Edgar Filing: COHEN & STEERS QUALITY INCOME REALTY FUND INC

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 2002

SECURITIES ACT FILE NO. 333-68150
INVESTMENT COMPANY ACT FILE NO. 811-10481
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2

(CHECK APPROPRIATE BOX OR BOXES)

[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

[x] PRE-EFFECTIVE AMENDMENT NO. 3

[ ] POST-EFFECTIVE AMENDMENT NO.

AND/OR

[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

[x] AMENDMENT NO. 3

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

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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)

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WITH COPIES TO:

SARAH E. COGAN, ESQ. LEONARD B. MACKEY, JR., ESQ.
SIMPSON THACHER & BARTLETT CLIFFORD CHANCE ROGERS & WELLS LLP
425 LEXINGTON AVENUE 200 PARK AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10166
(212) 455-2000 (212) 878-8000

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

If any securities being registered on this form will be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE REGISTRATION FEE(2)
----------------------------------------------------------------------------------------------------------------

Common Shares, $.001 par value........ 40,000,000 Shares $15.00 $600,000,000 $55,200
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(1) Estimated solely for the purpose of calculating the registration fee.

(2) Includes the registration fees of $264 and $5,256 previously paid on August
22, 2001 and January 23, 2002, respectively.
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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 THAT 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 DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

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

ITEM IN PART A OF FORM N-2
SPECIFIED IN PROSPECTUS LOCATION IN PROSPECTUS
----------------------- ----------------------

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............................... Fund Expenses
Item 4. Financial Highlights................................. Inapplicable
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; Use of Leverage;
Principal Risks of the Fund;
Additional Risk Considerations;
Repurchase of Shares
Item 9. Management........................................... Prospectus Summary; Management of
the Fund
Item 10. Capital Stock, Long-Term Debt, and Other
Securities......................................... Investment Objectives and
Policies; Use of Leverage;
Dividends and Distributions;
Taxation; Description of 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

PART B -- STATEMENT OF ADDITIONAL INFORMATION

LOCATION IN STATEMENT
ITEMS IN PART B OF FORM N-2 OF ADDITIONAL INFORMATION
--------------------------- -------------------------

Item 14. Cover Page........................................... Cover Page
Item 15. Table of Contents.................................... Table of Contents
Item 16. General Information and History...................... Inapplicable
Item 17. Investment Objectives and Policies................... Investment Objectives and
Policies; Investment Restrictions
Item 18. Management........................................... Management of the Fund;
Compensation of Directors and
Certain Officers; Investment
Advisory and Other Services
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........................................... Taxation
Item 23. Financial Statements................................. Report of Independent Accountants;
Statement of Assets and
Liabilities

PART C -- OTHER INFORMATION

Item 24-33. have been answered in Part C of this Registration
Statement

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, DATED FEBRUARY 25, 2002

PROSPECTUS SHARES

COHEN & STEERS
--------------------------
QUALITY INCOME REALTY FUND

COHEN & STEERS QUALITY
INCOME REALTY FUND, INC.
COMMON SHARES
$15.00 PER SHARE

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

Investment Objectives. Cohen & Steers Quality Income Realty Fund, Inc. (the
'Fund') is a recently-organized, non-diversified, closed-end management
investment company.

Our primary investment objective is high current income through investment
in real estate securities; and

Our secondary investment objective is capital appreciation.

Portfolio Contents. Under normal market conditions, we will invest at least
90% of our total assets in common stocks, preferred stocks and other equity
securities issued by real estate companies, such as 'real estate investment
trusts' ('REITs'). At least 80% of our total assets will be invested in income
producing equity securities issued by high quality REITs. See 'Investment
Objectives and Policies.' We may invest up to 10% of our total assets in debt
securities issued or guaranteed by real estate companies. We will not invest
more than 20% of our total assets in non-investment grade preferred stock or
debt securities (commonly known as 'junk bonds'). There can be no assurance that
we will achieve our investment objectives. See 'Principal Risks of the Fund.'

(continued on following page)

INVESTING THE COMMON SHARES INVOLVES RISKS THAT ARE DESCRIBED IN THE
'PRINCIPAL RISKS OF THE FUND' BEGINNING ON PAGE 26 OF THIS PROSPECTUS.
-----------------

PER SHARE TOTAL
--------- -----

Public offering price....................................... $15.00 $
Sales load(1)............................................... $ $
Proceeds, before expenses, to the Fund...................... $ $

(1) For a description of the manner in which the sales load may be reduced and
of other compensation paid to the underwriters by the Fund and others, see
'Underwriting.'

The underwriters may also purchase up to an additional Common Shares at
the public offering price, less the sales load, within 45 days of this
prospectus to cover over-allotments.

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

The Common Shares will be ready for delivery on or about February , 2002.

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

MERRILL LYNCH & CO.

A.G. EDWARDS & SONS, INC. PRUDENTIAL SECURITIES
RAYMOND JAMES CIBC WORLD MARKETS DEUTSCHE BANC ALEX. BROWN
LEGG MASON WOOD WALKER U.S. BANCORP PIPER JAFFRAY WACHOVIA SECURITIES
INCORPORATED
WELLS FARGO SECURITIES, LLC ROBERT W. BAIRD & CO. FAHNESTOCK & CO. INC.
JANNEY MONTGOMERY SCOTT LLC MORGAN KEEGAN & COMPANY, INC. QUICK & REILLY, INC.
-----------------
The date of this prospectus is February , 2002.

Leverage. The Fund intends to use leverage by issuing shares of preferred
stock representing approximately 33 1/3% of the Fund's capital after their
issuance or alternatively through borrowing. Through leveraging, the Fund will
seek to obtain a higher return for holders of common shares than if the Fund did
not use leverage. Leverage is a speculative technique and there are special
risks and costs associated with leveraging. There can be no assurance that a
leveraging strategy will be successful during any period in which it is
employed. See 'Use of Leverage -- Leverage Risks.'

No Prior History. Because the Fund is recently organized, its common shares
have no history of public trading. The shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering. The Fund's Common Shares have
been approved for listing on the New York Stock Exchange upon notice of issuance
under the symbol 'RQI.'

TABLE OF CONTENTS

PAGE
----

Prospectus Summary.......................................... 4
Summary of Fund Expenses.................................... 17
The Fund.................................................... 19
Use of Proceeds............................................. 19
Investment Objectives and Policies.......................... 19
Use of Leverage............................................. 22
Interest Rate Transactions.................................. 24
Principal Risks of the Fund................................. 26
Additional Risk Considerations.............................. 31
Management of the Fund...................................... 32
Dividends and Distributions................................. 34
Closed-End Structure........................................ 37
Possible Conversion to Open-End Status...................... 37
Repurchase of Shares........................................ 38
Taxation.................................................... 39
Description of Shares....................................... 40
Certain Provisions of the Articles of Incorporation and
By-Laws................................................... 41
Underwriting................................................ 44
Direct Placements........................................... 46
Custodian, Transfer Agent, Dividend Disbursing Agent and
Registrar................................................. 46
Reports to Shareholders..................................... 47
Validity of the Shares...................................... 47
Table of Contents of the Statement of Additional
Information............................................... 48

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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT, AND THE UNDERWRITERS HAVE NOT,
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. WE ARE NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU
SHOULD ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE
DATE OF THIS PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION 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 February , 2002 (the 'SAI'), containing additional
information about the Fund, has been filed with the Securities and Exchange
Commission and is incorporated by reference in its entirety into this
prospectus. You can review the table of contents of the SAI on page 48 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
Securities and Exchange Commission web site (http://www.sec.gov).

