the Preferred Shares will be
          , 2003, as agreed upon by the Underwriters, the Fund and the
Investment Manager pursuant to Rule 15c6-1 under the Securities Exchange Act
of 1934.

                                       64

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

    The Bank of New York, whose principal dealing and trading business is
100 Church Street, 8th Floor, New York, New York 10286, 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 The Bank of New York 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 LLP, 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 LLP 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          , 2003 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                            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. 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           , 2003
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.

                                       65

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

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
General Information.........................................     3
Investment Objectives and Policies, Additional Information
  Regarding Fund Investments................................     3
Investment Restrictions.....................................    11
Management of the Fund......................................    12
Compensation of Directors and Certain Officers..............    16
Investment Advisory and Other Services......................    17
Portfolio Transactions and Brokerage........................    19
Determination of Net Asset Value............................    20
Additional Information Concerning the Auctions for Preferred
  Shares....................................................    20
S&P and Moody's Guidelines..................................    22
U.S. Federal Taxation.......................................    30
Performance Data and Index Returns..........................    36
Experts.....................................................    37
Report of Independent Accountants...........................    38
Financial Information.......................................    39
Appendix A: Ratings of Investments..........................   A-1
Appendix B: Articles Supplementary..........................   B-1
</Table>

                                       66



<Page>

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

                            $
                                 COHEN & STEERS
                      REIT AND PREFERRED INCOME FUND, INC.


                                    SHARES, SERIES

                    LIQUIDATION PREFERENCE $25,000 PER SHARE



                                COHEN & STEERS
                         REIT AND PREFERRED INCOME FUND

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








                                          , 2003


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



<Page>

                   SUBJECT TO COMPLETION, DATED JUNE 20, 2003

    THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION ('STATEMENT OF
ADDITIONAL INFORMATION') 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 STATEMENT OF ADDITIONAL INFORMATION 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.


                                COHEN & STEERS
                         REIT AND PREFERRED INCOME FUND





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

                      STATEMENT OF ADDITIONAL INFORMATION
                                          , 2003

    THIS STATEMENT OF ADDITIONAL INFORMATION ('SAI') OF COHEN & STEERS REIT AND
PREFERRED INCOME FUND, INC. (THE 'FUND') RELATING TO THIS OFFERING OF THE FUND'S
TAXABLE AUCTION MARKET 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          , 2003, AS
SUPPLEMENTED FROM TIME TO TIME (THE 'PROSPECTUS').

    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
THIS PROSPECTUS OR IN THE GLOSSARY OF THIS SAI.

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



<Page>

                               TABLE OF CONTENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
General Information.........................................     3
Investment Objectives and Policies, Additional Information
  Regarding Fund Investments................................     3
Investment Restrictions.....................................    11
Management of the Fund......................................    12
Compensation of Directors and Certain Officers..............    16
Investment Advisory and Other Services......................    17
Portfolio Transactions and Brokerage........................    19
Determination of Net Asset Value............................    20
Additional Information Concerning the Auctions for Preferred
  Shares....................................................    20
S&P and Moody's Guidelines..................................    22
U.S. Federal Taxation.......................................    30
Performance Data and Index Returns..........................    36
Experts.....................................................    37
Report of Independent Accountants...........................    38
Financial Information.......................................    39
Appendix A: Ratings of Investments..........................   A-1
Appendix B: Articles Supplementary..........................   B-1
</Table>

                                       2



<Page>

                     STATEMENT OF ADDITIONAL INFORMATION

    Cohen & Steers REIT and Preferred Income Fund, Inc. (the 'Fund') is a
recently organized, non-diversified, closed-end management investment company
organized as a Maryland corporation on March 25, 2003. Much of the information
contained in this Statement of Additional Information expands on subjects
discussed in the Prospectus. Defined terms used herein have the same meanings as
in the Prospectus. No investment in the shares of the Fund should be made
without first reading the Prospectus.

                       INVESTMENT OBJECTIVES AND POLICIES
               ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS

    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 shareholders; however, the Fund will not change its non-fundamental
investment policies without written notice to shareholders.

INVESTMENTS IN REAL ESTATE COMPANIES AND REAL ESTATE INVESTMENT TRUSTS

    Under normal market conditions, we will invest at least 40%, but no more
than 60%, of our total assets in common stocks issued by real estate companies
or real estate investment trusts or '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
such 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 will consist
of securities issued by Equity REITs.

PREFERRED SECURITIES

    Under normal market conditions, the Fund will invest at least 40%, but no
more than 60%, of its total assets in preferred securities. Initially, the
preferred component of the Fund will be comprised primarily of hybrid-preferred
and other taxable preferred securities. The taxable preferred securities in
which the Fund intends to invest do not qualify for the dividends received
deduction (the 'DRD') under Section 243 of the Internal Revenue Code of 1986, as
amended (the 'Code') and are not expected to provide significant benefits under
the rules relating to 'qualified dividend income.' The DRD generally allows
corporations to deduct from their income 70% of dividends received. Pursuant to
recently enacted legislation, individuals will generally be taxed at long-term
capital gain rates on qualified dividend income. Accordingly, any corporate
shareholder who otherwise would qualify for the DRD, and any individual
shareholder who otherwise would qualify to be taxed at long-term capital gain
rates on qualified dividend income, should assume that none of the distributions
it receives from the Fund will qualify for the DRD or provide significant
benefits under the rules relating to qualified dividend income.

                                       3

<Page>
    There are two basic types of preferred securities: traditional preferred
securities and hybrid-preferred securities. When used in this SAI and the
related prospectus, taxable preferred securities refer generally to
hybrid-preferred securities as well as certain types of traditional preferred
securities that are not eligible for the DRD (and are not expected to provide
significant benefits under the rules relating to qualified dividend income),
such as REIT preferred securities.

    Traditional Preferred Securities. Traditional preferred securities pay fixed
or adjustable rate 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. In order to be payable, distributions on
preferred securities must be declared by the issuer's board of directors. Income
payments on typical preferred securities currently outstanding are cumulative,
causing dividends and distributions to accrue even if not declared by the board
of directors or otherwise made payable. There is no assurance that dividends or
distributions on the preferred securities in which the Fund invests will be
declared or otherwise made payable. Preferred stockholders usually have no right
to vote for corporate directors or on other matters. Shares of preferred
securities have a liquidation value that generally equals the original purchase
price at the date of issuance. The market value of preferred securities may be
affected by favorable and unfavorable changes impacting companies in the
utilities, real estate and financial services sectors, which are prominent
issuers of preferred securities, and by actual and anticipated changes in tax
laws, such as changes in corporate income tax rates, the rates applicable to
qualified dividend income and in the DRD. Because the claim on an issuer's
earnings represented by preferred securities may become onerous when interest
rates fall below the rate payable on such securities, the issuer may redeem the
securities. Thus, in declining interest rate environments in particular, the
Fund's holdings of higher rate-paying fixed rate preferred securities may be
reduced and the Fund would be unable to acquire securities paying comparable
rates with the redemption proceeds.

    Hybrid-Preferred Securities. The hybrid-preferred securities market is
divided into the '$25 par' and the 'institutional' segments. The $25 par segment
is typified by securities that are listed on the New York Stock Exchange, trade
and are quoted 'flat,' i.e., without accrued dividend income, and are typically
callable at par value five years after their original issuance date. The
institutional segment is typified by $1,000 par value securities that are not
exchange-listed, trade and are quoted on an 'accrued income' basis, and
typically have a minimum of ten years of call protection (at premium prices)
from the date of their original issuance.

    Hybrid-preferred securities are treated in a similar fashion to traditional
preferred securities by several regulatory agencies, including the Federal
Reserve Bank, and by credit rating agencies, for various purposes, such as the
assignment of minimum capital ratios, over-collateralization rates and
diversification limits.

    Within the category of hybrid-preferred securities are senior debt
instruments that trade in the broader preferred securities market. These debt
instruments, which are sources of long-term capital for the issuers, have
structural features similar to preferred stock such as maturities ranging from
30 years to perpetuity, call features, exchange listings and the inclusion of
accrued interest in the trading price. Similar to other hybrid-preferred
securities, these debt instruments usually do not offer equity capital
treatment. CORTS'r' and PINES'r' are two examples of senior debt instruments
which are structured and trade as hybrid-preferred securities.

    See 'Investment Objectives and Policies--Portfolio
Composition--Hybrid-Preferred Securities' in the Fund's prospectus for a
general description of hybrid-preferred securities.

SHORT-TERM FIXED INCOME SECURITIES

    For temporary defensive purposes or to keep cash on hand fully invested, and
following the offering pending investment in securities that meet the Fund's
investment objectives, the Fund may invest up to 100% of its total assets in
cash equivalents and short-term fixed income securities. Short-term fixed income
investments are defined to include, without limitation, the following:

                                       4

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    (1) U.S. Government securities, including bills, notes and bonds differing
        as to maturity and rates of interest that are either issued or
        guaranteed by the U.S. Treasury or by U.S. Government agencies or
        instrumentalities. U.S. Government securities include securities issued
        by (a) the Federal Housing Administration, Farmers Home Administration,
        Export-Import Bank of the United States, Small Business Administration,
        and Government National Mortgage Association, whose securities are
        supported by the full faith and credit of the United States; (b) the
        Federal Home Loan Banks, Federal Intermediate Credit Banks, and
        Tennessee Valley Authority, whose securities are supported by the right
        of the agency to borrow from the U.S. Treasury; (c) the Federal National
        Mortgage Association, whose securities are supported by the
        discretionary authority of the U.S. Government to purchase certain
        obligations of the agency or instrumentality; and (d) the Student Loan
        Marketing Association, whose securities are supported only by its
        credit. While the U.S. Government provides financial support to such
        U.S. Government-sponsored agencies or instrumentalities, no assurance
        can be given that it always will do so since it is not so obligated by
        law. The U.S. Government, its agencies and instrumentalities do not
        guarantee the market value of their securities. Consequently, the value
        of such securities may fluctuate.

    (2) Certificates of deposit issued against funds deposited in a bank or a
        savings and loan association. Such certificates are for a definite
        period of time, earn a specified rate of return, and are normally
        negotiable. The issuer of a certificate of deposit agrees to pay the
        amount deposited plus interest to the bearer of the certificate on the
        date specified thereon. Certificates of deposit purchased by the Fund
        may not be fully insured by the Federal Deposit Insurance Corporation.

    (3) Repurchase agreements, which involve purchases of debt securities. At
        the time the Fund purchases securities pursuant to a repurchase
        agreement, it simultaneously agrees to resell and redeliver such
        securities to the seller, who also simultaneously agrees to buy back the
        securities at a fixed price and time. This assures a predetermined yield
        for the Fund during its holding period, since the resale price is always
        greater than the purchase price and reflects an agreed-upon market rate.
        Such actions afford an opportunity for the Fund to invest temporarily
        available cash. The Fund may enter into repurchase agreements only with
        respect to obligations of the U.S. Government, its agencies or
        instrumentalities; certificates of deposit; or bankers' acceptances in
        which the Fund may invest. Repurchase agreements may be considered loans
        to the seller, collateralized by the underlying securities. The risk to
        the Fund is limited to the ability of the seller to pay the agreed-upon
        sum on the repurchase date; in the event of default, the repurchase
        agreement provides that the Fund is entitled to sell the underlying
        collateral. If the value of the collateral declines after the agreement
        is entered into, and if the seller defaults under a repurchase agreement
        when the value of the underlying collateral is less than the repurchase
        price, the Fund could incur a loss of both principal and interest. The
        Investment Manager monitors the value of the collateral at the time the
        action is entered into and at all times during the term of the
        repurchase agreement. The Investment Manager does so in an effort to
        determine that the value of the collateral always equals or exceeds the
        agreed-upon repurchase price to be paid to the Fund. If the seller were
        to be subject to a Federal bankruptcy proceeding, the ability of the
        Fund to liquidate the collateral could be delayed or impaired because of
        certain provisions of the bankruptcy laws.

    (4) Commercial paper, which consists of short-term unsecured promissory
        notes, including variable rate master demand notes issued by
        corporations to finance their current operations. Master demand notes
        are direct lending arrangements between the Fund and a corporation.
        There is no secondary market for such notes. However, they are
        redeemable by the Fund at any time.

    The Investment Manager will consider the financial condition of the
corporation (e.g., earning power, cash flow and other liquidity ratios) and will
continuously monitor the corporation's ability

                                       5

<Page>
to meet all of its financial obligations, because the Fund's liquidity might be
impaired if the corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper rated in the
two highest categories by a major rating agency or are unrated but determined to
be of comparable quality by the Investment Manager and which mature within one
year of the date of purchase or carry a variable or floating rate of interest.

LOWER RATED SECURITIES

    The Fund may invest up to 10% of its total assets (measured at the time of
purchase) in securities rated below investment grade such as those rated Ba or B
by Moody's and BB or B by S&P or securities comparably rated by other rating
agencies or in unrated securities determined by the Investment Manager to be of
comparable quality. Securities rated Ba by Moody's are judged to have
speculative elements; their future cannot be considered as well assured and
often the protection of interest and principle payments may be very moderate.
Securities rated BB by S&P are regarded as having predominantly speculative
characteristics and, while such obligations have less near-term vulnerability to
default than other speculative grade debt, they face major ongoing uncertainties
or exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments. The
lowest rated security that the Fund will invest in is one rated B by either
Moody's or S&P.

    Lower grade securities, though high yielding, are characterized by high
risk. They may be subject to certain risks with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
securities. The retail secondary market for lower grade securities may be less
liquid than that of higher rated securities; adverse conditions could make it
difficult at times for the Fund to sell certain securities or could result in
lower prices than those used in calculating the Fund's net asset value.

    The prices of debt securities generally are inversely related to interest
rate changes; however, the price volatility caused by fluctuating interest rates
of securities also is inversely related to the coupons of such securities.
Accordingly, below investment grade securities may be relatively less sensitive
to interest rate changes than higher quality securities of comparable maturity
because of their higher coupon. This higher coupon is what the investor receives
in return for bearing greater credit risk. The higher credit risk associated
with below investment grade securities potentially can have a greater effect on
the value of such securities than may be the case with higher quality issues of
comparable maturity.

    Lower grade securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could severely disrupt the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principle and pay interest thereon and increase the incidence of default for
such securities.

    The ratings of Moody's, S&P and other rating agencies represent their
opinions as to the quality of the obligations that they undertake to rate.
Ratings are relative and subjective and, although ratings may be useful in
evaluating the safety of interest and principle payments, they do not evaluate
the market value risk of such obligations. Although these ratings may be an
initial criterion for selection of portfolio investments, the Investment Manager
also will independently evaluate these securities and the ability for the
issuers of such securities to pay interest and principal. To the extent that the
Fund invests in lower grade securities that have not been rated by a rating
agency, the Fund's ability to achieve its investment objectives will be more
dependent on the Fund's credit analysis than would be the case when the Fund
invests in rated securities.

STRATEGIC TRANSACTIONS

    Consistent with its investment objective and policies as set forth herein,
the Fund may also enter into certain hedging and risk management transactions.
In particular, the Fund may purchase and sell futures contracts, exchange-listed
and over-the-counter put and call options on securities, financial indices and
futures contracts and may enter into various interest rate transactions

                                       6

<Page>
(collectively, 'Strategic Transactions'). Strategic Transactions may be used to
attempt to protect against possible changes in the market value of the Fund's
portfolio resulting from fluctuations in the securities markets and changes in
interest rates, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes or to establish a position in the securities markets as a temporary
substitute for purchasing particular securities. Any or all of these techniques
may be used at any time. There is no particular strategy that requires use of
one technique rather than another. Use of any Strategic Transaction is a
function of market conditions. The Strategic Transactions that the Fund may use
are described below. The ability of the Fund to hedge successfully will depend
on the Investment Manager's ability to predict pertinent market movements, which
cannot be assured.

    Interest Rate Transactions. Among the Strategic Transactions into which the
Fund may enter are interest rate swaps and the purchase or sale of interest rate
caps and floors. The Fund expects to enter into the transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio as a duration management technique or to protect against any increase
in the price of securities the Fund anticipates purchasing at a later date or,
as discussed in the prospectus, to hedge against increased Fund Preferred Share
dividend rates or increases in the Fund's cost of borrowing. For a more complete
discussion of interest rate transactions, see 'Use of Leverage--Interest Rate
Transactions.'

    Futures Contracts and Options on Futures Contracts. In connection with its
hedging and other risk management strategies, the Fund may also enter into
contracts for the purchase or sale for future delivery ('future contracts') of
debt securities, aggregates of debt securities, financial indices, and U.S.
Government debt securities or options on the foregoing to hedge the value of its
portfolio securities that might result from a change in interest rates or market
movements. The Fund will engage in such transactions only for bona fide hedging
or non-hedging purposes in accordance with CFTC regulations which permit
principals of an investment company registered under the 1940 Act to engage in
such transactions without registering as commodity pool operators. The Fund will
determine that the price fluctuations in the futures contracts and options on
futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or which the Fund expects to
purchase. Except as stated below, the Fund's futures transactions will be
entered into for traditional hedging purposes--i.e., futures contracts will be
sold to protect against a decline in the price of securities that the Fund owns,
or futures contracts will be purchased to protect the Fund against an increase
in the price of securities it intends to purchase.

    Although the Fund does not intend to engage in non-hedging transactions, in
accordance with CFTC regulations, the Fund is permitted to engage in non-hedging
transactions, provided that:

        (i) its pro rata share of the sum of the amount of initial margin
    deposits on futures contracts entered into by the Fund and premiums paid for
    unexpired options with respect to such contracts does not exceed 5% of the
    liquidation value of the Fund's assets, after taking into account unrealized
    profits and unrealized losses on such contracts and options (in the case of
    an option that is in-the-money at the time of purchase, the in-the-money
    amount may be excluded in calculating the 5% limitation); or

        (ii) the aggregate 'notional value' (i.e., the size of the contract, in
    contract units, times the current market price (futures position) or strike
    price (options position) of each such unit) of the contract, it does not
    exceed the liquidation value of the Fund, after taking into account
    unrealized profits and unrealized losses on such contracts and options.

    Credit Derivatives. The Fund may engage in credit derivative transactions.
There are two broad categories of credit derivatives: default price risk
derivatives and market spread derivatives. Default price risk derivatives are
linked to the price of reference securities or loans after a default by the
issuer or borrower, respectively. Market spread derivatives are based on the
risk that changes in market factors, such as credit spreads, can cause a decline
in the value of a security, loan or index. There are three basic transactional
forms for credit derivatives: swaps, options and structured instruments. The use
of credit derivatives is a highly specialized activity that involves strategies
and risks different from those associated with ordinary portfolio security
transactions. If

                                       7

<Page>
incorrect in its forecasts of default risks, market spreads or other applicable
factors, the investment performance of the Fund would diminish compared with
what it would have been if these techniques were not used. Moreover, even if it
is correct in its forecasts, there is a risk that a credit derivative position
may correlate imperfectly with the price of the asset or liability being hedged.
There is no limit on the amount of credit derivative transactions that may be
entered into by the Fund. The Fund's risk of loss in a credit derivative
transaction varies with the form of the transaction. For example, if the Fund
purchases a default option on a security, and if no default occurs with respect
to the security, the Fund's loss is limited to the premium it paid for the
default option. In contrast, if there is a default by the grantor of a default
option, the Fund's loss will include both the premium that it paid for the
option and the decline in value of the underlying security that the default
option hedged.

    Calls on Securities, Indices and Futures Contracts. In order to enhance
income or reduce fluctuations in net asset value, the Fund may sell or purchase
call options ('calls') on securities, futures contracts and indices based upon
the prices of debt securities that are traded on U.S. securities exchanges and
to the over-the-counter markets. A call option gives the purchaser of the option
the right to buy, and obligates the seller to sell, the underlying security,
futures contract or index at the exercise price at any time or at a specified
time during the option period. All such calls sold by the Fund must be 'covered'
as long as the call is outstanding (i.e., the Fund must own the instrument
subject to the call or other securities or assets acceptable for applicable
segregation and coverage requirements). A call sold by the Fund exposes the Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security, index or futures
contract and may require the Fund to hold an instrument that it might otherwise
have sold. The purchase of a call gives the Fund the right to buy the underlying
instrument or index at a fixed price. Calls on futures contracts on securities
written by the Fund must also be covered by assets or instruments acceptable
under applicable segregation and coverage requirement.

    Puts on Securities, Indices and Futures Contracts. As with calls, the Fund
may purchase put options ('puts') on securities (whether or not it holds such
securities in its portfolio). For the same purposes, the Fund may also sell puts
on securities, financial indices and puts on futures contracts on securities if
the Fund's contingent obligations on such puts are secured by segregated assets
consisting of cash or liquid securities having a value not less than the
exercise price. The Fund will not sell puts if, as a result, more than 50% of
the Fund's assets would be required to cover its potential obligation under its
hedging and other investment transactions. In selling puts, there is a risk that
the Fund may be required to buy the underlying instrument or index at higher
than the current market price.

    The principal risks relating to the use of futures and other Strategic
Transitions are: (i) less than perfect correlation between the prices of the
hedging instrument and the market value of the securities in the Fund's
portfolio; (ii) possible lack of a liquid secondary market for closing out a
position in such instruments; (iii) losses resulting from interest rate or other
market movements not anticipated by the Investment Manager; and (iv) the
obligation to meet additional variation margin or other payment requirements.

    Certain provisions of the Code may restrict or affect the ability of the
Fund to engage in Strategic Transactions. See 'Taxation.'

OTHER INVESTMENT COMPANIES

    The Fund may invest up to 10% of its total assets in securities of other
open- or closed-end investment companies; including exchange traded funds, that
invest primarily in securities of the types in which the Fund may invest
directly. The Fund generally expects to invest in other investment companies
either during periods when it has large amounts of uninvested cash, such as the
period shortly after the Fund receives the proceeds of the offering of its
common shares, or during periods when there is a shortage of attractive
opportunities in the market. As a shareholder in an investment company, the Fund
would bear its ratable share of that investment company's expenses, and would
remain subject to payment of the Fund's advisory and other fees and

                                       8

<Page>
expenses with respect to assets so invested. Holders of common shares would
therefore be subject to duplicative expenses to the extent the Fund invests in
other investment companies. The Investment Manager will take expenses into
account when evaluating the investment merits of an investment in an investment
company relative to available bond investments. The securities of other
investment companies may also be leveraged and will therefore be subject to the
same leverage risks to which the Fund is subject. As described in the prospectus
in the sections entitled 'Use of Leverage' and 'Use of Leverage--Leverage
Risks,' the net asset value and market value of leveraged shares will be more
volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares. Investment companies may have investment
policies that differ from those of the Fund. In addition, to the extent the Fund
invests in other investment companies, the Fund will be dependent upon the
investment and research abilities of persons other than the Investment Manager.

RESTRICTED AND ILLIQUID SECURITIES

    When purchasing securities that have not been registered under the
Securities Act, and are not readily marketable, the Fund will endeavor, to the
extent practicable, to obtain the right to registration at the expense of the
issuer. Generally, there will be a lapse of time between the Fund's decision to
sell any such security and the registration of the security permitting sale.
During any such period, the price of the securities will be subject to market
fluctuations. In addition, the Fund may not be able to readily dispose of such
securities at prices that approximate those at which the Fund could sell such
securities if they were more widely traded and, as a result of such illiquidity,
the Fund may have to sell other investments or engage in borrowing transactions
if necessary to raise cash to meet its obligations.

    The Fund may purchase certain securities eligible for resale to qualified
institutional buyers as contemplated by Rule 144A under the Securities Act
('Rule 144A Securities'). Rule 144A provides an exemption from the registration
requirements of the Securities Act for the resale of certain restricted
securities to certain qualified institutional buyers. One effect of Rule 144A is
that certain restricted securities may be considered liquid, though no assurance
can be given that a liquid market for Rule 144A Securities will develop or be
maintained. However, where a substantial market of qualified institutional
buyers has developed for certain unregistered securities purchased by the Fund
pursuant to Rule 144A, the Fund intends to treat such securities as liquid
securities in accordance with procedures approved by the Fund's Board of
Directors. Because it is not possible to predict with assurance how the market
for Rule 144A Securities will develop, the Fund's Board of Directors has
directed the Investment Manager to monitor carefully the Fund's investments in
such securities with particular regard to trading activity, availability of
reliable price information and other relevant information. To the extent that,
for a period of time, qualified institutional buyers cease purchasing restricted
securities pursuant to Rule 144A, the Fund's investing in such securities may
have the effect of increasing the level of illiquidity in its investment
portfolio during such period.

WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES

    The Fund may purchase securities on a 'when-issued' basis and may purchase
or sell securities on a 'forward commitment' basis in order to acquire the
security or to hedge against anticipated changes in interest rates and prices.
When such transactions are negotiated, the price, which is generally expressed
in yield terms, is fixed at the time the commitment is made, but delivery and
payment for the securities take place at a later date. When-issued securities
and forward commitments may be sold prior to the settlement date, but the Fund
will enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may be. If the Fund
disposes of the right to acquire a when-issued security prior to its acquisition
or disposes of its right to deliver or receive against a forward commitment, it
might incur a gain or loss. At the time the Fund enters into a transaction on a
when-issued or forward commitment basis, it will designate on its books and
records cash or liquid debt securities

                                       9

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equal to at least the value of the when-issued or forward commitment securities.
The value of these assets will be monitored daily to ensure that their marked to
market value will at all times equal or exceed the corresponding obligations of
the Fund. There is always a risk that the securities may not be delivered and
that the Fund may incur a loss. Settlements in the ordinary course, which may
take substantially more than three business days, are not treated by the Fund as
when-issued or forward commitment transactions and accordingly are not subject
to the foregoing restrictions.

    Securities purchased on a forward commitment or when-issued basis are
subject to changes in value (generally changing in the same way, i.e.,
appreciating when interest rates decline and depreciating when interest rates
rise) based upon the public's perception of the creditworthiness of the issuer
and changes, actual or anticipated, in the level of interest rates. Securities
purchased with a forward commitment or when-issued basis may expose the Fund to
risks because they may experience such fluctuations prior to their actual
delivery. Purchasing securities on a when-issued basis can involve the
additional risks that the yield available in the market when the delivery takes
place actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when-issued basis when the Fund
is fully invested may result in greater potential fluctuation in the value of
the Fund's net assets and its net asset value per share.

REVERSE REPURCHASE AGREEMENTS

    The Fund may enter into reverse repurchase agreements with respect to its
portfolio investments subject to the investment restrictions set forth herein.
Reverse repurchase agreements involve the sale of securities held by the Fund
with an agreement by the Fund to repurchase the securities at an agreed upon
price, date and interest payment. The use by the Fund of reverse repurchase
agreements involves many of the same risks of leverage described under 'Use of
Leverage--Leverage Risks,' since the proceeds derived from such reverse
repurchase agreements may be invested in additional securities. At the time the
Fund enters into a reverse repurchase agreement, it may designate on its books
and records liquid instruments having a value not less than the repurchase price
(including accrued interest). If the Fund designates liquid instruments on its
books and records, a reverse repurchase agreement will not be considered a
borrowing by the Fund; however, under circumstances in which the Fund does not
designate liquid instruments on its books and records, such reverse repurchase
agreement will be considered a borrowing for the purpose of the Fund's
limitation on borrowings. Reverse repurchase agreements involve the risk that
the market value of the securities acquired in connection with the reverse
repurchase agreement may decline below the price of the securities the Fund has
sold but is obligated to repurchase. Also, reverse repurchase agreements involve
the risk that the market value of the securities retained in lieu of sale by the
Fund in connection with the reverse repurchase agreement may decline in price.

    If the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Fund would bear the risk of loss to the extent that the
proceeds of the reverse repurchase agreement are less than the value of the
securities subject to such agreement.