Through and including , 2002, all dealers effecting transactions in
these securities, whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

PROSPECTUS SUMMARY

This is only a summary. This summary may not contain all of the information
that you should consider before investing in our common shares. You should
review the more detailed information contained in this prospectus and in the
Statement of Additional Information, especially the information set forth under
the heading 'Principal Risks of the Fund.'

THE FUND..................................... Cohen & Steers Quality Income Realty Fund, Inc. (the
'Fund') is a recently organized, non-diversified,
closed-end management investment company.

THE OFFERING................................. We are offering shares of common stock
('Common Shares') through a group of underwriters led
by Merrill Lynch & Co. You must purchase at least 100
Common Shares ($1,500). The underwriters have been
granted an option to purchase up to additional
Common Shares solely to cover over-allotments, if
any. The initial public offering price is $15.00 per
share. See 'Underwriting.' Cohen & Steers Capital
Management, Inc. (the 'Investment Manager') will be
responsible for (i) all organization expenses and
(ii) offering costs (other than the sales load) that
exceed $0.03 per share of the Fund's Common Shares.

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

Under normal market conditions, we will invest at
least 90% of our total assets in common stocks,
preferred stocks and other equity securities issued
by real estate companies, such as 'real estate
investment trusts' ('REITs'). At least 80% of our
total assets will be invested in income producing
equity securities issued by high quality REITs, and
substantially all of the equity securities of real
estate companies in which we intend to invest are
traded on a national securities exchange or in the
over-the-counter market. High quality REITs are
companies that, in the opinion of the Investment
Manager, offer excellent prospects for consistent,
above-average revenue and earnings growth. To
determine whether a company is of high quality, the
Investment Manager generally looks to a strong record
of earnings

growth, as well as to a company's current ratio of
debt to capital and the quality of its management.
All of the REITs in which the Fund will invest will
have a market capitalization greater than $100
million. A real estate company generally derives at
least 50% of its revenue from real estate or has at
least 50% of its assets in real estate. A REIT is a
company dedicated to owning, and usually operating,
income producing real estate, or to financing real
estate. REITs are generally not taxed on income
distributed to shareholders provided they distribute
to their shareholders substantially all of their
income and otherwise comply with the requirements of
the Internal Revenue Code of 1986, as amended (the
'Code'). As a result, REITs generally pay relatively
high dividends (as compared to other types of
companies) and the Fund intends to use these REIT
dividends in an effort to meet its objective of high
current income. We may invest up to 10% of our total
assets in debt securities issued or guaranteed by
real estate companies. It is our current intention to
invest approximately 70% of our total assets in
common stocks of real estate companies and
approximately 30% of our total assets in preferred
stock of real estate companies, although the actual
percentage of common and preferred stocks in our
investment portfolio may vary over time. We will not
invest more than 20% of our total assets in preferred
stock or debt securities rated below investment grade
(commonly known as 'junk bonds') or unrated
securities of comparable quality. Preferred stock or
debt securities will be considered to be investment
grade if, at the time of investment, such security
has a rating of 'BBB' or higher by Standard & Poor's
Ratings Services ('S&P'), 'Baa' or higher by Moody's
Investors Service, Inc. ('Moody's') or an equivalent
rating by a nationally recognized statistical rating
agency. The Investment Manager may also invest in
preferred stock or debt securities which are unrated
but which, in the opinion of the Investment Manager,
are determined to be of equivalent quality. All of
our investments will be in securities of U.S. issuers
and we will generally not invest more than 10% of our
total assets in the securities of one issuer. There
can be no assurance that our investment objectives
will be achieved. See 'Investment Objectives and
Policies.'

USE OF LEVERAGE.............................. Subject to market conditions and the Fund's receipt
of a AAA/aaa credit rating on the Fund Preferred
Shares, approximately one to three months after
completion of this offering, the Fund intends to
offer shares of preferred stock ('Fund Preferred
Shares') representing approximately 33 1/3% of the
Fund's capital after their issuance. The issuance of
Fund Preferred Shares will leverage your investment
in Common Shares. As an alternative to Fund Preferred
Shares, the Fund may leverage through borrowing. Any
borrowing will have seniority over the Common Shares.

The use of leverage creates an opportunity for
increased Common Share net income, but also creates
special risks for holders of Common Shares ('Common
Shareholders'). The Fund Preferred Shares will pay
dividends based on short-term rates, which will be
reset frequently. Borrowings may be at a fixed or
floating rate. The Fund may seek to protect itself
from the risk of increasing dividends or interest
expenses resulting from an increase in short-term
interest rates by entering into a swap or cap
transaction as to all or a portion of the Fund
Preferred Shares or any borrowings. See 'Interest
Rate Transactions.' As long as the rate of return,
net of applicable Fund expenses, on the Fund's
portfolio investments exceeds Fund Preferred Share
dividend rates, as reset periodically, interest on
any borrowings or the payment rate set by any
interest rate swap, the investment of the proceeds of
the Fund Preferred Shares or any borrowing will
generate more income than will be needed to pay such
dividends, interest rate or swap payment. If so, the
excess will be available to pay higher dividends to
Common Shareholders. If, however, the dividends or
interest rate on any borrowings, as modified by any
cap, or payment rate set by any interest rate swap,
exceeds the rate of return on the Fund's investment
portfolio, the return to Common Shareholders will be
less than if the Fund had not leveraged.

The holders of Fund Preferred Shares voting as a
separate class will be entitled to elect two members
of the Board of Directors of the Fund and in the
event that the Fund fails to pay two full years of
accrued dividends on the Fund Preferred Shares, the
holders of the Fund Preferred Shares will be entitled
to elect a

majority of the members of the Board of Directors.
See 'Use of Leverage' and 'Description of
Shares -- Fund Preferred Shares.'

There is no assurance that the Fund will utilize
leverage or that, if utilized, the Fund's leveraging
strategy will be successful. See 'Use of
Leverage -- Leverage Risk.'

Leverage Risk. Leverage creates two major types of
risks for Common Shareholders:

the likelihood of greater volatility of net asset
value and market price of Common Shares because
changes in the value of the Fund's portfolio
(including changes in the value of any interest rate
swap, if applicable) are borne entirely by the
Common Shareholders; and

the possibility either that Common Share income will
fall if the dividend rate on the Fund Preferred
Shares or the interest rate on any borrowings rises,
or that Common Share income will fluctuate because
the dividend rate on the Fund Preferred Shares or
the interest rate on any borrowings varies.

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 equals the net asset value of the Common
Shares plus the liquidation preference on any Fund
Preferred Shares plus the principal amount of any
borrowings).