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

                                       10

<Page>
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
Moody's or S&P, 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;

         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;

         6. Invest more than 25% of its total assets in securities of issuers in
    any one industry other than the real estate industry, in which at least 25%
    of the Fund's total assets will be invested; provided, however, that such
    limitation shall not apply to obligations issued or guaranteed by the United
    States Government or by its agencies or instrumentalities;

         7. Purchase preferred stock and debt securities rated below investment
    grade and unrated securities of comparable quality, if, as a result, more
    than 10% of the Fund's total assets would then be invested in such
    securities;

         8. 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, or any exemption granted
    under the 1940 Act (b) acquire securities of any investment company as part
    of a merger, consolidation or similar transaction;

        9. 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;

                                       11

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

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

    The investment restrictions numbered 1 through 6 in this Statement of
Additional Information have been adopted as fundamental policies of the Fund.
Under the 1940 Act, a fundamental policy may not be changed without the approval
of the holders of a 'majority of the outstanding' Common Shares and the Fund
Preferred Shares voting together as a single class, and of the holders of a
'majority of the outstanding' Preferred Shares voting as a separate class. When
used with respect to particular shares of the Fund, a 'majority of the
outstanding' shares means (i) 67% or more of the shares present at a meeting, if
the holders of more than 50% of the shares are present or represented by proxy,
or (ii) more than 50% of the shares, whichever is less. Investment restrictions
numbered 7 through 11 above are non-fundamental and may be changed at any time
by vote of a majority of the Board of Directors.

    Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after the issuance the value of the Fund's total assets is at
least 200% of the liquidation value of the outstanding preferred shares (i.e.,
such liquidation value may not exceed 50% of the Fund's total assets less
liabilities other than borrowing). In addition, the Fund is not permitted to
declare any cash dividend or other distribution on its Common Shares unless, at
the time of such declaration, the value of the Fund's total assets less
liabilities other than borrowing is at least 200% of such liquidation value. The
Fund intends, to the extent possible, to purchase or redeem Preferred Shares
from time to time to the extent necessary in order to maintain coverage of any
Preferred Shares of at least 200%. If the Fund has Preferred Shares outstanding,
two of the Fund's Directors will be elected by the holders of the Preferred
Shares, voting separately as a class. The remaining Directors of the Fund will
be elected by holders of Common Shares and Preferred Shares voting together as a
single class. In the event the Fund failed to pay dividends on Preferred Shares
for two years, Preferred Shareholders would be entitled to elect a majority of
the Directors of the Fund.

    Under the 1940 Act, the Fund generally is not permitted to borrow unless
immediately after the borrowing the value of the Fund's total assets less
liabilities other than the borrowing is at least 300% of the principal amount of
such borrowing (i.e., such principal amount may not exceed 33 1/3% of the Fund's
total assets). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless, at the time of such
declaration, the value of the Fund's total assets, less liabilities other than
the borrowings, is at least 300% of such principal amount. If the Fund borrows,
the Fund intends, to the extent possible, to prepay all or a portion of the
principal amount of the borrowing to the extent necessary in order to maintain
the required asset coverage. Failure to maintain certain asset coverage
requirements could result in an event of default and entitle the debt holders to
elect a majority of the board of directors.

                             MANAGEMENT OF THE FUND

    The business and affairs of the Fund are managed under the direction of 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, 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 April 30, 2003, the Directors and officers
as a group beneficially owned, directly or indirectly, less than 1% of the
outstanding shares of the Fund.

    Basic information about the identity and experience of each Director and
officer is set forth in the charts below. Each such Director and officer is also
a director or officer of Cohen & Steers Advantage Income Realty Fund, Inc.,
Cohen & Steers Quality Income Realty Fund, Inc., Cohen & Steers Premium Income
Realty Fund, Inc. and Cohen & Steers Total Return Realty Fund, Inc.,

                                       12

<Page>
which are closed-end investment companies 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.

    The Directors of the Fund, their addresses, their ages, the length of time
served, their principal occupations for at least the past five years, the number
of portfolios they oversee within the Fund complex, and other directorships held
by the Director are set forth below.

<Table>
<Caption>
                                                                                  NUMBER OF
                                                                                 FUNDS WITHIN
                                                                 PRINCIPAL           FUND
                                                                OCCUPATION         COMPLEX
                                                                DURING PAST      OVERSEEN BY
                                                                  5 YEARS          DIRECTOR
                             POSITION HELD       TERM OF     (INCLUDING OTHER     (INCLUDING    LENGTH OF
  NAME, ADDRESS AND AGE        WITH FUND         OFFICE     DIRECTORSHIPS HELD)   THE FUND)    TIME SERVED
  ---------------------        ---------         ------     -------------------   ---------    -----------
<S>                        <C>                 <C>          <C>                  <C>           <C>
INTERESTED DIRECTORS

Robert H. Steers ........  Director, Chairman  Until Next   Chairman of Cohen &      9         Since
757 Third Avenue           of the Board, and   Election of  Steers Capital                     Inception
New York, New York             Secretary       Directors    Management, Inc.,
Age: 50                                                     the Fund's
                                                            Investment Manager.

Martin Cohen ............      Director,       Until Next   President of Cohen       9         Since
757 Third Avenue             President and     Election of  & Steers Capital                   Inception
New York, New York             Treasurer       Directors    Management, Inc.,
Age: 54                                                     the Fund's
                                                            Investment Manager.

DISINTERESTED DIRECTORS

Gregory C. Clark ........       Director       Until Next   Private Investor.        9            Since
99 Jane Street                                 Election of  Prior thereto,                      Inception
New York, New York                             Directors    President of
Age: 56                                                     Wellspring
                                                            Management Group
                                                            (investment
                                                            advisory firm).

Bonnie Cohen ............       Director       Until Next   Consultant. Prior        9            Since
1824 Phelps Place, N.W.                        Election of  thereto,                            Inception
Washington, D.C.                               Directors    Undersecretary of
Age: 60                                                     State, United
                                                            States Department
                                                            of State. Director
                                                            of Wellsford Real
                                                            Properties, Inc.

George Grossman .........       Director       Until Next   Attorney-at-law.         9            Since
17 Elm Place                                   Election of                                      Inception
Rye, New York                                  Directors
Age: 49
Richard J. Norman .......       Director       Until Next   Private Investor.        9            Since
7520 Hackamore Drive                           Election of  Prior thereto,                      Inception
Potomac, Maryland                              Directors    Investment
Age: 59                                                     Representative of
                                                            Morgan Stanley Dean
                                                            Witter.
</Table>

                                                  (table continued on next page)

                                       13

<Page>
(table continued from previous page)

<Table>
<Caption>
                                                                                  NUMBER OF
                                                                                 FUNDS WITHIN
                                                                 PRINCIPAL           FUND
                                                                OCCUPATION         COMPLEX
                                                                DURING PAST      OVERSEEN BY
                                                                  5 YEARS          DIRECTOR
                             POSITION HELD       TERM OF     (INCLUDING OTHER     (INCLUDING    LENGTH OF
  NAME, ADDRESS AND AGE        WITH FUND         OFFICE     DIRECTORSHIPS HELD)   THE FUND)    TIME SERVED
  ---------------------        ---------         ------     -------------------   ---------    -----------
<S>                        <C>                 <C>          <C>                  <C>           <C>
Willard H. Smith, Jr. ...       Director       Until Next   Board member of          9            Since
7231 Encelia Drive                             Election of  Essex Property                      Inception
La Jolla, California                           Directors    Trust Inc.,
Age: 66                                                     Highwoods
                                                            Properties, Inc.,
                                                            Realty Income
                                                            Corporation and
                                                            Crest Net Lease,
                                                            Inc. Managing
                                                            Director at Merrill
                                                            Lynch & Co., Equity
                                                            Capital Markets
                                                            Division from 1983
                                                            to 1995.
</Table>

    The 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 OCCUPATION DURING PAST FIVE YEARS
------------------------------  -------------------  -------------------------------------------
<S>                             <C>                  <C>
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 a Vice
Age: 36                                              President of the Fund's Investment Manager
                                                     since 2000. Prior thereto, he was an
                                                     investment analyst with another real estate
                                                     securities investment manager.

William F. Scapell ...........  Vice President       Senior Vice President of Cohen & Steers
757 Third Avenue                                     Capital Management, Inc., the Fund's
New York, New York                                   Investment Manager, since February 2003.
Age: 36                                              Prior thereto, he was the chief strategist
                                                     for preferred securities at Merrill Lynch &
                                                     Co.

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 to
Age: 38                                              that Vice President of the Fund's
                                                     Investment Manager.

Lawrence B. Stoller ..........  Assistant Secretary  Senior Vice President and General Counsel
757 Third Avenue                                     of Cohen & Steers Capital Management, Inc.,
New York, New York                                   the Fund's Investment Manager, since 1999.
Age: 39                                              Prior to that, Associate General Counsel,
                                                     Neuberger Berman Management, Inc. (money
                                                     manager); and Assistant General Counsel,
                                                     The Dreyfus Corporation (money manager).
</Table>

                                       14

<Page>
    The following table provides information concerning the dollar range of the
Fund's equity securities owned by each Director and the aggregate dollar range
of securities owned in the Cohen & Steers Fund Complex.

<Table>
<Caption>
                                                                                     AGGREGATE DOLLAR
                                                                                     RANGE OF EQUITY
                                                                                    SECURITIES IN THE
                                                              DOLLAR RANGE OF         COHEN & STEERS
                                                            EQUITY SECURITIES IN           FUND
                                                               THE FUND AS OF         COMPLEX AS OF
                                                                       , 2003                 , 2003
                                                                   ------                 ------
<S>                                                         <C>                    <C>
Robert H. Steers..........................................          --
Martin Cohen..............................................          --
Gregory C. Clark..........................................          --
Bonnie Cohen..............................................          --
George Grossman...........................................          --
Richard Norman............................................          --
Willard H. Smith, Jr......................................          --
</Table>

    Conflicts of Interest. No Director who is not an 'interested person' of the
Fund as defined in the 1940 Act, and no immediate family members, owns any
securities issued by the Investment Manager, or any person or entity (other than
the Fund) directly or indirectly controlling, controlled by, or under common
control with the Investment Manager. Solely as a result of their ownership of
securities of certain of the underwriters, Messrs. Clark and Smith are
technically 'interested persons' of the Fund as defined in the 1940 Act until
after completion of the offering of the common stock. After the completion of
the offering, they will be non-interested Directors.

BOARD'S ROLE IN FUND GOVERNANCE

    Committees. The Fund's Board of Directors has one standing committee of the
Board, the Audit Committee, which is composed of all of the Directors who are
not interested persons of the Fund, as defined in the 1940 Act. The function of
the Audit Committee is to assist the Board of Directors in its oversight of the
Fund's financial reporting process.

    Approval of Investment Management Agreement. The Board of Directors,
including a majority of the Directors who are not parties to the Fund's
Investment Management Agreement, or interested persons of any such party
('Disinterested Directors') has the responsibility under the 1940 Act to approve
the Fund's Investment Management Agreement for its initial term and annually
thereafter at a meeting called for the purpose of voting on such matter. The
Investment Management Agreement was approved for an initial two-year term by the
Fund's Directors, including a majority of the Disinterested Directors, at a
meeting held on May   , 2003. In determining to approve the Investment
Management Agreement, the Directors reviewed the materials provided by the
Investment Manager and considered the following: (1) the level of the management
fees and estimated expense ratio of the Fund as compared to competitive Funds of
a comparable size; (2) the nature and quality of the services rendered by the
Investment Manager; (3) anticipated benefits derived by the Investment Manager
from the relationship with the Fund; (4) the costs of providing services to the
Fund; and (5) the anticipated profitability of the Fund to the Investment
Manager. They also considered the fact that the Investment Manager agreed to pay
all organizational expenses and offering costs, other than the sales load, that
exceeded $.05 per share in connection with the Fund's common stock offering. The
Directors then took into consideration the benefits to be derived by the
Investment Manager in connection with the Investment Management Agreement,
noting particularly the research and related services, within the meaning of
Section 28(e) of the Securities Exchange Act of 1934, as amended, that the
Investment Manager would be eligible to receive by allocating the Fund's
brokerage transactions.

                                       15

<Page>
                 COMPENSATION OF DIRECTORS AND CERTAIN OFFICERS

    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, 2003 and the aggregate compensation paid by the fund complex of
which the Fund is a part for the fiscal year ended December 31, 2002. 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 aggregate amount paid to the Director by the
Fund and the seven other funds that each Director serves in the fund complex.
The Directors do not receive any pension or retirement benefits from the fund
complex.

<Table>
<Caption>
                                                                                  TOTAL
                                                                              COMPENSATION
                                                               AGGREGATE        FROM FUND
                                                              COMPENSATION   COMPLEX PAID TO
         NAME OF PERSON, POSITION OF FUND DIRECTORS            FROM FUND        DIRECTORS
         ------------------------------------------            ---------        ---------
<S>                                                           <C>            <C>
Gregory C. Clark,* Director.................................
Bonnie Cohen,* Director.....................................
Martin Cohen,** Director and President......................
George Grossman,* Director..................................
Richard J. Norman,* Director................................
Willard H. Smith, Jr.,* Director............................
Robert H. Steers,** Director and Chairman...................
</Table>

---------

 * Member of the Audit Committee.

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

                                       16



<Page>

PRINCIPAL STOCKHOLDERS

    To the knowledge of the Fund, as of May 31, 2003, 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.

    As of May 31, 2003, no person to the knowledge of the Fund, owned
beneficially more than 5% of the outstanding Common Shares.

                     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., Cohen
& Steers Quality Income Realty Fund, Inc., Cohen & Steers Premium Income Realty
Fund, Inc. and Cohen & Steers Total Return Realty Fund, Inc., 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. 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.

    Under the Investment Management Agreement, the Fund pays the Investment
Manager a monthly management fee computed at the annual rate of .65% 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

                                       17

<Page>
Fund's shares, earnings reports and other financial data; (vii) monitoring
relationships with organizations providing services to the Company, 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 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, .06% of the Fund's managed assets up to $1 billion, .04%
of the Fund's average daily managed assets in excess of $1 billion up to
$1.5 billion and .02% of the Fund's average daily managed assets in excess of
$1.5 billion.

    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
Securities and Exchange Commission 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 .030% of the first $200 million in assets, .020%
of the next $200 million, and .010% 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., six funds at $200
million or $1.2 billion at .030%, 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 AND TRANSFER AND DIVIDEND DISBURSING AGENT

    State Street Bank, which has its principal business office at 225 Franklin
Street, Boston, MA 02110, has been retained to act as custodian of the Fund's
investments and EquiServe Trust Company, NA, which has its principal business
office at 150 Royall Street, Canton, MA 02021, as the Fund's transfer and
dividend disbursing agent. Neither State Street nor EquiServe 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 and Investment Manager 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,

                                       18

<Page>
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.