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 Fund 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. Depending on the state
of interest rates in general, our use of interest
rate swaps or caps could enhance or decrease the net
income of the Common Shares. To the extent there is a
decline in interest rates, the value of the interest
rate swap or cap could decline, and could result in a
decline in the net asset value of the Fund Common
Shares. In addition, 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 whether the Fund would be
entitled to receive net payments from the
counterparty on the swap or cap, which in turn would
depend on the general state of short-term interest
rates and the returns on the Fund's portfolio
securities at that point in time, such default could
negatively impact the performance of the Fund's
Common 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
performance of the Fund's Common Shares. If the Fund
fails to maintain the required 200% asset coverage of
the liquidation value of the outstanding Fund
Preferred Shares or if the Fund loses its expected
AAA/aaa rating on the Fund Preferred Shares or fails
to maintain other covenants, the Fund may be required
to redeem some or all of the Fund Preferred Shares.
Similarly, the Fund could be required to prepay the
principal amount of any borrowings. Such redemption
or prepayment 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 Fund's leverage. See 'Use of Leverage' and
'Interest Rate Transactions' for additional
information.

PRINCIPAL RISKS OF 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.

No Operating History. As a recently organized entity,
we have no operating history. See 'The Fund.'

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. Your investment in Common Shares
represents an indirect investment in the REIT shares
and other real estate securities owned by the Fund,
substantially all of which are traded on a national
securities exchange or in the over-the-counter
markets. The value of these securities, like other
stock market investments, may move up or down,
sometimes rapidly and unpredictably. Preferred stocks
and debt securities are generally more sensitive to
changes in interest rates than common stocks. When
interest rates rise, the market value of preferred
stocks and debt securities generally will fall. Your
Common Shares at any point in time may be worth less
than what you invested, even after taking into
account the reinvestment of Fund dividends and
distributions. The Fund may utilize leverage, which
magnifies the stock market risk. See 'Use of
Leverage -- Leverage Risk.'

General Real Estate Risks. Since we concentrate our
assets in the real estate industry, your investment
in the Fund will be closely linked to the performance
of the real estate markets. Property values may fall
due to increasing vacancies or declining rents
resulting from economic, legal, cultural or
technological developments. REIT prices also may drop
because of the failure of borrowers to pay their
loans and poor management. Many REITs utilize
leverage which increases investment risk and could
adversely affect a REIT's operations and

market value in periods of rising interest rates as
well as risks normally associated with debt
financing. In addition, there are risks associated
with particular sectors of real estate investments.

Retail Properties. Retail properties are affected by
the overall health of the applicable economy and may
be adversely affected by the growth of alternative
forms of retailing, bankruptcy, departure or
cessation of operations of a tenant, a shift in
consumer demand due to demographic changes, spending
patterns and lease terminations.

Office Properties. Office properties are affected by
the overall health of the economy, and other factors
such as a downturn in the businesses operated by
their tenants, obsolescence and non-competitiveness.

Hotel Properties. The risks of hotel properties
include, among other things, the necessity of a high
level of continuing capital expenditures,
competition, increases in operating costs which may
not be offset by increases in revenues, dependence on
business and commercial travelers and tourism,
increases in fuel costs and other expenses of travel,
and adverse effects of general and local economic
conditions. Hotel properties tend to be more
sensitive to adverse economic conditions and
competition than many other commercial properties.

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 on a local and
regional basis. The failure of any healthcare
operator to comply with governmental laws and
regulations may affect its ability to operate its
facility or receive government reimbursements.

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 the management team, the
level of

mortgage rates, presence of competing properties,
adverse economic conditions in the locale,
oversupply, and rent control laws or other laws
affecting such properties.

Insurance. Certain of the portfolio companies may
carry comprehensive liability, fire, flood,
earthquake extended coverage and rental loss
insurance with various policy specifications, limits
and deductibles. 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 operative effectively.

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, operator or responsible
party of such properties and, therefore, may be
potentially liable for removal or remediation costs,
as well as certain other costs, including
governmental fines and liabilities for injuries to
persons and property. The existence of any such
material environmental liability could have a
material adverse effect on the results of operations
and cash flow of any such portfolio company and, as a
result, the amount available to make distributions on
shares of the Fund 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. REIT
shares, therefore, can be more volatile than, and
perform differently from, larger company stocks.
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.
Further, smaller companies may have fewer business
lines; changes in any one line of business,
therefore, may have a greater impact on a smaller
company's stock price than is the case for a larger
company.

As of December 31, 2001, the market capitalization of
REITs ranged in size from approximately $1.5 million
to approximately $12.5 billion.

See 'Principal Risks of the Fund -- General Risks of
Securities Linked to the Real Estate Market.'

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

Market Price Discount From Net Asset Value. Shares of
closed-end investment companies frequently trade at a
discount from their net asset value. This
characteristic is a risk separate and distinct from
the risk that net asset value could decrease as a
result of investment activities and may be greater
for investors expecting to sell their shares in a
relatively short period following completion of this
offering. We cannot predict whether the shares will
trade at, above or below net asset value. See
'Principal Risks of the Fund -- Market Price Discount
From Net Asset Value.'

ADDITIONAL RISK CONSIDERATIONS............... Portfolio Turnover. We may engage in portfolio
trading when considered appropriate. There are no
limits on the rate of portfolio turnover. A higher
turnover rate results in correspondingly greater
brokerage commissions and other transactional
expenses which are borne by the Fund. See 'Additional
Risk Considerations -- Portfolio Turnover.'

Inflation Risk. Inflation risk is the risk that the
value of assets or income from investments will be
worth less than in the future as inflation decreases
the value of money. As inflation increases, the real
value of the

Common Shares and distributions can decline and the
dividend payments on the Fund Preferred Shares, if
any, or interest payments on any borrowings may
increase. See 'Additional Risk Considerations --
Inflation Risk.'

Non-Diversified Status. Because we, as a
non-diversified investment company, may invest in a
smaller number of individual issuers than a
diversified investment company, an investment in the
Fund presents greater risk to you than an investment
in a diversified company. We intend to comply with
the diversification requirements of the Code
applicable to regulated investment companies. See
'Additional Risk Considerations -- Non-Diversified
Status.' See also 'Taxation' in the SAI.

Anti-Takeover Provisions. Certain provisions of our
Articles of Incorporation and By-Laws could have the
effect of limiting the ability of other entities or
persons to acquire control of the Fund or to modify
our structure. The provisions may have the effect of
depriving you of an opportunity to sell your shares
at a premium over prevailing market prices and may
have the effect of inhibiting conversion of the Fund
to an open-end investment company. See 'Certain
Provisions of the Articles of Incorporation and
By-Laws' and 'Additional Risk Considerations --
Anti-Takeover Provisions.'

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

Given the risks described above, an investment in the
shares may not be appropriate for all investors. You
should carefully consider your ability to assume
these risks before making an investment in the Fund.

INVESTMENT MANAGER........................... Cohen & Steers Capital Management, Inc. is the
investment manager pursuant to an Investment

Management Agreement. The Investment Manager, which
was formed in 1986, is a leading firm specializing in
the management of real estate securities portfolios
and as of December 31, 2001 had approximately $5.7
billion in assets under management. Its clients
include pension plans, endowment funds and mutual
funds, including some of the largest open-end and
closed-end real estate funds. The Investment
Manager's client accounts are invested principally in
real estate securities and the Investment Manager
focuses exclusively on real estate. The Investment
Manager also will have responsibility for providing
administrative services, and assisting the Fund with
operational needs pursuant to an 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.'

FEES AND EXPENSES............................ The Fund will pay the Investment Manager a monthly
fee computed at the annual rate of 0.85% of average
daily managed assets (i.e., the net asset value of
Common Shares plus the liquidation preference of any
Fund Preferred Shares and the principal amount of any
borrowings used for leverage). The fees payable to
the Investment Manager are higher than the management
fees paid by many investment companies, but are
comparable to fees paid by many registered management
investment companies that invest primarily in real
estate securities. The Investment Manager has
contractually agreed to waive a portion of its
investment management fees in the amount of 0.32% of
average daily total managed assets for the first 5
fiscal years of the Fund's operations (through
December 31, 2006), and in declining amounts for each
of the five years thereafter (through December 31,
2011). Based on information compiled by the
Investment Manager from various sources, including
Morningstar, Inc., Lipper Inc. and Securities and
Exchange Commission filings, for most of this 10 year
period, the Investment Manager expects the Fund's
fees and expenses to be lower than most comparable
funds.

See 'Management of the Fund -- Investment Manager.'
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 include the liquidation preference of preferred
stock, and the principal amount of any outstanding
borrowings used for leverage. The Fund's investment
management fees and other expenses are paid only by
the Common Shareholders, and not by holders of the
Fund Preferred Shares. See 'Use of Leverage.'

LISTING AND SYMBOL........................... The Fund's Common Shares have been approved for
listing on the New York Stock Exchange upon notice of
issuance under the symbol 'RQI.'

DIVIDENDS AND DISTRIBUTIONS.................. Commencing with the Fund's first dividend, the Fund
intends to make regular monthly cash distributions to
Common Shareholders at a level rate based on the
projected performance of the Fund, which rate may be
adjusted from time to time. The Fund's ability to
maintain a level dividend rate will depend on a
number of factors, including the stability of income
received from its investments and dividends payable
on the Fund Preferred Shares or interest payments on
borrowings. As portfolio and market conditions
change, the rate of dividends on the Common Shares
and the Fund's dividend policy will likely change.
Over time, the Fund will distribute all of its net
investment income (after it pays accrued dividends on
any outstanding Fund Preferred Shares and interest on
any borrowings). In addition, at least annually, the
Fund intends to distribute net capital gain and
taxable ordinary income, if any, to you so long as
the net capital gain and taxable ordinary income are
not necessary to pay accrued dividends on, or redeem
or liquidate any Fund Preferred Shares, or pay
interest on any borrowings. Your initial distribution
is expected to be declared approximately 45 days, and
paid approximately 60 to 75 days, from the completion
of this offering, depending on market conditions.
Following the commencement of this offering, the Fund
intends to file an exemptive application with the
Securities and Exchange Commission seeking an order
under the Investment Company Act of 1940 (the '1940

Act') facilitating the implementation of a dividend
policy calling for monthly distributions of a fixed
percentage of its net asset value ('Managed Dividend
Policy'). If, and when, the Fund receives the
requested relief, the Fund may, subject to the
determination of its Board of Directors, implement a
Managed Dividend Policy. See 'Dividends and
Distributions.'

DIVIDEND REINVESTMENT PLAN................... Shareholders will receive their dividends in
additional Common Shares purchased in the open market
or issued by the Fund through the Fund's Dividend
Reinvestment Plan, unless they elect to have their
dividends and other distributions from the Fund paid
in cash. Shareholders whose Common Shares are held in
the name of a broker or nominee should contact the
broker or nominee to confirm that the dividend
reinvestment service is available. See 'Dividends and
Distributions' and 'Taxation.'

CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND REGISTRAR............. State Street Bank and Trust Company will act as
custodian, and EquiServe Trust Company, NA will act
as transfer agent, dividend disbursing agent and
registrar for the Fund. See 'Custodian, Transfer
Agent, Dividend Disbursing Agent and Registrar.'

SUMMARY OF FUND EXPENSES

The purpose of the following table is to help you understand the fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The expenses shown in the table are based on estimated amounts for the Fund's
first year of operations, unless otherwise indicated, and assume that the Fund
issues approximately 17,000,000 Common Shares. If the Fund issues fewer Common
Shares, all other things being equal, these expenses would increase. See
'Management of the Fund.' The expenses in the table also assume the issuance of
Fund Preferred Shares in an amount equal to 33 1/3% of the Fund's total capital
(after issuance), and the table shows Fund expenses both as a percentage of net
assets attributable to Common Shares and, in footnote 3, as a percentage of
managed assets.

SHAREHOLDER TRANSACTION EXPENSES
Sales Load Paid by You (as a percentage of offering
price) (1)............................................ %
Dividend Reinvestment Plan Fees......................... None

PERCENTAGE OF NET
ASSETS ATTRIBUTABLE
TO COMMON SHARES(3)
-------------------

ANNUAL EXPENSES
Investment Management Fees (2).......................... 1.28%
Other Expenses (2)...................................... 0.33%
Interest Payments on Borrowed Funds (2)................. None
------
Total Annual Fund Operating Expenses (2) (4)............ 1.61%
Fee Waiver and Expense Reimbursement (Years 1-5)........ (0.48%)(4)
------
Total Net Annual Expenses (2)........................... 1.13% (4)
------
------

---------

(1) The Fund will use the proceeds of this offering to purchase, immediately
after the closing of the offering, REIT common and preferred stocks issued
in transactions for which Merrill Lynch, Pierce, Fenner & Smith Incorporated
('Merrill Lynch') has served as placement agent for the issuer ('Direct
Placements'). Of the placement agent fees payable to Merrill Lynch by the
issuers in connection with these Direct Placements, $ , (representing %
of the total aggregate offering price of the Common Shares) has been applied
as a credit against sales loads that would otherwise be paid by investors in
the Fund thereby reducing the actual sales load paid by Fund investors. All
placement agent fees for Direct Placements paid to Merrill Lynch which
exceed the credit to Fund investors as described above will be retained by
Merrill Lynch in its capacity as placement agent for such issuers. See
'Underwriting' for a more complete description of this sales load credit.

(2) In the event the Fund, as an alternative to issuing Fund Preferred Shares,
utilizes leverage by borrowing in an amount equal to approximately 33 1/3%
of the Fund's total assets (including the amount obtained from leverage), it
is estimated that, as a percentage of net assets attributable to Common
Shares, the Investment Management Fee would be 1.28%, Other Expenses would
be 0.18%, Interest Payments on Borrowed Funds (assuming an interest rate of
5.60%, which interest rate is subject to change based on prevailing market
conditions) would be 2.80%, Total Annual Fund Operating Expenses would be
4.26% and Total Net Annual Expenses would be 3.78%. Based on the total net
annual expenses and in accordance with the example below, the expenses for
years 1, 3, 5 and 10 would be $ , $ , $ and $ , respectively.