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 markup. In certain instances, the Fund may make purchases of
underwritten issues at prices which include underwriting fees.

    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
shareholders. The Investment Manager may also take into account payments made by
brokers effecting transactions for the Fund to other persons on behalf of the

                                       19

<Page>
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 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 and dividends declared but unpaid), by the total number of
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 (NASDAQ traded securities are valued at the NASDAQ
official closing price). 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 mean of the current bid and asked
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

                                       20

<Page>
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 willful misconduct or gross 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 grossly negligent in ascertaining the pertinent facts.

    The auction agent may conclusively 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 Auction.

    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, 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 Fund, 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 Fund 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

                                       21

<Page>
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.

                           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. S&P and
Moody's have agreed that the auditors must certify once per quarter the asset
coverage test on a date randomly selected by the auditor. 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.

                                       22

<Page>
    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 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.

    With respect to an S&P Eligible Asset specified below, the following
applicable number is the S&P Discount Factor (used to determine the Discounted
Value of any S&P Eligible Asset) provided that the S&P Exposure Period is 25
Business Days or less.

    (a) Types of S&P Eligible Assets

<Table>
<Caption>
                                                             DISCOUNT FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET                                       AAA RATING
--------------------------                                       ----------
<S>                                                          <C>
Common Stock of REITs and other real estate companies               162%
DRD Eligible Preferred Stock with a senior or preferred
  stock rating of at least BBB                                      245%
REIT and Non-DRD eligible Preferred Stock with a senior or
  preferred stock rating of at least BBB                            164%
DRD Eligible Preferred Stock with a senior or preferred
  stock rating below BBB                                            250%
REIT and non-DRD Eligible Preferred Stock with a senior or
  preferred stock rating below BBB                                  169%
Un-rated DRD Eligible Preferred Stock                               255%
Un-rated Non-DRD Eligible and un-rated REIT Preferred Stock         174%
Convertible bonds rated AAA to AAA-                                 165%
Convertible bonds rated AA+ to AA-                                  170%
Convertible bonds rated A+ to A-                                    175%
</Table>

                                       23

<Page>

<Table>
<Caption>
                                                             DISCOUNT FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET                                       AAA RATING
--------------------------                                       ----------
<S>                                                          <C>
Convertible bonds rated BBB+ to BBB-                                180%
Convertible bonds rated BB+ to BB-                                  185%
Convertible bonds rated B+ to B                                     190%
Convertible bonds rated B-                                          195%
Convertible bonds rated CCC+                                        205%
Convertible bonds rated CCC                                         220%
U.S. Short-Term Money Market Investments with maturities of
  180 days or less                                                  104%
U.S. Short-Term Money Market Investments with maturities of
  between 181 and 360 days                                          113%
U.S. Government Obligations (52 week Treasury Bills)                102%
U.S. Government Obligations (Two-Year Treasury Notes)               104%
U.S. Government Obligations (Five-Year Treasury Notes)              110%
U.S. Government Obligations (Ten-Year Treasury Notes)               117%
U.S. Government Obligations (Thirty-Year Treasury Bonds)            130%
Agency Mortgage Collateral (Fixed 15-Year)                          129%
Agency Mortgage Collateral (Fixed 30-Year)                          132%
Agency Mortgage Collateral (ARM 1/1)                                122%
Agency Mortgage Collateral (ARM 3/1)                                123%
Agency Mortgage Collateral (ARM 5/1)                                123%
Agency Mortgage Collateral (ARM 10/1)                               123%
Mortgage Pass-Through Fixed (15 Year)                               131%
Mortgage Pass-Through Fixed (30 Year)                               134%
    Debt securities of REIT's and other real estate
      companies according to the following corporate bond
      schedule
    Corporate Bonds rated at least AAA                              110%
    Corporate Bonds rated at least AA+                              111%
    Corporate Bonds rated at least AA                               113%
    Corporate Bonds rated at least AA-                              115%
    Corporate Bonds rated at least A+                               116%
    Corporate Bonds rated at least A                                117%
    Corporate Bonds rated at least A-                               118%
    Corporate Bonds rated at least BBB+                             120%
    Corporate Bonds rated at least BBB                              122%
    Corporate Bonds rated at least BBB-                             124%
    Corporate Bonds rated at least BB+                              129%
    Corporate Bonds rated at least BB                               135%
    Corporate Bonds rated at least BB-                              142%
    Corporate Bonds rated at least B+                               156%
    Corporate Bonds rated at least B                                169%
    Corporate Bonds rated at least B-                               184%
    Corporate Bonds rated at least CCC+                             202%
    Corporate Bonds rated at least CCC                              252%
    Corporate Bonds rated at least CCC-                             350%
Cash and Cash Equivalents                                           100%
</Table>

    (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;

                                       24

<Page>
    (c) Cash and Cash Equivalents

        (i) Cash and Cash Equivalents Cash and demand deposits in an 'A-1+'
    rated institution are valued at 100%. 'A-1+' rated commercial paper, with
    maturities no greater than 30 days and held instead of cash until maturity,
    is valued at 100%. Securities with next-day maturities invested in 'A-1+'
    rated institutions re considered cash equivalents and are valued at 100%.
    Securities maturing in 181 to 360 calendar days are valued at 114.2%.

        (ii) The S&P Discount Factor for shares of unrated Money Market Funds
    affiliated with the Fund used as 'sweep' vehicles will be 111%. Money Market
    Funds rated 'AAAm' will be discounted at the appropriate level as dictated
    by the exposure period. No S&P Discount Factor will be applied to Money
    Market Funds rated AAAm by S&P with effective next day maturities.

    'S&P Eligible Assets' shall mean:

        (A) Deposit Securities;

        (B) U.S. Government Obligations and U.S. Government Agencies;

        (C) Corporate Indebtedness. Evidences of indebtedness other than Deposit
    Securities, U.S. Government Obligations and Municipal Obligations that are
    not convertible into or exchangeable or exercisable for stock of a
    corporation (except to the extent of ten percent (10%) in the case of a
    share exchange or tender offer) ('Other Debt') and that satisfy all of the
    following conditions:

           (1) At least 80% of the Market Value of the Other Debt is rated at
       least 'BBB' by S&P or comparably rated by Moody's or Fitch, and no more
       than 10% of the Other Debt may be unrated;

           (2) the remaining term to maturity of such Other Debt shall not
       exceed thirty (30) years;

           (3) such Other Debt must provide for periodic interest payments in
       cash over the life of the security;

           (4) the issuer of such evidences of indebtedness files periodic
       financial statements with the U.S. Securities and Exchange Commission;

           (5) which, in the aggregate, have an average duration of 7.5.

        (D) Convertible Corporate Indebtedness. Evidences of indebtedness other
    than Deposit Securities, U.S. Government Obligations and Municipal
    Obligations that are convertible into or exchangeable or exercisable for
    stock of a corporation and that satisfy all of the following conditions:

           (1) such evidence of indebtedness is rated at least CCC by S&P; and

           (2) if such evidence of indebtedness is rated BBB or lower by S&P,
       the market capitalization of the issuer of such evidence of indebtedness
       is at least $100 million;

        (E) Agency Mortgage Collateral. Certificates guaranteed by U.S.
    Government Agencies (as defined below) (e.g., FNMA, GNMA and FHLMC) for
    timely payment of interest and full and ultimate payment of principal.
    Agency Mortgage Collateral also evidence undivided interests in pools of
    level-payment, fixed, variable, or adjustable rate, fully amortizing loans
    that are secured by first liens on one- to four-family residences
    residential properties (or in the case of Plan B FHLMC certificates, five or
    more units primarily designed for residential use) ('Agency Mortgage
    Collateral'). Agency Mortgage Collateral the following conditions apply:

           (1) For GNMA certificates backed by pools of graduated payment
       mortgages, levels are 20 points above established levels;

           (2) Qualifying 'large pool' FNMA mortgage-backed securities and FHLMC
       participation certificates are acceptable as eligible collateral. The
       eligible fixed-rate programs include FNMA MegaPools, FNMA Majors, FHLMC
       Multilender Swaps, and

                                       25

<Page>
       FHLMC Giant certificates. Eligible adjustable rate mortgage ('ARMs')
       programs include nonconvertible FNMA ARM MegaPools and FHLMC weighted
       average coupon ARM certificates. Eligible FHLMC Giant programs exclude
       interest-only and principal only stripped securities;

           (3) FNMA certificates backed by multifamily ARMs pegged to the 11th
       District Cost of Funds Index are acceptable as eligible collateral at 5
       points above established levels; and

           (4) Multiclass REMICs issued by FNMA and FHLMC are acceptable as
       eligible collateral at the collateral levels established for CMOs.

        (F) Mortgage Pass-Through Certificates. Publicly issued instruments
    maintaining at least a AA- ratings by S&P. Certificates evidence
    proportional, undivided interests in pools of whole residential mortgage
    loans. Pass-through certificates backed by pools of convertible ARMs are
    acceptable as eligible collateral at 5 points above the levels established
    for pass-through certificates backed by fixed or non-convertible ARM pools.

        (G) Preferred Stocks. Preferred stocks that satisfy all of the following
    conditions:

           1. The preferred stock issue has a senior rating from Standard &
       Poor's, or the preferred issue must be rated. In the case of Yankee
       preferred stock, the issuer should have a Standard & Poor's senior rating
       of at least 'BBB', or the preferred issue must be rated at least 'BBB'.

           2. The issuer--or if the issuer is a special purpose corporation,
       its parent--is listed on either the New York Stock Exchange, the
       American Stock Exchange or NASDAQ if the traded par amount is less than
       $1,000. If the traded par amount is $1,000 or more exchange listing is
       not required.

           3. The collateral pays cash dividends denominated in U.S. dollars.
       New preferred stock issuers without a dividend history should have an 'A'
       or higher senior or preferred stock rating from Standard & Poor's.

           4. Private placement 144A with registration rights are eligible
       assets.

           5. The minimum market capitalization of eligible issuers is US$50
       million.

           Restrictions for floating-rate preferred stock:

               1. Holdings must be limited to stock with a dividend period of
           less than or equal to 49 days, except for a new issue, where the
           first dividend period may be up to 64 days.

               2. The floating-rate preferred stock may not have been subject to
           a failed auction.

           Restrictions for adjustable--or auction-rate preferred stock:

               1. The total fair market value of adjustable-rate preferred stock
           held in the portfolio may not exceed 10% of eligible assets.

           Concentration Limits:

               2. Total issuer exposure in preferred stock of any one issuer is
           limited to 10% of the fair market value of eligible assets.

               3. Preferred stock rated below B- (including non-rated preferred
           stock) and preferred stock with a market cap of less than US$50
           million are limited to no more than 15% of the fair market value of
           the eligible assets.

               4. Add 5 points to over-collateralization level for issuers with
           a senior rating or preferred stock rating of less than BBB.

               5. Add 10 point to over-collateralization level of issuers with
           no senior rating or preferred stock rating.

                                       26

<Page>
        (H) Common Stocks of REITs and Other Real Estate Companies. Common
    stocks of REITs and Other Real Estate Companies that satisfy all of the
    following conditions:

           (1) such common stock (including the common stock of any predecessor
       or constituent issuer) has been traded on a recognized national
       securities exchange or quoted on the National Market System (or any
       equivalent or successor thereto) of NASDAQ, but excluding '144a' or 'pink
       sheet' stock not carried in daily newspaper over-the-counter listings;

           (2) the market capitalization of such issuer of common stock exceeds
       $100 million;

           (3) the issuer of such common stock is not an entity that is treated
       as a partnership for federal income taxes;

           (4) if such issuer is organized under the laws of any jurisdiction
       other than the United States, any state thereof, any possession or
       territory thereof or the District of Columbia, the common stock of such
       issuer held by the Fund is traded on a recognized national securities
       exchange or quoted on the National Market System of NASDAQ either
       directly or in the form of depository receipts.

        Escrow Bonds may comprise 100% of the Fund's S&P Eligible Assets. Bonds
    that are legally defeased and secured by direct U.S. government obligations
    are not required to meet any minimum issuance size requirement. Bonds that
    are economically defeased or secured by other U.S. agency paper must meet
    the minimum issuance size requirement for the Trust described above. Bonds
    initially rated or rerated as an escrow bond by another Rating Agency are
    limited to 50% of the Fund's S&P Eligible Assets, and carry one full rating
    lower than the equivalent S&P rating for purposes of determining the
    applicable discount factors. Bonds economically defeased and either
    initially rated or rerated by S&P or another Rating Agency are assigned that
    same rating level as its debt issuer, and will remain in its original
    industry category unless it can be demonstrated that a legal defeasance has
    occurred.

        With respect to the above, the Fund portfolio must consist of no less
    than 20 issues representing no less than 10 industries as determined by the
    S&P Industry Classifications and S&P Real Estate Industry/Property sectors.

        'S&P Exposure Period' shall mean the sum of (i) that number of days from
    the last Valuation Date on which the Fund's Discounted Value of S&P Eligible
    Assets were greater than the Preferred Shares Basic Maintenance Amount to
    the Valuation Date on which the Fund's Discounted Value of S&P Eligible
    Assets failed to exceed the Preferred Shares Basic Maintenance Amount,
    (ii) the maximum number of days following a Valuation Date that the Fund has
    under this Statement to cure any failure to maintain a Discounted Value of
    S&P Eligible Assets at least equal to the Preferred Shares Basic Maintenance
    Amount, and (iii) the maximum number of days the Fund has to effect a
    mandatory redemption under Section 10(b) of this Statement.

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.