(footnotes continued on next page)

(footnotes continued from previous page)

(3) Stated as percentages of the Fund's managed assets attributable to both
Common and Preferred Shares, the Fund's expenses would be estimated to be as
follows:

PERCENTAGE OF
MANAGED ASSETS
--------------

ANNUAL EXPENSES
Investment Management Fees............................... 0.85%
Other Expenses........................................... 0.22%
Interest Payments on Borrowed Funds...................... None
-------
Total Annual Fund Operating Expenses (4)................. 1.07%
Fee Waiver and Expense Reimbursement (Years 1-5)......... (0.32%)(4)
-------
Total Net Annual Expenses (2)............................ 0.75% (4)
-------
-------

(4) Cohen & Steers Capital Management, Inc., the Investment Manager, has
contractually agreed to waive a portion of its fees and expenses in the
amount of 0.32% of average daily managed assets (which includes the
liquidation preference of any Fund Preferred Shares and the principal amount
of any borrowings used for leverage) for the first 5 fiscal years of the
Fund's operations, 0.26% of average daily managed assets in year 6, 0.20% of
average daily managed assets in year 7, 0.14% of average daily managed
assets in year 8, 0.08% of average daily managed assets in year 9 and 0.02%
of average daily managed assets in year 10. The Investment Manager, has also
agreed to pay all organizational expenses and offering costs (other than the
sales load) that exceed $0.03 per Common Share (0.20% of the offering
price).

The following example illustrates the expenses (including the sales load of
$ ) that you would pay on a $1,000 investment in Common Shares, assuming (1)
total net annual expenses of 1.13% of net assets attributable to Common Shares
in years 1 through 5, increasing to 1.58% in year 10 and (2) a 5% annual return:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------

Total Expenses Incurred................................. $ $ $ $

THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE HIGHER OR LOWER. The example assumes that the estimated
'Other Expenses' set forth in the Annual Expenses table are accurate, that fees
and expenses increase as described in footnote 2 above and that all dividends
and distributions are reinvested at net asset value. Actual expenses may be
greater or less than those assumed. Moreover, the Fund's actual rate of return
may be greater or less than the hypothetical 5% return shown in the example. The
expenses you would pay, based on the Fund's expenses as stated as percentages of
the Fund's managed assets (assuming the issuance of Fund Preferred Shares in an
amount equal to 33 1/3% of the Fund's capital after their issuance) and
otherwise on the assumptions in the example would be: 1 Year $ ; 3 Years $ ;
5 Years $ ; and 10 Years $ .

THE FUND

Cohen & Steers Quality Income Realty Fund, Inc. is a recently organized,
non-diversified, closed-end management investment company. We were organized as
a Maryland corporation on August 22, 2001 and are registered as an investment
company under the Investment Company Act of 1940 (the '1940 Act'). As a
recently-organized entity, we have no operating history. Our principal office is
located at 757 Third Avenue, New York, New York 10017, and our telephone number
is (212) 832-3232.

USE OF PROCEEDS

We estimate the net proceeds of this offering, after deducting (i) all
organization expenses and (ii) offering costs (other than the sales load) that
do not exceed $0.03 per share of Common Shares, to be $ , or $ assuming
exercise of the over-allotment option in full. The net proceeds will be invested
in accordance with the policies set forth under 'Investment Objectives and
Policies.' A portion of the organization and offering expenses of the Fund has
been advanced by the Investment Manager and will be repaid by the Fund upon
closing of this offering. The Investment Manager will incur and be responsible
for (i) all of the Fund's organization expenses and (ii) offering expenses
(other than the sales load) that exceed $0.03 per share of the Fund's Common
Shares.

Approximately % of the net proceeds of the offering (excluding the
over-allotment option) is expected to be used to complete the purchase of Direct
Placements immediately after the closing of the offering. We estimate that the
remaining net proceeds of this offering will be fully invested in accordance
with our investment objectives and policies within three to six months of the
initial public 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.'

INVESTMENT OBJECTIVES AND POLICIES

GENERAL

Our primary investment objective is high current income through investment
in real estate securities. Capital appreciation is a secondary investment
objective. The Fund's investment objectives and certain other policies are
fundamental and may not be changed without the approval of shareholders. Unless
otherwise indicated, the Fund's investment policies are not fundamental and may
be changed by the Board of Directors without the approval of shareholders,
although we have no current intention of doing so. The Fund has a policy of
concentrating its investments in the U.S. real estate industry and not in any
other industry. This investment policy is fundamental and cannot be changed
without the approval of a majority of the Fund's outstanding voting securities,
as defined in the 1940 Act, as amended. Under normal market conditions, we will
invest at least 90% of our total assets in common stocks, preferred stocks and
other equity securities issued by real estate companies, such as 'real estate
investment trusts' ('REITs'). At least 80% of our total assets will be invested
in income producing equity securities issued by high quality REITs, and
substantially all of the equity securities of real estate companies in which we
intend to invest are traded on a national securities exchange or in the
over-the-counter market. High quality REITs are companies that, in the opinion
of the Investment Manager, offer excellent prospects for consistent,
above-average revenue and earnings growth. To determine whether a

company is of high quality, the Investment Manager generally looks to a strong
record of earnings growth, as well as to a company's current ratio of debt to
capital and the quality of its management. All of the REITs in which the Fund
will invest will have a market capitalization greater than $100 million. We may
invest up to 10% of our total assets in debt securities issued or guaranteed by
real estate companies. We will not invest more than 20% of our total assets in
preferred stock or debt securities rated below investment grade (commonly known
as 'junk bonds') or unrated securities of comparable quality. Preferred stock or
debt securities will be considered to be investment grade if, at the time of
investment, such security has a rating of 'BBB' or higher by Standard & Poor's
Ratings Services ('S&P'), 'Baa' or higher by Moody's Investors Service, Inc.
('Moody's') or an equivalent rating by a nationally recognized statistical
rating agency. The Investment Manager may also invest in preferred stock or debt
securities which are unrated but which, in the opinion of the Investment
Manager, are determined to be of equivalent quality. See Appendix A in the SAI
for a description of bond ratings. These two policies are fundamental and cannot
be changed without the approval of a majority of the Fund's voting securities,
as defined in the 1940 Act, as amended. We will invest only in securities of
U.S. issuers and generally will not invest more than 10% of our total assets in
the securities of one issuer.

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

INVESTMENT STRATEGIES

In making investment decisions on behalf of the Fund, the Investment Manager
relies on a fundamental analysis of each company. The Investment Manager reviews
each company's potential for success in light of the company's current financial
condition, its industry and sector position, and economic and market conditions.
The Investment Manager evaluates a number of factors, including growth
potential, earnings estimates and the quality of management.