                                       27

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

<Table>
<Caption>
                                                              DISCOUNT FACTOR(1)(2)(3)
                                                              ------------------------
<S>                                                           <C>
Common stock of REITs and other real estate companies.......            154%
Preferred stock of REITs
    with Senior Implied Moody's (or S&P or Fitch) rating:...            154%
    without Senior Implied Moody's (or S&P or Fitch)
      rating:...............................................            208%
Preferred stock of Other Real Estate Companies
    with Senior Implied Moody's (or S&P or Fitch) rating:...            208%
    without Senior Implied Moody's (or S&P or Fitch)
      rating:...............................................            250%
Preferred Securities of non-real estate companies...........
The Moody's Discount Factor for non-REIT preferred
  securities shall be
    (A) for preferred securities issued by a utility........            152%
    (B) for preferred securities of industrial and financial
        issuers and other issuers...........................            197%
    (C) for auction rate preferred securities...............            350%
</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(1)(3):

<Table>
<Caption>
       MATURITY IN YEARS          Aaa     Aa     A     Baa     Ba     B     NR(2)
       -----------------          ---     --     -     ---     --     -     -----
<S>                               <C>    <C>    <C>    <C>    <C>    <C>    <C>
1...............................  109%   112%   115%   118%   119%   125%   250%
2...............................  115%   118%   122%   125%   127%   133%   250%
3...............................  120%   123%   127%   131%   133%   140%   250%
4...............................  126%   129%   133%   138%   140%   147%   250%
5...............................  132%   135%   139%   144%   146%   154%   250%
7...............................  139%   143%   147%   152%   156%   164%   250%
10..............................  145%   150%   155%   160%   164%   173%   250%
15..............................  150%   155%   160%   165%   170%   180%   250%
20..............................  150%   155%   160%   165%   170%   190%   250%
30..............................  150%   155%   160%   165%   170%   191%   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 corporate debt securities, which are corporate debt securities rated
    below B by Moody's or rated by neither Moody's nor S&P, taken together with
    debt securities rated Ba1 and below by Moody's are limited to 10% of the
    discounted Moody's Eligible Assets.

(3) Corporate debt securities if (A) such securities provide for the periodic
    payment of interest in cash in U.S. dollars or euros, except that such
    securities that do not pay interest in U.S. dollars or euros shall be
    considered Moody's Eligible Assets if they are rated by Moody's or S&P or
    Fitch; (B) for debt securities rated Ba1 and below taken together with
    'Unrated' securities, no more than 10% of the original amount of such issue
    may constitute Moody's Eligible Assets; (C) such securities have been
    registered under the Securities Act or are restricted as to resale under
    federal securities laws but are eligible for resale pursuant to Rule 144A
    under the Securities Act as determined by the Fund's investment manager or
    portfolio manager acting pursuant to procedures approved by the Board of
    Directors, except that such securities that are not subject to U.S. federal
    securities laws shall be considered Moody's Eligible Assets if they are
    publicly traded; and (D) such securities are not subject to extended
    settlement.

                                       28

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

<Table>
<Caption>
                                                 U.S. TREASURY SECURITIES
          REMAINING TERM TO MATURITY                 DISCOUNT FACTOR        U.S. TREASURY STRIPS
          --------------------------                 ---------------        --------------------
<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.

    (e) Rule 144A Debt or Preferred Securities:

        The Moody's Discount Factor applied to Rule 144A debt or preferred
    securities for Rule 144A debt or preferred Securities will be 130% of the
    Moody's Discount Factor which would apply were the securities registered
    under the Securities Act.

    (f) Convertible Securities:

                           MOODY'S RATING CATAGORY(1)

<Table>
<Caption>
    INDUSTRY CATEGORY            Aaa               Aa                 A                Baa               Ba                 B
    -----------------            ---               --                 -                ---               --                 -
<S>                             <C>               <C>               <C>               <C>               <C>               <C>
Utility..................       162%              167%              172%              188%              195%              199%
Industrial...............       256%              261%              266%              282%              290%              293%
Financial................       233%              238%              243%              259%              265%              270%
</Table>

---------

(1) If a corporate debt security is unrated by Moody's but is rated by S&P or
    Fitch, 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 or comparable Fitch
    rating will be used; where the S&P rating is AA+, a Moody's rating of Aa3 or
    comparable Fitch rating will be used).

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

        (i) Common Stock, Preferred Stock and any debt security of REITs and
    Other Real Estate Companies and Preferred Stock and debt securities of non
    real estate companies: (A) which comprise at least 7 of the total number of
    Moody's Real Estate Industry/ Property Sector Classifications ('Moody's
    Sector Classifications') and Moody's Industry Classification, each listed
    below 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
    6.0% 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; (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,

                                       29

<Page>
    unqualified auditor's report without qualified, explanatory language and
    (E) in the aggregate, do not exceed 10% of the discounted Moody's Eligible
    Assets;

        (iii) Interest rate swaps entered into according to International Swap
    Dealers Association ('ISDA') standards if (A) 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) 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;

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

        (v) 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

        (vi) 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 (1) settled through clearing house firms with respect
    to which the Corporation has received prior written authorization from
    Moody's or (2) with counterparties having a Moody's long-term debt rating of
    at least Baa3 or (3) 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 Securities; any nationally recognized rating agency providing
a rating for the Preferred Securities may, at any time, change or withdraw any
such rating.

                             U.S. FEDERAL TAXATION

    The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Fund and its shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Fund or its
shareholders, and the following discussion is not intended as a substitute for
careful tax planning. Shareholders 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

                                       30

<Page>
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 shareholders, provided that it distributes at least 90% of the
sum of its investment company taxable income and any net tax-exempt interest
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 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 shareholders, 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 U.S. federal income tax at
regular corporate rates without any deduction for distributions to shareholders,
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 (i) for the DRD in the case of corporate shareholders
and (ii) for treatment as qualified dividend income in the case of individual
shareholders.

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 shareholders in the calendar
year

                                       31

<Page>
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 shareholders as ordinary income. 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 shareholders, if properly
designated, may be eligible for the DRD. In addition, for taxable years
beginning on or before December 31, 2008, distributions of investment income
designated by the Fund as derived from qualified dividend income will be taxed
in the hands of individuals at the rates applicable to long-term capital gain,
provided holding period and other requirements are met. The Fund does not expect
a significant portion of Fund distributions to be eligible for the DRD or
derived from qualified dividend income.

    The Fund may either retain or distribute to shareholders 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 shareholders at long-term
capital gains rates regardless of the length of time the shareholders 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
shareholders. As a result, each shareholder will be required to report his or
her pro 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.

    Long-term capital gain rates for individuals have been temporarily reduced
to 15% (with lower rates for individuals in the 10% and 15% rate brackets) for
taxable years beginning on or before December 31, 2008.

    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 shareholder's tax basis in his or her shares; any such
return of capital distributions in excess of the shareholder'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 shareholder purchases
shares of the Fund reflects undistributed income or gain, distributions of such
amounts will be taxable to the shareholder in the manner described above, even
though such distributions economically constitute a return of capital to the
shareholder.

    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, capital gains dividends
qualifying for the DRD and qualified dividend income) based upon the percentage
of total dividends paid out of current or accumulated earnings and profits to
each class for the tax year. Accordingly, the Fund intends each year to allocate
capital gain dividends, dividends qualifying for the DRD and dividends derived
from qualified dividend income, if any, between its Common Shares, Series and
Series    Preferred Shares in proportion to the total dividends paid out of
current or accumulated earnings and 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    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

                                       32

<Page>
excess of such earnings and profits, if any, will be made disproportionately to
holders of Common Shares.

SALE OF SHARES

    A shareholder 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 shareholder'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 shareholder's holding period for the shares. Generally, a
shareholder'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
shareholder (or amounts credited to the shareholder 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 U.S. 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.

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 shareholders.

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 U.S.
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 shareholders of the regulated investment company in
proportion to the dividends received by such shareholders, with the same
consequences as if the shareholders held the related REMIC residual interest
directly. In general, excess inclusion income allocated to shareholders (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

                                       33

<Page>
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 shareholder, 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 U.S. 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 shareholder 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 shareholder 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 shareholders and other shareholders 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 U.S. federal income tax
liability if the appropriate information is provided to the IRS.

FOREIGN SHAREHOLDER

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

    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
shareholder, 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 shareholder (see 'U.S. 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. federal
withholding tax at the rate of 30% (or lower treaty rate) unless the foreign
shareholder 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. federal income tax on his or her worldwide income at
the graduated rates applicable to U.S. citizens, rather than the 30% U.S.
federal withholding tax. In the case of a foreign shareholder who is a
nonresident alien individual, the Fund may be required to backup withhold U.S.
federal income tax on distributions of net capital gain unless the foreign
shareholder certifies his or her non-U.S. status under penalties of perjury or
otherwise establishes an exemption. See 'U.S. Federal Taxation--Backup
Withholding' above. Any gain that a foreign shareholder realizes upon the sale
or exchange of such shareholder's shares of the Fund will ordinarily be exempt
from U.S. federal withholding tax unless (i) in the case of a shareholder that
is a nonresident alien individual, the gain is U.S. source income and such
shareholder 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 shareholder held
such shares of the Fund and the five year period ending on the date of

                                       34

<Page>
the disposition of those shares, the Fund was a 'U.S. real property holding
corporation' and the foreign shareholder actually or constructively held more
than 5% of the shares of the same class, in which event described in (ii), the
gain would be taxed in the same manner as for a U.S. shareholder as discussed
above and a 10% U.S. federal withholding tax generally would be imposed on the
amount realized on the disposition of such shares to be credited against the
foreign shareholder's U.S. federal 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 shareholder,
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. federal income tax at the graduated
rates applicable to U.S. citizens, residents and domestic corporations. Foreign
corporate shareholders may also be subject to the branch profits tax imposed by
the Code.

    The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may differ from those described herein. Foreign
shareholders 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 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 shareholders also may be subject to state, local and
foreign taxes, depending upon each shareholder's particular situation.
Shareholders are urged to consult their tax advisers as to the particular
consequences to them of an investment in the Fund.

TAX SHELTER REPORTING REGULATIONS

    Under recently promulgated Treasury regulations, if a shareholder recognizes
a loss with respect to shares of $2 million or more for an individual
shareholder or $10 million or more for a corporate shareholder in any single
taxable year (or a greater loss over a combination of years), the shareholder
must file with the IRS a disclosure statement on Form 8886. Direct shareholders
of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a regulated investment
company are not excepted. Future guidance may extend the current exception from
this reporting requirement to shareholders of most or all regulated investment
companies. The fact that a loss is reportable under these regulations does not
affect the legal determination of whether the taxpayer's treatment of the loss
is proper. Shareholders should consult their tax advisors to determine the
applicability of these regulations in light of their individual circumstances.

                                       35

<Page>
OTHER TAXATION

    Fund shareholders may be subject to state, local and foreign taxes on their
Fund distributions. Shareholders are advised to consult their own tax advisers
with respect to the particular tax 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 shareholders. 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 Securities and Exchange
Commission. The formula can be expressed as follows:

<Table>
<C>           <S>
                                    P(1 + T)'pp'n = ERV
 Where: P =   a hypothetical initial payment of $1,000

        T =   average annual total return

    'pp'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>
<C>           <S>
  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 shareholders 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 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

                                       36

<Page>
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.)

    Marketing materials for the Fund may make reference to other closed-end
investment companies for which the Investment Manager serves as investment
adviser. The past performance of any other Cohen & Steers Fund is not a
guarantee of future performance for the Fund.

                                    EXPERTS

                             has been appointed as independent accountants for
the Fund. The statement of assets and liabilities and the statement of
operations of the Fund as of           , 2003 included in this statement of
additional information has been so included in reliance on the report of
                         , independent accountants, given the authority of the
firm as experts in auditing and accounting.

                                       37

<Page>
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholder and Board of Directors of
COHEN & STEERS REIT AND PREFERRED INCOME 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 REIT and Preferred Income Fund, Inc. (the
'Fund') at           , 2003 and the results of its operations for the one day
then ended 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
financial 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
          , 2003

                                       38

<Page>

<Table>
<Caption>
           COHEN & STEERS PREMIUM INCOME REALTY FUND, INC.

           STATEMENT OF ASSETS AND LIABILITIES AS OF , 2003
<S>                                                           <C>
Assets:
    Cash....................................................  $
    Deferred Offering Costs.................................
    Receivable from adviser.................................
        Total Assets........................................
Liabilities
    Accrued expenses........................................
    Payable for organization costs..........................
        Total Liabilities...................................
Net Assets applicable to 4,200 shares of $.001 par value
  common stock outstanding..................................  $
Net asset value per Common Shares outstanding ($100,275
  divided by 4,200 Common shares outstanding)...............  $
                                                              --------
                                                              --------
</Table>

<Table>
<S>                                                           <C>
                       STATEMENT OF OPERATIONS
               FOR THE ONE DAY ENDED            , 2003
INVESTMENT INCOME...........................................  $  --
Expenses:
    Organization costs......................................
    Expense reimbursement...................................
                                                              --------
        Total expenses......................................     --
                                                              --------
Net investment income.......................................  $  --
                                                              --------
                                                              --------
</Table>

NOTES TO FINANCIAL STATEMENTS

NOTE 1: ORGANIZATION

    Cohen & Steers REIT and Preferred Income Fund, Inc. (the 'Fund') was
incorporated under the laws of the State of Maryland on March 25, 2003 and is
registered under the Investment Company Act of 1940 (the 'Act'), as amended, as
a closed-end non-diversified management investment company. The Fund has been
inactive since that date except for matters relating to the Fund's
establishment, designation, registration of the Fund's shares of common stock
('Shares') under the Securities Act of 1933, and the sale of 4,200 shares
('Initial Shares') for $100,275 to Cohen & Steers Capital Management, Inc. (the
'Adviser'). 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.

    Cohen & Steers Capital Management, Inc. has agreed to reimburse all
organization expenses (approximately $15,000) and pay all offering costs (other
than the sales load) that exceed $.05 per Common Share.

NOTE 2: ACCOUNTING POLICIES

    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 these estimates.

NOTE 3: INVESTMENT MANAGEMENT AGREEMENT

    The Fund has entered into an Investment Management Agreement with the
Adviser, under which the Adviser will provide general investment advisory and
administrative services for the Fund. For providing these services, facilities
and for bearing the related expenses, the Adviser will receive a fee from the
Fund, accrued daily and paid monthly, at an annual rate equal to .65% of the
average daily managed assets. Managed asset value is the net asset value of the
Common Shares plus the liquidation preference of any Preferred Shares and the
principal amount of any borrowings used for leverage.