PORTFOLIO COMPOSITION

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

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

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

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

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

common stocks (including REIT shares);

preferred stocks;

rights or warrants to purchase common and preferred stocks; and

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

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

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

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

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

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

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

OTHER INVESTMENTS

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

USE OF LEVERAGE

Subject to market conditions and the Fund's receipt of AAA/aaa credit rating
on the Fund Preferred Shares, approximately one to three months after the
completion of the offering of the Common Shares, the Fund intends to offer Fund
Preferred Shares representing approximately 33 1/3% of the Fund's capital
immediately after their issuance. The issuance of Fund Preferred Shares will
leverage the Common Shares. As an alternative to the Fund Preferred Shares, the
Fund may leverage through borrowings. Any borrowings will have seniority over
the Common Shares.

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. If
Fund Preferred Shares are issued, the Fund intends, to the extent possible, to
purchase or redeem Fund Preferred Shares from time to time to the extent
necessary in order to maintain coverage of any Fund Preferred Shares of at least
200%. If the Fund has Fund Preferred Shares outstanding, two of the Fund's
Directors will be elected by the holders of Fund Preferred Shares, voting
separately as a class. The remaining Directors of the Fund will be elected by
holders of Common Shares and Fund Preferred Shares voting together as a single
class. In the event the Fund failed to pay dividends on Fund Preferred Shares
for two years, Fund Preferred Shareholders would be entitled to elect a majority
of the Directors of the Fund. The failure to pay dividends or make distributions
could result in the Fund ceasing to qualify as a regulated investment company
under the Code, which could have a material adverse effect on the value of the
Common Shares. See 'Description of Shares -- Fund Preferred Shares.'

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.

The Fund may be subject to certain restrictions imposed by either guidelines
of one or more rating agencies which may issue ratings for Fund Preferred Shares
or, if the Fund borrows from a lender, by the lender. These guidelines may
impose asset coverage or portfolio composition requirements that are more
stringent than those imposed on the Fund by the 1940 Act. It is not anticipated
that these covenants or guidelines will impede the Investment Manager from
managing the Fund's portfolio in accordance with the Fund's investment
objectives and policies. In addition to other considerations, to the extent that
the Fund believes that the covenants and guidelines required by the rating
agencies would impede its ability to meet its investment objectives, or if the
Fund is unable to obtain the rating on the Fund Preferred Shares (expected to be
AAA/aaa), the Fund will not issue the Fund Preferred Shares.

Assuming that the Fund Preferred Shares or borrowings will represent
approximately 33 1/3% of the Fund's capital and pay dividends or interest or
payment rate set by an interest rate transaction at an annual average rate of
5.60%, the income generated by the Fund's portfolio (net of estimated expenses)
must exceed 1.87% in order to cover such dividend payments or interest or
payment rates and other expenses specifically related to the Fund Preferred
Shares or borrowings. Of course, these numbers are merely estimates, used for
illustration. Actual Fund Preferred Share dividend rates, interest, or payment
rates may vary frequently and may be significantly higher or lower than the rate
estimated above.

The following table is furnished in response to requirements of the
Securities and Exchange Commission. It is designed to illustrate the effect of
leverage on Common Share total return, assuming investment portfolio total
returns (comprised of income and changes in the value of investments held in the
Fund's portfolio) of - 10%, - 5%, 0%, 5% and 10%. These assumed investment
portfolio returns are hypothetical figures and are not necessarily indicative of
the investment portfolio returns expected to be experienced by the Fund. The
table further reflects the issuance of Fund Preferred Shares or borrowings
representing 33 1/3% of the Fund's total capital, a 8.25% yield on the Fund's
investment portfolio, net of expenses, and the Fund's currently projected annual
Fund Preferred Share dividend rate, borrowing interest rate or payment rate set
by an interest rate transaction of 5.60%. See 'Use of Leverage -- Leverage
Risks.'

Assumed Portfolio Total Return.......... (10)% (5)% 0 % 5% 10%
Common Share Total Return............... (17.80)% (10.30)% (2.80)% 4.70% 12.20%

Common Share total return is composed of two elements -- the Common Share
dividends paid by the Fund (the amount of which is largely determined by the net
investment income of the Fund after paying dividends on Fund Preferred Shares or
interest on borrowings) and gains or losses on the value of the securities the
Fund owns. As required by Securities and Exchange Commission rules, the table
assumes that the Fund is more likely to suffer capital losses than to enjoy
capital appreciation.

During the time in which 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. Only the Fund's Common
Shareholders bear the cost of the Fund's fees and expenses.

The Fund may also borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities.

LEVERAGE RISKS

Utilization of leverage is a speculative investment technique and involves
certain risks to the holders of Common Shares. These include the possibility of
higher volatility of the net asset value of the Common Shares and potentially
more volatility in the market value of the Common Shares. So long as the Fund is
able to realize a higher net return on its investment portfolio than the then
current cost of any leverage together with other related expenses, the effect of
the leverage will be to cause holders of Common Shares to realize higher current
net investment income than if the Fund were not so leveraged. On the other hand,
to the extent that the then current cost of any leverage, together with other
related expenses, approaches the net return on the Fund's investment portfolio,
the benefit of leverage to holders of Common Shares will be reduced, and if the
then current cost of any leverage were to exceed the net return on the Fund's
portfolio, the Fund's leveraged capital structure would result in a lower rate
of return to Common Shareholders than if the Fund were not so leveraged.

Any decline in the net asset value of the Fund's investments will be borne
entirely by Common Shareholders. Therefore, if the market value of the Fund's
portfolio declines, the leverage will result in a greater decrease in net asset
value to Common Shareholders than if the Fund were not leveraged. Such greater
net asset value decrease will also tend to cause a greater decline in the market
price for the Common Shares. To the extent that the Fund is required or elects
to redeem any Fund Preferred Shares or prepay any borrowings, the Fund may need
to liquidate investments to fund such redemptions or prepayments. Liquidation at
times of adverse economic conditions may result in capital loss and reduce
returns to Common Shareholders.

In addition, such redemption or prepayment would likely result in the Fund
seeking to terminate early all or a portion of any swap or cap transaction.
Early termination of the swap could result in a termination payment by or to the
Fund. Early termination of a cap could result in a termination payment to the
Fund. See 'Interest Rate Transactions.'

Unless and until Fund Preferred Shares are issued or borrowings for leverage
are made, the Common Shares will not be leveraged and the disclosure regarding
these strategies will not apply.

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. Interest rate swaps involve the Fund's agreement with the swap
counterparty to pay a fixed rate payment in exchange for the counterparty paying
the Fund a variable rate payment that is intended to approximate the Fund's
variable rate payment obligation on the Fund Preferred Shares or any variable
rate borrowing. The payment obligation would be based on the notional amount of
the swap. We may use an interest rate cap, which would require us to pay a
premium to the cap counterparty and would entitle us, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, to receive
from the counterparty payment of the difference based on the notional amount. We
would use interest rate swaps or caps only with the intent to reduce or
eliminate the risk that an increase in short-term interest rates could have on
the performance of the Fund's Common Shares as a result of leverage.

enhance or harm the overall performance of the Fund's Common Shares. To the
extent there is a decline in interest rates, the value of the interest rate swap
or cap could decline, and could result in a decline in the net asset value of
the Common Shares. In addition, if short-term interest rates are lower than our
rate of payment on the interest rate swap, this will reduce the performance of
the Fund's Common Shares. If, on the other hand, short-term interest rates are
higher than our rate of payment on the interest rate swap, this will enhance the
performance of the Fund's Common Shares. Buying interest rate caps could enhance
the performance of the Fund's Common Shares by providing a maximum leverage
expense. Buying interest rate caps could also decrease the net income of the
Fund's Common Shares in the event that the premium paid by the Fund to the
counterparty exceeds the additional amount the Fund would have been required to
pay had it not entered into the cap agreement. The Fund has no current intention
of selling an interest rate swap or cap. We would not enter into interest rate
swap or cap transactions in an aggregate notional amount that exceeds the
outstanding amount of the Fund's leverage.

Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund is contractually obligated to make. If the counter party defaults, the
Fund would not be able to use the anticipated net receipts under the swap or cap
to offset the dividend payments on the Fund Preferred Shares or rate of interest
on borrowings. Depending on whether the Fund would be entitled to receive net
payments from the counterparty on the swap or cap, which in turn would depend on
the general state of short-term interest rates at that point in time, such
default could negatively impact the performance of the Fund's Common Shares.
Although this will not guarantee that the counterparty does not default, the
Fund will not enter into an interest rate swap or cap transaction with any
counterparty that the Investment Manager believes does not have the financial
resources to honor its obligation under the interest rate swap or cap
transaction. Further, the Investment Manager will continually monitor the
financial stability of a counterparty to an interest rate swap or cap
transaction in an effort to proactively protect the Fund's investments. In
addition, at the time the 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 performance of the Fund's Common Shares.

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.

The Fund may choose or be required to redeem some or all of the Fund
Preferred Shares or prepay any borrowings. This redemption would likely result
in the Fund seeking to terminate early all or a portion of any swap or cap
transaction. Such early termination of a swap could result in termination
payment by or to the Fund. An early termination of a cap could result in a
termination payment to the Fund.

PRINCIPAL RISKS OF 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.

NO OPERATING HISTORY

We are a newly organized non-diversified closed-end management investment
company with no operating history.

STOCK MARKET RISK

Because prices of equity securities fluctuate from day-to-day, the value of
our portfolio and the price per Common Share 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 the Common Shares may change at different rates compared
to the value of shares of a registered investment company with investments in a
mix of different industries and will depend on the general condition of the
economy. An economic downturn could have a material adverse effect on the real
estate markets and on real estate companies in which the Fund invests, which in
turn could result in the Fund not achieving its investment objectives.

General Real Estate Risks. Real property investments are subject to varying
degrees of risk. The yields available from investments in real estate depend on
the amount of income and capital appreciation generated by the related
properties. Income and real estate values may also be

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

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

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

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

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

Also, hotels may be operated pursuant to franchise, management and operating
agreements that may be terminable by the franchiser, the manager or the
operator. Contrarily, it may be

difficult to terminate an ineffective operator of a hotel property subsequent to
a foreclosure of such property.

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

These governmental laws and regulations are subject to frequent and
substantial changes resulting from legislation, adoption of rules and
regulations, and administrative and judicial interpretations of existing law.
Changes may also be applied retroactively and the timing of such changes cannot
be predicted. The failure of any healthcare operator to comply with governmental
laws and regulations may affect its ability to operate its facility or receive
government 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, would
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 and secured debt-to-total asset ratios,
and other contractual obligations may restrict a REIT's range of operating
activity. A portfolio company, therefore, may be limited from incurring
additional indebtedness, selling its assets and engaging in mergers or making
acquisitions which may be beneficial to the operation of the REIT.

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

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.

LEVERAGE RISK

The Fund intends to use leverage by issuing Fund Preferred Shares,
representing approximately 33 1/3% of the Fund's capital after their issuance or
alternatively, through borrowing. Leverage is a speculative technique and there
are special risks and costs associated with leveraging. For a more detailed
description of the risks associated with leverage, see 'Use of Leverage.'

INTEREST RATE TRANSACTIONS RISK

The Fund may enter into a swap or cap transaction to attempt to protect
itself from increasing dividend or interest expenses resulting from increasing
short-term interest rates. A decline in interest rates may result in a decline
in the value of the swap or cap which may result

in a decline in the net asset value of the Fund. A sudden and dramatic decline
in interest rates may result in a significant decline in the net asset value of
the Fund. See 'Interest Rate Transactions.'

RISKS OF INVESTMENT IN PREFERRED STOCKS AND DEBT SECURITIES

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

RISKS OF INVESTMENT IN LOWER-RATED SECURITIES

Lower-rated securities may be considered speculative with respect to the
issuer's continuing ability to make principal and interest payments. Analysis of
the creditworthiness of issuers of lower-rated securities may be more complex
than for issuers of higher quality debt securities, and our ability to achieve
our investment objectives may, to the extent we are invested in lower-rated
securities, be more dependent upon such creditworthiness analysis than would be
the case if we were investing in higher quality securities. We may invest in
high yield securities that are rated 'CCC' or higher by S&P or 'Caa' or higher
by Moody's or unrated securities that are determined by the Investment Manager
to be of comparable quality. An issuer of these securities has a currently
identifiable vulnerability to default and the 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 PRICE DISCOUNT FROM NET ASSET VALUE

Shares of closed-end investment companies frequently trade at a discount
from their net asset value. This characteristic is a risk separate and distinct
from the risk that the Fund's net asset value could decrease as a result of our
investment activities and may be greater for investors expecting to sell their
shares in a relatively short period following completion of this offering. The

net asset value of the shares will be reduced immediately following the offering
as a result of the payment of certain offering costs. Whether investors will
realize gains or losses upon the sale of the shares will depend not upon the
Fund's net asset value but entirely upon whether the market price of the shares
at the time of sale is above or below the investor's purchase price for the
shares. Because the market price of the shares will be determined by factors
such as relative supply of and demand for shares in the market, general market
and economic conditions, and other factors beyond the control of the Fund, we
cannot predict whether the shares will trade at below or above net asset value,
or at below or above the initial public offering price.

ADDITIONAL RISK CONSIDERATIONS

PORTFOLIO TURNOVER

We 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. Although we cannot accurately predict our portfolio
turnover rate, it is not expected to exceed 100% under normal circumstances.
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
turnover rate results in correspondingly greater brokerage commissions and other
transactional expenses which 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. See
'Taxation.'

INFLATION RISK

Inflation risk is the risk that the value of assets or income from
investments will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the Common Shares and
distributions can decline. In addition, during any periods of rising inflation,
Fund Preferred Shares dividend rates would likely increase, which would tend to
further reduce returns to Common Shareholders.