                                       39

<Page>
          STATEMENT OF ASSETS AND LIABILITIES AS OF             , 2003
                                  (UNAUDITED)

<Table>
<S>                                                           <C>
Assets:
Investments in securities, at value (Identified
  cost -- $          )......................................  $
    Cash....................................................
    Dividends 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 depreciation on investments..............
STATEMENT OF OPERATIONS FOR THE PERIOD          , 2003
  THROUGH         , 2003 (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 Realized and Unrealized (Loss) on Investments:
    Net realized gain on investments........................
    Net change in unrealized appreciation/(depreciation) on
      investments...........................................
        Net realized and unrealized (loss) on investments...
Net Decrease in Net Assets Resulting from Operations........
</Table>

           See accompanying notes to unaudited financial information

                                       40

<Page>
                       STATEMENT OF CHANGES IN NET ASSETS
            FOR THE PERIOD FROM        , 2003 THROUGH        , 2003
                                  (UNAUDITED)

<Table>
<Caption>
                                                                  FOR THE PERIOD
                                                                      , 2003
                                                              THROUGH         , 2003
                                                                    (UNAUDITED)
                                                                    -----------
<S>                                                           <C>
Changes in Net Assets:
From Operations:
    Net investment income...................................       $
    Net realized gain on investments........................
    Net change in unrealized appreciation/depreciation on
      investments...........................................
        Net decrease 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 unaudited financial information

                                       41

<Page>
                              FINANCIAL HIGHLIGHTS
                                  (UNAUDITED)

<Table>
<Caption>
                                                                   FOR THE PERIOD
                                                                      , 2003*
                                                                THROUGH       , 2003
                                                                   --------------
<S>                                                           <C>
PER SHARE OPERATING PERFORMANCE:
    Net asset value, beginning of period....................           $     **
    Less: Offering costs charged to paid-in capital on
      common shares.........................................
         Dilutive effect of common share offering...........
         Total offering and organization costs..............
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>

---------

* Commencement of operations.
** Prior to         , 2003 (Commencement of Operations), 4,200 shares were sold
   to Cohen & Steers Capital Management, Inc. (the 'Investment Manager') for
   $100,275.
(1) Not annualized.
(2) Annualized.

           See accompanying notes to unaudited financial information

                                       42

<Page>
NOTES TO UNAUDITED FINANCIAL INFORMATION

1. SIGNIFICANT ACCOUNTING POLICIES

    Cohen & Steers REIT and Preferred Income Fund, Inc. (the 'Fund') was
incorporated under the laws of the State of Maryland on March 25, 2003 and is
registered under the Investment Company Act of 1940, as amended, as a
closed-end, non-diversified management investment company. Prior to          ,
2003, the Fund had no operations except when it sold 4,200 shares of common
stock for $100,275 to Cohen & Steers Capital Management, Inc. (the 'Investment
Manager'). Investment operations commenced on          , 2003. The following is
a summary of significant accounting policies consistently followed by the Fund
in the preparation of its financial information. The policies are in conformity
with generally accepted accounting principles. The preparation of the financial
information 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 information 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.

    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

                                       43

<Page>
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 $.05 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
.65% of the Fund's average daily net assets (including the liquidation value of
Preferred Shares). For the period of          , 2003 (commencement of operations
through          , 2003), 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 .06% of the Fund's managed assets. For the period of
         , 2003 (commencement of operations) through          , 2003, the Fund
incurred $     in administration fees.

    In addition, Cohen & Steers REIT and Preferred Income Fund, Inc., Cohen &
Steers Premium Income Realty Fund, Inc., 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 (including the liquidation value of Preferred Shares) in the
Fund at an annual rate equal to .03% of the first $200 million in assets, .02%
of the next $200 million, and .01% of assets in excess of $400 million, with a
minimum fee of $120,000. 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 of          , 2003 (commencement of operations) through
         , 2003.

3. PURCHASES AND SALES OF SECURITIES

    Purchases and sales of securities, excluding short-term investments, for the
period of          , 2003 (commencement of operations) through          , 2003,
totaled $          and $0, respectively.

                                       44

<Page>
    At          , 2003, 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 depreciation.................................  $
</Table>

4. COMMON STOCK

    At          , 2003, the Fund has one class of common stock, par value $0.001
per share, of which 100,000,000 million shares are authorized and
shares are outstanding. Cohen & Steers Capital Management, Inc. owned 4,200
shares.

    On          , 2003 the Fund completed the initial public offering of
         shares of common stock. Proceeds paid to the Fund amounted to
$          after deduction of underwriting commissions and offering expenses of
$         .

    On             , 2003, the Fund completed a subsequent offering of
shares of common stock. Proceeds paid to the Fund amounted to $         after
deduction of underwriting commissions and offering expenses of $        .

    On          , 2003, the Fund completed a subsequent offering of
shares of common stock. Proceeds paid to the Fund amounted to $         after
deduction of underwriting commissions and offering expenses of $      .

5. SUBSEQUENT EVENTS

    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.

                                       45



<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.

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-3



<Page>

                                                                      APPENDIX B

                             ARTICLES SUPPLEMENTARY

              COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.

            Articles Supplementary Creating And Fixing The Rights of
                   Series M, Series T, Series F and Series TH
                    Taxable Auction Market Preferred Shares

    Cohen & Steers REIT and Preferred Income 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 Market Preferred Shares (par value $.001 per share) (the 'Preferred
Shares') and has further classified      of such shares as 'Series   Preferred
Shares', liquidation preference $25,000 per share,     of such shares as 'Series
   Preferred Shares', liquidation preference $25,000 per share, 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' the 'Series   Preferred
Shares', the 'Series   Preferred Shares', and the 'Series   Preferred Shares'
and each a 'Series' of Taxable Auction Market 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 M Taxable Auction Market Preferred Shares' ('Series M Preferred
Shares'). Each share of Series   Preferred Shares 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.

    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 Market Preferred Shares' ('Series   Preferred Shares').
Each share of 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

                                      B-1

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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.

    Series   Preferred Shares: A series of    Preferred Shares, par value $0.001
per share, liquidation preference $25,000 per share, is hereby designated
'Series F Taxable Auction Market Preferred Shares' ('Series F Preferred
Shares'). Each share of Series   Preferred Shares 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.

    Series   Preferred Shares: A series of    Preferred Shares, par value $0.001
per share, liquidation preference $25,000 per share, is hereby designated
'Series TH Taxable Auction Market Preferred Shares' ('Series   Preferred
Shares'). Each share of Series   Preferred Shares 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: TERMS OF PREFERRED SHARES

    1. Number of Shares; Ranking.

    (a) The initial number of authorized shares constituting the Series
    Preferred Shares is    shares, the initial number of authorized shares
constituting the Series   Preferred Shares is    shares, 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.

                                      B-2

<Page>
    (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 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 will, upon request and 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. If as a result of an unforeseeable
disruption of the financial markets, an Auction cannot be held for a period of
more than three business days, the dividend rate for the Subsequent Dividend
Period will be the same as the dividend rate for the current Dividend 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.

    (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

                                      B-4

<Page>
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 (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

                                      B-5

<Page>
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 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

                                      B-6

<Page>
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 and Rating
Agencies (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. Only with respect to shares held by
the Securities Depository, 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 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;

                                      B-7

<Page>
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 once each week 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 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
Paying 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.

                                      B-8

<Page>
    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 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 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

                                      B-9

<Page>
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 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.

                                      B-10

<Page>
    (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 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

                                      B-11

<Page>
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 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

                                      B-12

<Page>
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 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 entity or entities, 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

                                      B-13

<Page>
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 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 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

                                      B-14

<Page>
    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.

        (h) Engage in interest rate swaps, caps and floors, except that the
    Corporation may, without obtaining the written consent described above,
    engage in swaps, caps and floors if: (i) the unsecured senior debt or claims
    paying ability of the counterparty to the swap, cap or floor is rated A or
    A-1 or better by S&P and Aaa3 or better by Moody's; (ii) the swap, collar or
    floor is marked-to-market daily by the counterparty; (iii) a swap, collar or
    floor that is 'in the money' is valued at 95% of the accrued net excess of
    the Corporation's entitlements under such instrument over its obligations
    under such instrument for purposes of calculating the Discounted Value of
    S&P Eligible Assets (if S&P is then rating the Preferred Shares) and the
    Discounted Value of the Moody's Eligible Assets (if Moody's is then rating
    the Preferred Shares); (iv) for swaps that have a negative mark to market
    value, 100% of any accrued net excess of the Corporation's obligations under
    such instrument over its entitlements under such instrument, which excess is
    included as indebtedness which is senior to the Preferred Shares for the
    purposes of calculating the Preferred Shares Basic Maintenance Amount;
    (v) the swap, cap or floor will be terminated if the Corporation fails to
    maintain S&P Eligible Assets having an aggregate Discounted Value equal to
    or greater than the Preferred Shares Basic Maintenance Amount (if S&P is
    then rating the Preferred Shares) and Moody's Eligible Assets having an
    aggregate Discounted Value equal to or greater than the Preferred Shares
    Basic Maintenance Amount (if Moody's is then rating the Preferred Shares) on
    any two consecutive Valuation Dates; and (vi) the Corporation provides S&P
    (if S&P is then rating the Preferred Shares) and Moody's (if Moody's is then
    rating the Preferred Shares) subsequent notice of entering into the swap,
    cap or floor.

        (i) Change the pricing service referred to in the definition of Market
    Value.

        (j) Enter into reverse repurchase agreements.

    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) In the case of the asset coverage requirements for Moody's, the
    auditors must certify once per quarter the asset coverage test on a date
    randomly selected by the auditor.

                                      B-15

<Page>
        (e) 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) on or before the 5th business day after 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.

        (f) 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.

        (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
    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.

        (j) The Corporation agrees to provide S&P with no less than 30 days'
    notification of: (i) any material changes to the Corporation's
    organizational documents and material contracts, (ii) any redemptions, or
    (iii) any failed auctions.

    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.

                                      B-16

<Page>
    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 7 days 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 financial 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 Commercial
    Paper Dealers (or Dealer), if any, or, if there are no such Commercial Paper
    Dealers, by the Auction Agent as agreed to by Merrill Lynch & Co. For
    purposes of this definition, (A) 'Commercial Paper Dealers' shall mean
    (1) Salomon Smith Barney Inc., Lehman Brothers Inc., Merrill Lynch, Pierce,
    Fenner & Smith Incorporated and Goldman Sachs & Co.; (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.

                                      B-17

<Page>
        '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 M, Series T and Series F Preferred Shares, and the
    30-day 'AA' Composite Commercial Paper Rate in the case of the Series TH
    Preferred Shares.

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

        '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 The Bank of New York 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.

        '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.

                                      B-18

<Page>
        '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.

        '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'

        (a) for Moody's 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.

        (b) for S&P means the quotient of the Market Value of an Eligible Aset
    divided by the applicatble Discount Factor

        '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 Business Day
    following each Dividend Period for such Series and ending on the calendar
    day immediately preceding the next Dividend Payment Date for such Series.

        '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.

                                      B-19

<Page>
        '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 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 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

                                      B-20

<Page>
    Factor for any Moody's Eligible Asset other than the securities set forth
    below will be the percentage provided in writing by Moody's.

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

<Table>
<Caption>
                                                          DISCOUNT FACTOR(1)(2)(3)
                                                          ------------------------
<S>                                                       <C>
Common stock of REITs and other real estate companies                    154%
Preferred stock of REITs
    with Senior Implied Moody's (or S&P or Fitch)
      rating:                                                            154%
    without Senior Implied Moody's (or S&P or Fitch)
      rating:                                                            208%
Preferred stock of Other Real Estate Companies
    with Senior Implied Moody's (or S&P or Fitch)
      rating:                                                            208%
    without Senior Implied Moody's (or S&P or Fitch)
      rating:                                                            250%
Preferred Securities of non-real estate companies:
The Moody's Discount Factor for non-REIT preferred
  securities shall be
    (A) for preferred securities issued by a utility,                    152%
    (B) for preferred securities of industrial and
      financial issuers and other issuers,                               197%
    (C) for auction rate preferred securities,                           350%
</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 (1) (3):
<Table>
<Caption>
MATURITY
IN YEARS          Aaa               Aa                 A                Baa               Ba                 B
--------          ---               --                 -                ---               --                 -
<S>               <C>               <C>               <C>               <C>               <C>               <C>
    1             109%              112%              115%              118%              119%              125%
    2             115%              118%              122%              125%              127%              133%
    3             120%              123%              127%              131%              133%              140%
    4             126%              129%              133%              138%              140%              147%
    5             132%              135%              139%              144%              146%              154%
    7             139%              143%              147%              152%              156%              164%
   10             145%              150%              155%              160%              164%              173%
   15             150%              155%              160%              165%              170%              180%
   20             150%              155%              160%              165%              170%              190%
   30             150%              155%              160%              165%              170%              191%

<Caption>
MATURITY
IN YEARS        NR(2)
--------        -----
<S>            <C>
    1            250%
    2            250%
    3            250%
    4            250%
    5            250%
    7            250%
   10            250%
   15            250%
   20            250%
   30            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 corporate debt securities, which are rated by neither Moody's nor
    S&P, taken together with debt securities rated Ba1 and below by Moody's are
    limited to 10% of the discounted Moody's Eligible Assets.

(3) Corporate debt securities if (A) such securities provide for the periodic
    payment of interest in cash in U.S. dollars or euros, except that such
    securities that do not pay interest in U.S. dollars or euros shall be
    considered Moody's Eligible Assets if they are rated by Moody's or S&P or
    Fitch; (B) for debt securities rated Ba1 and below taken together with
    'Unrated' securities, no more than 10% of the original amount of such issue
    may constitute Moody's Eligible Assets; (C) such securities have been
    registered under the Securities Act or are restricted as to resale under
    federal securities laws but are eligible for resale pursuant to Rule 144A
    under the Securities Act as determined by the Fund's investment manager or
    portfolio manager acting pursuant to procedures approved by the Board of
    Directors, except that such securities that are not subject to U.S. federal
    securities laws shall be considered Moody's Eligible Assets if they are
    publicly traded; and (D) such securities are not subject to extended
    settlement.

                                      B-21

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

<Table>
<Caption>
                                                 U.S. TREASURY SECURITIES
REMAINING TERM TO MATURITY                           DISCOUNT FACTOR        U.S. TREASURY STRIPS
--------------------------                           ---------------        --------------------
<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.

    (e) Rule 144A Debt or Preferred Securities:

    The Moody's Discount Factor applied to Rule 144A debt or preferred
securities for Rule 144A debt or preferred Securities will be 130% of the
Moody's Discount Factor which would apply were the securities registered under
the Securities Act.

    (f) Convertible Securities:

                           MOODY'S RATING CATEGORY(1)
<Table>
<Caption>
INDUSTRY CATEGORY                          Aaa               Aa                 A                Baa               Ba
-----------------                          ---               --                 -                ---               --
<S>                                        <C>               <C>               <C>               <C>               <C>
Utility                                    162%              167%              172%              188%              195%
Industrial                                 256%              261%              266%              282%              290%
Financial                                  233%              238%              243%              259%              265%

<Caption>
INDUSTRY CATEGORY                           B
-----------------                           -
<S>                                        <C>
Utility                                    199%
Industrial                                 293%
Financial                                  270%
</Table>

---------

(1) If a corporate debt security is unrated by Moody's but is rated by S&P or
    Fitch, 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 or comparable Fitch
    rating will be used; where the S&P rating is AA+, a Moody's rating of Aa3 or
    comparable Fitch rating will be used).

    `Moody's Eligible Assets' means the following:

        (i) Common Stock, Preferred Stock and any debt security of REITs and
    Other Real Estate Companies, and Preferred Stock and debt securities of non
    real estate companies:

           (A) which comprise at least 7 of the total number of Moody's Real
       Estate Industry/Property Sector Classifications ('Moody's Sector
       Classifications') and Moody's Industry Classifications, each listed below
       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 6.0% of the Market Value of Moody's Eligible Assets, and

                                      B-22

<Page>
           (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;

        (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;

        (iii) Interest rate swaps entered into according to International Swap
    Dealers Association ('ISDA') standards if

           (A) 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) 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;

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

        (v) 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

        (vi) 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 (1) settled
       through clearing house firms with respect to which the Corporation has
       received prior written authorization from Moody's or (2) with
       counterparties having a Moody's long-term debt rating of at least Baa3 or
       (3) 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 details 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 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.

                                      B-23

<Page>
        'Moody's Industry Classifications' means, for the purposes of
    determining Moody's Eligible Assets, each of the following Industry
    Classifications:

        [TO BE INSERTED HERE]

        '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'):

           (i) Office

           (ii) Industrial

           (iii) Mixed

           (iv) Shopping Centers

           (v) Regional Malls

           (vi) Free Standing

           (vii) Apartments

           (viii) Manufactured Homes

           (ix) Diversified

           (x) Lodging/Resorts

           (xi) Health Care

           (xii) Home Financing

           (xiii) Commercial Financing

           (ixv) Self Storage

        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.

                                      B-24

<Page>
        '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
    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 The Bank of New York 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 Basic Maintenance Amount' means as of any Valuation
    Date as the dollar amount equal to the sum of:

           (i)(A) the product of the number of Preferred Shares outstanding on
       such date multiplied by $25,000 (plus the product of the number of shares
       of any other series of preferred shares outstanding on such date
       multiplied by the liquidation preference of such shares), plus any
       redemption premium applicable to the Preferred Shares (or other preferred
       shares) then subject to redemption; (B) the aggregate amount of dividends
       that will have accumulated at the respective Applicable Rates (whether or
       not earned or declared) to (but not including) the first respective
       Dividend Payment Date for the Preferred Shares outstanding that follows
       such Valuation Date (plus the aggregate amount of dividends, whether or
       not earned or declared, that will have accumulated in respect of other
       outstanding preferred shares to, but not including, the first respective
       dividend payment date for such other shares that follows such Valuation
       Date); (C) the aggregate amount of dividends that would accumulate on
       shares of each series of the Preferred Shares outstanding from such first
       respective Dividend Payment Date therefor through the 56th day after such
       Valuation Date, at the Maximum Rate; (D) the amount of anticipated
       expenses of the Trust for the 90 days subsequent to such Valuation Date;
       (E) the amount of any indebtedness or obligations of the Corporation
       senior in right of payment to the Preferred Shares; and (F) any current
       liabilities as of such Valuation Date, to the extent not reflected in any
       of (i)(A) through (i)(F) less

           (ii) the value (i.e., for purposes of current Moody's guidelines, the
       face value of cash and short-term securities that are the direct
       obligation of the U.S. government, provided in each case that such
       securities mature on or prior to the date upon which any of (i) (A)
       through (i) (F) become payable, otherwise the Moody's Discounted Value)
       (i.e., for the purposes of the current S&P guidelines, the face value of
       cash, and short term securities that are the direct obligations of the
       U.S. government, provided in each case

                                      B-25

<Page>
       that such securities mature on or prior to the date upon which any of
       (i)(A) through (i)(F) becomes payable, otherwise the S&P Discounted
       Value) of any of the Trust's assets irrevocably deposited by the
       Corporation for the payment of any of (i)(A) through (i)(F).

        '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 Global Pricing
           Chanin Capital Partners
           Data Resources Inc. (a McGraw-Hill company)
           FT Interactive Data
           J.J. Kenny Drake
           JP Morgan Pricing Services
           Loan Pricing Corporation (owned by Reuters)
           Meenan, Mcdevitt & Co., Inc
           Reuters
           Securities Evaluation Services
           Standard & Poor's Evaluation Services
           Thomson Financial Securities Management
           Telerate
           Telekurs
           Trepp Pricing Service
           Van Kampen Merritt Investment Advisory Corp Pricing Service
           CIBC World Markets

        '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 The Bank of New York, 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, with respect to an S&P Eligible Asset
    specified below, the following applicable number is the S&P Discount Factor
    provided that the S&P Exposure Period is 25 Business Days or less:

                                      B-26

<Page>
    (a) Types of S&P Eligible Assets

<Table>
<Caption>
                                                             DISCOUNT FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET                                       AAA RATING
--------------------------                                       ----------
<S>                                                          <C>
Common Stock of REITs and other real estate companies               162%
DRD Eligible Preferred Stock with a senior or preferred
  stock rating of at least BBB                                      245%
REIT and Non-DRD eligible Preferred Stock with a senior or
  preferred stock rating of at least BBB                            164%
DRD Eligible Preferred Stock with a senior or preferred
  stock rating below BBB                                            250%
REIT and non-DRD Eligible Preferred Stock with a senior or
  preferred stock rating below BBB                                  169%
Un-rated DRD Eligible Preferred Stock                               255%
Un-rated Non-DRD Eligible and un-rated REIT Preferred Stock         174%
Convertible bonds rated AAA to AAA-                                 165%
Convertible bonds rated AA+ to AA-                                  170%
Convertible bonds rated A+ to A-                                    175%
Convertible bonds rated BBB+ to BBB-                                180%
Convertible bonds rated BB+ to BB-                                  185%
Convertible bonds rated B+ to B                                     190%
Convertible bonds rated B-                                          195%
Convertible bonds rated CCC+                                        205%
Convertible bonds rated CCC                                         220%
U.S. Short-Term Money Market Investments with maturities of
  180 days or less                                                  104%
U.S. Short-Term Money Market Investments with maturities of
  between 181 and 360 days                                          113%
U.S. Government Obligations (52 week Treasury Bills)                102%
U.S. Government Obligations (Two-Year Treasury Notes)               104%
U.S. Government Obligations (Five-Year Treasury Notes)              110%
U.S. Government Obligations (Ten-Year Treasury Notes)               117%
U.S. Government Obligations (Thirty-Year Treasury Bonds)            130%
Agency Mortgage Collateral (Fixed 15-Year)                          129%
Agency Mortgage Collateral (Fixed 30-Year)                          132%
Agency Mortgage Collateral (ARM 1/1)                                122%
Agency Mortgage Collateral (ARM 3/1)                                123%
Agency Mortgage Collateral (ARM 5/1)                                123%
Agency Mortgage Collateral (ARM 10/1)                               123%
Mortgage Pass-Through Fixed (15 Year)                               131%
Mortgage Pass-Through Fixed (30 Year)                               134%
    Debt securities of REIT's and other real estate
      companies according to the following corporate bond
      schedule
    Corporate Bonds rated at least AAA                              110%
    Corporate Bonds rated at least AA+                              111%
    Corporate Bonds rated at least AA                               113%
    Corporate Bonds rated at least AA-                              115%
    Corporate Bonds rated at least A+                               116%
    Corporate Bonds rated at least A                                117%
    Corporate Bonds rated at least A-                               118%
    Corporate Bonds rated at least BBB+                             120%
    Corporate Bonds rated at least BBB                              122%
    Corporate Bonds rated at least BBB-                             124%
    Corporate Bonds rated at least BB+                              129%
    Corporate Bonds rated at least BB                               135%
</Table>

                                      B-27

<Page>

<Table>
<Caption>
                                                             DISCOUNT FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET                                       AAA RATING
--------------------------                                       ----------
<S>                                                          <C>
    Corporate Bonds rated at least BB-                              142%
    Corporate Bonds rated at least B+                               156%
    Corporate Bonds rated at least B                                169%
    Corporate Bonds rated at least B-                               184%
    Corporate Bonds rated at least CCC+                             202%
    Corporate Bonds rated at least CCC                              252%
    Corporate Bonds rated at least CCC-                             350%
Cash and Cash Equivalents                                           100%
</Table>

    (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) Cash and Cash Equivalents

        (i) Cash and Cash Equivalents Cash and demand deposits in an 'A-1+'
    rated institution are valued at 100%. 'A-1+' rated commercial paper, with
    maturities no greater than 30 days and held instead of cash until maturity,
    is valued at 100%. Securities with next-day maturities invested in 'A-1+'
    rated institutions re considered cash equivalents and are valued at 100%.
    Securities maturing in 181 to 360 calendar days are valued at 114.2%.

        (ii) The S&P Discount Factor for shares of unrated Money Market Funds
    affiliated with the Corporation used as 'sweep' vehicles will be 111%. Money
    Market Funds rated 'AAAm' will be discounted at the appropriate level as
    dictated by the exposure period. No S&P Discount Factor will be applied to
    Money Market Funds rated AAAm by S&P with effective next day maturities.

    'S&P Eligible Assets' shall mean:

        (A) Deposit Securities;

        (B) U.S. Government Obligations and U.S. Government Agencies;

        (C) Corporate Indebtedness. Evidences of indebtedness other than Deposit
    Securities, U.S. Government Obligations and Municipal Obligations that are
    not convertible into or exchangeable or exercisable for stock of a
    corporation (except to the extent of ten percent (10%) in the case of a
    share exchange or tender offer) ('Other Debt') and that satisfy all of the
    following conditions:

           (1) At least 80% of the Market Value of the Other Debt is rated at
       least 'BBB' by S&P or comparably rated by Moody's or Fitch, and no more
       than 10% of the Other Debt may be unrated;

           (2) the remaining term to maturity of such Other Debt shall not
       exceed thirty (30) years;

           (3) such Other Debt must provide for periodic interest payments in
       cash over the life of the security;

           (4) the issuer of such evidences of indebtedness files periodic
       financial statements with the U.S. Securities and Exchange Commission;

           (5) which, in the aggregate, have an average duration of 7.5.

        (D) Convertible Corporate Indebtedness. Evidences of indebtedness other
    than Deposit Securities, U.S. Government Obligations and Municipal
    Obligations that are convertible into or

                                      B-28

<Page>
    exchangeable or exercisable for stock of a corporation and that satisfy all
    of the following conditions:

           (1) such evidence of indebtedness is rated at least CCC by S&P; and

           (2) if such evidence of indebtedness is rated BBB or lower by S&P,
       the market capitalization of the issuer of such evidence of indebtedness
       is at least $100 million;

        (E) Agency Mortgage Collateral. Certificates guaranteed by U.S.
    Government Agencies (as defined below) (e.g., FNMA, GNMA and FHLMC) for
    timely payment of interest and full and ultimate payment of principal.
    Agency Mortgage Collateral also evidence undivided interests in pools of
    level-payment, fixed, variable, or adjustable rate, fully amortizing loans
    that are secured by first liens on one- to four-family residences
    residential properties (or in the case of Plan B FHLMC certificates, five or
    more units primarily designed for residential use) ('Agency Mortgage
    Collateral'). Agency Mortgage Collateral the following conditions apply:

           (1) For GNMA certificates backed by pools of graduated payment
       mortgages, levels are 20 points above established levels;

           (2) Qualifying 'large pool' FNMA mortgage-backed securities and FHLMC
       participation certificates are acceptable as eligible collateral. The
       eligible fixed-rate programs include FNMA MegaPools, FNMA Majors, FHLMC
       Multilender Swaps, and FHLMC Giant certificates. Eligible adjustable rate
       mortgage ('ARMs') programs include nonconvertible FNMA ARM MegaPools and
       FHLMC weighted average coupon ARM certificates. Eligible FHLMC Giant
       programs exclude interest-only and principal only stripped securities;

           (3) FNMA certificates backed by multifamily ARMs pegged to the 11th
       District Cost of Funds Index are acceptable as eligible collateral at 5
       points above established levels; and

           (4) Multiclass REMICs issued by FNMA and FHLMC are acceptable as
       eligible collateral at the collateral levels established for CMOs.

        (F) Mortgage Pass-Through Certificates. Publicly issued instruments
    maintaining at least a AA- ratings by S&P. Certificates evidence
    proportional, undivided interests in pools of whole residential mortgage
    loans. Pass-through certificates backed by pools of convertible ARMs are
    acceptable as eligible collateral at 5 points above the levels established
    for pass-through certificates backed by fixed or non-convertible ARM pools.

        (G) Preferred Stocks. Preferred stocks that satisfy all of the following
    conditions:

           1. The preferred stock issue has a senior rating from Standard &
       Poor's, or the preferred issue must be rated. In the case of Yankee
       preferred stock, the issuer should have a Standard & Poor's senior rating
       of at least 'BBB', or the preferred issue must be rated at least 'BBB'.

           2. The issuer -- or if the issuer is a special purpose corporation,
       its parent--is listed on either the New York Stock Exchange, the
       American Stock Exchange or NASDAQ if the traded par amount is less than
       $1,000. If the traded par amount is $1,000 or more exchange listing is
       not required.