NON-DIVERSIFIED STATUS

The Fund is classified as a 'non-diversified' investment company under the
1940 Act, which means we are not limited by the 1940 Act in the proportion of
our assets that may be invested in the securities of a single issuer. However,
we intend to conduct our operations so as to qualify as a regulated investment
company for purposes of the Code, which generally will relieve the Fund of any
liability for federal income tax to the extent our earnings are distributed to
shareholders. See 'Taxation' in the SAI. To so qualify, among other
requirements, we will limit our investments so that, at the close of each
quarter of the taxable year, (i) not more than 25% of the market value of our
total assets will be invested in the securities (other than U.S. Government
securities or the securities of other regulated investment companies) of a
single issuer, or two or more issuers which the Fund controls and are engaged in
the same, similar or related trades or businesses and (ii) at least 50% of the
market value of our total assets will be invested in cash and cash items, U.S.
Government securities, securities of other regulated investment companies and
other securities; provided, however, that with respect to such other securities,
not more than 5% of the market value of our total assets will be invested in the
securities of a single issuer and we will not own

more than 10% of the outstanding voting securities of a single issuer. Because
we, as a non-diversified investment company, may invest in a smaller number of
individual issuers than a diversified investment company, an investment in the
Fund presents greater risk to you than an investment in a diversified company.

ANTI-TAKEOVER PROVISIONS

Certain provisions of our Articles of Incorporation and By-Laws may have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change our structure. These provisions may also have the
effect of depriving shareholders of an opportunity to sell their shares at a
premium over prevailing market prices. These include provisions for staggered
terms of office for Directors, super-majority voting requirements for merger,
consolidation, liquidation, termination and asset sale transactions, amendments
to the Articles of Incorporation, and conversion to open-end status. See
'Description of Shares' and 'Certain Provisions of the Articles of Incorporation
and By-Laws.'

RECENT DEVELOPMENTS

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

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 with more than $5.7 billion of assets under
management. Its current clients include pension plans, endowment funds and
registered investment companies, including the Fund, Cohen & Steers Advantage
Income Realty Fund, Inc. and Cohen & Steers

Total Return Realty Fund, Inc., which are closed-end investment companies, and
Cohen & Steers Institutional Realty Shares, Inc., Cohen & Steers Realty Shares,
Inc., Cohen & Steers Special Equity Fund, Inc. and Cohen & Steers Equity Income
Fund, Inc., which are open-end investment companies. Cohen & Steers Realty
Shares, Inc. is currently the largest registered investment company that invests
primarily in real estate securities. Cohen & Steers' client accounts are
invested principally in real estate securities.

INVESTMENT MANAGEMENT AGREEMENT

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

For its services under the Investment Management Agreement, the Fund pays
the Investment Manager a monthly management fee computed at the annual rate of
0.85% of the average daily managed asset value of the Fund. Managed asset value
is the net asset value of the Common Shares plus the liquidation preference of
any Fund Preferred Shares and the principal amount of any borrowings used for
leverage. 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
Fund Preferred Shares, listing expenses, expenses of preparing, printing and
distributing shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any. The Investment Manager has
contractually agreed to waive a portion of its investment management fees in the
amount of 0.32% of average daily total managed assets for the first 5 fiscal
years of the Fund's operations, 0.26% of average daily managed assets in year 6,
0.20% of average daily managed assets in year 7, 0.14% of average daily managed
assets in year 8, 0.08% of average daily managed assets in year 9 and 0.02% of
average daily managed assets in year 10. See 'Summary of Fund Expenses.' 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 Fund
Preferred Shares and the principal amount of borrowings for leverage. See 'Use
of 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 adviser, 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 adviser, 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 adviser, as a Vice President in April 2000 and
has been a Senior Vice President since January 2002. Prior to joining Cohen
& Steers, Mr. Brooks was an investment analyst with another real estate
securities investment manager. Mr. Brooks is a Certified Financial Analyst.

ADMINISTRATION AND SUB-ADMINISTRATION AGREEMENT

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

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

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

DIVIDENDS AND DISTRIBUTIONS

LEVEL RATE DIVIDEND POLICY

Subject to the determination of the Board of Directors to implement a
Managed Dividend Policy, as discussed below, commencing with the Fund's first
dividend, the Fund intends to make regular monthly cash distributions to Common
Shareholders at a level rate based on the projected performance of the Fund,
which rate may be adjusted from time to time. Distributions can only be made
from net investment income after paying accrued dividends on Fund Preferred
Shares, if any,

and interest and required principal payments on Borrowings, if any, as well as
making any required payments on any interest rate transactions. The Fund's
ability to maintain a Level Rate Dividend Policy will depend on a number of
factors, including the stability of income received from its investments and
dividends payable on Fund Preferred Shares, if any, and interest and required
principal payments on Borrowings, if any. Over time, all the net investment
income of the Fund will be distributed. At least annually, the Fund intends to
distribute all of its net capital gain and ordinary taxable income after paying
any accrued dividends on, or redeeming or liquidating, any Fund Preferred
Shares, if any, or making interest and required principal payments on
Borrowings, if any. Initial distributions to Common Shareholders are expected to
be declared approximately 45 days, and paid approximately 60 to 75 days, from
the commencement of this offering, depending upon market conditions. The net
income of the Fund consists of all interest income accrued on portfolio assets
less all expenses of the Fund. Expenses of the Fund are accrued each day. In
addition, the Fund currently expects that a portion of its distributions will
consist of amounts in excess of investment company taxable income and net
capital gain derived from the non-taxable components of the cash flow from the
real estate underlying the Fund's portfolio investments. To permit the Fund to
maintain a more stable monthly distribution, the Fund will initially distribute
less than the entire amount of net investment income earned in a particular
period. The undistributed net investment income would be available to supplement
future distributions. As a result, the distributions paid by the Fund for any
particular monthly period may be more or less than the amount of net investment
income actually earned by the Fund during the period. Undistributed net
investment income will be added to the Fund's net asset value and,
correspondingly, distributions from undistributed net investment income will be
deducted from the Fund's net asset value. See 'Taxation.'

MANAGED DIVIDEND POLICY

Following the commencement of this offering, the Fund intends to file an
exemptive application with the Securities and Exchange Commission seeking an
order under the 1940 Act facilitating the implementation of a Managed Dividend
Policy. If, and when, the Fund receives the requested relief, the Fund may,
subject to the determination of its Board of Directors, implement a Managed
Dividend Policy. Under a Managed Dividend Policy, the Fund would intend to
distribute a monthly fixed percentage of net asset value to Common Shareholders.
As with the Level Dividend Rate Policy, distributions would be made only after
paying dividends on Fund Preferred Shares, if any, and interest and required
principal payments on Borrowings, if any. Under a Managed Dividend Policy, if,
for any monthly distribution, net investment income and net realized capital
gain were less than the amount of the distribution, the difference would be
distributed from the Fund's assets. The Fund's final distribution for each
calendar year would include any remaining net investment income and net realized
capital gain undistributed during the year. Pursuant to the requirements of the
1940 Act and other applicable laws, a notice would accompany each monthly
distribution with respect to the estimated source of the distribution made. In
the event the Fund distributed in any calendar year amounts in excess of net
investment income and net realized capital gain (such excess, the 'Excess'),
such distribution would decrease the Fund's total assets and, therefore, have
the likely effect of increasing the Fund's expense ratio. There is a risk that
the Fund would not eventually realize capital gains in an amount corresponding
to a distribution of the Excess. In addition, in order to make such
distributions, the Fund may have to sell a portion of its investment portfolio
at a time when independent investment judgment might not

dictate such action. There is no guarantee that the Fund will receive an
exemptive order facilitating the implementation of a Managed Dividend