           3. The collateral pays cash dividends denominated in U.S. dollars.
       New preferred stock issuers without a dividend history should have an 'A'
       or higher senior or preferred stock rating from Standard & Poor's.

           4. Private placement 144A with registration rights are eligible
       assets.

           5. The minimum market capitalization of eligible issuers is US$50
       million.

           Restrictions for floating-rate preferred stock:

                                      B-29

<Page>
               1. Holdings must be limited to stock with a dividend period of
           less than or equal to 49 days, except for a new issue, where the
           first dividend period may be up to 64 days.

               2. The floating-rate preferred stock may not have been subject to
           a failed auction.

           Restrictions for adjustable--or auction-rate preferred stock:

               1. The total fair market value of adjustable-rate preferred stock
           held in the portfolio may not exceed 10% of eligible assets.

           Concentration Limits:

               2. Total issuer exposure in preferred stock of any one issuer is
           limited to 10% of the fair market value of eligible assets.

               3. Preferred stock rated below B- (including non-rated preferred
           stock) and preferred stock with a market cap of less than US$50
           million are limited to no more than 15% of the fair market value of
           the eligible assets.

               4. Add 5 points to over-collateralization level for issuers with
           a senior rating or preferred stock rating of less than BBB.

               5. Add 10 point to over-collateralization level of issuers with
           no senior rating or preferred stock rating.

        (H) Common Stocks of REITs and Other Real Estate Companies. Common
    stocks of REITs and Other Real Estate Companies that satisfy all of the
    following conditions:

           (1) such common stock (including the common stock of any predecessor
       or constituent issuer) has been traded on a recognized national
       securities exchange or quoted on the National Market System (or any
       equivalent or successor thereto) of NASDAQ, but excluding '144a' or 'pink
       sheet' stock not carried in daily newspaper over-the-counter listings;

           (2) the market capitalization of such issuer of common stock exceeds
       $100 million;

           (3) the issuer of such common stock is not an entity that is treated
       as a partnership for federal income taxes;

           (4) if such issuer is organized under the laws of any jurisdiction
       other than the United States, any state thereof, any possession or
       territory thereof or the District of Columbia, the common stock of such
       issuer held by the Corporation is traded on a recognized national
       securities exchange or quoted on the National Market System of NASDAQ
       either directly or in the form of depository receipts.

        Escrow Bonds may comprise 100% of the Corporation's S&P Eligible Assets.
    Bonds that are legally defeased and secured by direct U.S. government
    obligations are not required to meet any minimum issuance size requirement.
    Bonds that are economically defeased or secured by other U.S. agency paper
    must meet the minimum issuance size requirement for the Trust described
    above. Bonds initially rated or rerated as an escrow bond by another Rating
    Agency are limited to 50% of the Corporation's S&P Eligible Assets, and
    carry one full rating lower than the equivalent S&P rating for purposes of
    determining the applicable discount factors. Bonds economically defeased and
    either initially rated or rerated by S&P or another Rating Agency are
    assigned that same rating level as its debt issuer, and will remain in its
    original industry category unless it can be demonstrated that a legal
    defeasance has occurred.

        With respect to the above, the Corporation portfolio must consist of no
    less than 20 issues representing no less than 10 industries as determined by
    the S&P Industry Classifications and S&P Real Estate Industry/Property
    sectors.

        'S&P Exposure Period' shall mean the sum of (i) that number of days from
    the last Valuation Date on which the Corporation's Discounted Value of S&P
    Eligible Assets were greater than the Preferred Shares Basic Maintenance
    Amount to the Valuation Date on which

                                      B-30

<Page>
    the Corporation's Discounted Value of S&P Eligible Assets failed to exceed
    the Preferred Shares Basic Maintenance Amount, (ii) the maximum number of
    days following a Valuation Date that the Corporation has under this
    Statement to cure any failure to maintain a Discounted Value of S&P Eligible
    Assets at least equal to the Preferred Shares Basic Maintenance Amount, and
    (iii) the maximum number of days the Corporation has to effect a mandatory
    redemption under Section 10(b) of this Statement.

        'S&P Industry Classifications' shall mean, for the purposes of
    determining S&P Eligible Assets, each of the following industry
    classifications (as defined by the S&P global industry classification):

           Aerospace & Defense
           Air Freight and Logistics Airlines
           Automobiles
           Automobile Components
           Beverages
           Biotechnology
           Building Products
           Cable
           Capital Markets
           Computers & Peripherals
           Commercial Banks
           Commercial Services & Supplies
           Communications Equipment
           Construction & Engineering
           Consumer Finance
           Containing & Packaging
           Distributors
           Diversified Financial Services
           Diversified Telecommunication Services
           Electric Utilities
           Electrical Equipment
           Electronic Equipment & Instrument
           Energy Equipment & Services
           Food & Staples Retailing
           Food Products
           Gas Utilities
           Healthcare Equipment & Supplies
           Healthcare Providers & Services
           Hotels, Restaurants & Leisure
           Household Durables
           Household Products
           Industrial Conglomerates
           Insurance
           Internet & Catalog Retail
           Internet Software & Services
           IT Services
           Leisure Equipment & Products
           Machinery
           Marine
           Media
           Metals & Mining
           Office Electronics
           Oil & Gas
           Packaging and Containers
           Paper & Forest Products

                                      B-31

<Page>
           Personal Products
           Pharmaceuticals
           Real Estate
           Retail
           Road & Rail
           Software
           Specialty Retail
           Semiconducters and Semi Conducter Equipment
           Textiles, Apparel and Luxury Goods
           Thrift & Mortgage Finance
           Tobacco
           Trading Companies & Distributors
           Transportation and Infrastructure
           Transportation Utilities
           Water Utilities
           Wireless Telecommunication Services

        '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

        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

                                      B-32

<Page>
       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;

           (iv) U.S. Government Securities; and

           (v) Rule 2a-7 eligible money market funds.

        '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 M, Series T and Series F Preferred Shares unless the day
    after such 7th day is not a Business Day, then the number of days ending on
    the calendar day next preceding the next Business Day (such Business Day,
    being the Dividend Payment Date for the applicable Series), or 28 days in
    the case of the Series TH Preferred Shares, unless the day after such 28th
    day is not a Business Day, then the number of days ending on the calendar
    day next preceding the next Business Day.

        '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 The Bank of New York, 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.

                                      B-33

<Page>
        '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.

        '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

                                      B-34

<Page>
    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 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-35

<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 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:

                                      B-36

<Page>
           (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 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

                                      B-37

<Page>
        (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) 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

                                      B-38

<Page>
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:

        (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

                                      B-39

<Page>
       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, 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.

                                      B-40

<Page>
        (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 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-41

<Page>
    IN WITNESS WHEREOF, COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC. has
caused these presents to be signed in its name and on its behalf by its
President and witnessed by its Assistant Secretary as of this   day of       ,
2003.

WITNESS:

By:
    ..................................
Name: Lawrence B. Stoller
Title: Assistant Secretary

                                          COHEN & STEERS REIT AND PREFERRED
                                          INCOME FUND, INC.

                                          By:
                                              ..................................
                                          Name: Adam M. Derechin
                                          Title: Vice President

    THE UNDERSIGNED, Vice President of the COHEN & STEERS REIT AND PREFERRED
INCOME 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: Adam M. Derechin
                                          Title: Vice President

                                      B-42



<Page>

                                     PART C

                               OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

1) Financial Statements
Part A -- Statement of Assets and Liabilities, as of           , 2003 (audited)
Part B -- Statement of Operations, for the one day ended           , 2003
(audited)

       -- Statement of Assets and Liabilities, as of           ,
          2003 (audited)
       -- Statement of Operations, as of           , 2003
          (unaudited)
       -- Statement of Changes in Net Assets, for the period
                   , 2003 through           , 2003 (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
(a)  -- Articles of Incorporation**
(b)  -- By-Laws**
(c)  -- Not Applicable
(d)  -- (i) Form of Articles Supplementary creating Preferred
        Shares.*
     -- (ii) The Specimen Certificate for Preferred Shares.*
(e)  -- Form of Dividend Reinvestment Plan**
(f)  -- Not Applicable
(g)  -- (i) Form of Investment Management Agreement**
     -- (ii) Not Applicable
(h)  -- Form of Purchase Agreement*
(i)  -- Not Applicable
(j)  -- Form of Custodian Agreement**
(k)  -- (i) Form of Transfer Agency, Registrar and Dividend
        Disbursing Agency Agreement**
     -- (ii) Form of Administration Agreement between the Fund
        and the Investment Manager**
     -- (iii) Form of Administration Agreement between the Fund
        and State Street Bank and Trust Company**
     -- (iv) Form of Auction Agency Agreement between the Fund
        and the Bank of New York*
     -- (v) Form of Broker-Dealer Agreement*
(l)  -- (i) Opinion and Consent of Simpson Thacher & Bartlett, LLP*
     -- (ii) Opinion and Consent of Venable, Baetjer and Howard, LLP*
(m)  -- Not Applicable
(n)  -- Consent of Independent Accountants*
(o)  -- Not Applicable
(p)  -- Not Applicable
(q)  -- Not Applicable
(r)  -- (i) Code of Ethics of the Fund*
     -- (ii) Code of Ethics of Investment Manager*
(s)  -- Power of Attorney*

---------
 * To be filed by Amendment.
** Incorporated by reference to Amendment No. 1 to the Fund's Registration
Statement, (File Nos. 333-104047 and 811-21326) filed May 5, 2003.

ITEM 25. MARKETING ARRANGEMENTS

    See Exhibit 2(h).

                                      C-1




<Page>

ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

    The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this registration statement:

<Table>
<S>                                                           <C>
SEC Registration fees.......................................  $80.90
New York Stock Exchange listing fee*........................
Printing and engraving expenses*............................
Auditing fees and expenses*.................................
Legal fees and expenses*....................................
NASD Fees*..................................................
Miscellaneous*..............................................
                                                              -------
    Total*..................................................  $
                                                              -------
                                                              -------
</Table>

---------

* Estimated.

ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

    None.

ITEM 28. NUMBER OF HOLDERS OF SECURITIES

    Set forth below is the number of record holders as of           , 2003, of
each class of securities of the Registrant:

<Table>
<Caption>
                                                                NUMBER OF
                       TITLE OF CLASS                         RECORD HOLDERS
                       --------------                         --------------
<S>                                                           <C>
Common Shares...............................................
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 Articles of Incorporation, 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 Articles of Incorporation. 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.

    The Registrant has agreed to indemnify the Underwriters of the Registrant's
common stock to the extent set forth in Exhibit 2(h).

    Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to the directors and officers, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is
therefore unenforceable. If a claim for indemnification against such liabilities
under the Securities Act of 1933 (other than for expenses incurred in a
successful defense) is asserted against the Company by the directors or officers
in connection with the shares, 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 of whether such indemnification by it
is against public policy as expressed in such Act and will be governed by the
final adjudication of such issue.

                                      C-2

<Page>
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER

    The descriptions 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
Greg E. Brooks..................................  Senior Vice President
William F. Scapell..............................  Senior Vice President
Kevin P. Norton.................................  Senior Vice President
Rahul Bhattacharjee.............................  Vice President
Jay J. Chen.....................................  Vice President
Terrance R. Ober................................  Vice President
Victor M. Gomez.................................  Vice President--Finance and Treasurer
Anthony Dotro...................................  Vice President
Robert Tisler...................................  Vice President
Mark Freed......................................  Vice President
Norbert Berrios.................................  Vice President
</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 Premium Income Realty Fund, Inc.

    Cohen & Steers Quality Income Realty Fund, Inc.

    Cohen & Steers Realty Shares, Inc.

    Cohen & Steers Total Return Realty Fund, Inc.

    Cohen & Steers Special Equity Fund, Inc.

    American Skandia Trust--AST Cohen & Steers Realty 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) Registrant undertakes to suspend the offering of shares until the
prospectus is amended, if subsequent to the effective date of this registration
statement, its net asset value declines more than ten percent from its net asset
value as of the effective date of the registration statement or its 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) Registrant undertakes that, for the purpose of determining any liability
under the Securities Act, the information omitted from the form of prospectus
filed as part of the registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
497(h) will be deemed to be a part of the registration statement as of the time
it was declared effective.

    Registrant undertakes that, for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a form of
prospectus will be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
will be deemed to be the initial bona fide offering thereof.

    (6) Registrant undertakes to send by first-class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.

                                      C-4



<Page>

                                   SIGNATURES

    Pursuant to the requirements of the Securities Act and the 1940 Act, 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    day of    , 2003.

                                          COHEN & STEERS REIT AND PREFERRED
                                          INCOME FUND, INC.

                                          By:        /S/ ROBERT H. STEERS
                                              ..................................
                                                      ROBERT H. STEERS
                                                          CHAIRMAN

    Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.

<Table>
<Caption>
             SIGNATURE                             TITLE                              DATE
             ---------                             -----                              ----
<C>                                         <S>                                   <C>
        By:  /s/ ROBERT:H. STEERS             Director, Chairman and Secretary        June 20, 2003
..........................................
             (ROBERT H. STEERS)

        By:   /s/ MARTIN COHEN                President, Treasurer and Director       June 20, 2003
 .........................................
              (MARTIN COHEN)

        By:   /s/ GREGORY C. CLARK            Director                                June 20, 2003
 .........................................
             (GREGORY CLARK)

        By:    /s/ BONNIE COHEN               Director                                June 20, 2003
 .........................................
              (BONNIE COHEN)

        By:    /s/ MARTIN COHEN               Director                                June 20, 2003
 .........................................
              (MARTIN COHEN)

        By:    /s/ GEORGE GROSSMAN            Director                                June 20, 2003
 .........................................
            (GEORGE GROSSMAN)

        By:   /s/ RICHARD J. NORMAN           Director                                June 20, 2003
 .........................................
           (RICHARD J. NORMAN)

        By:   /s/ WILLARD H. SMITH, JR.       Director                                June 20, 2003
 .........................................
         (WILLARD H. SMITH, JR.)
</Table>

                                      C-5



                         STATEMENT OF DIFFERENCES

The registered trademark symbol shall be expressed as....................  'r'
The service mark symbol shall be expressed as............................  'sm'
Characters normally expressed as superscript shall be prceded by.........  'pp'




</TEXT>
</DOCUMENT>
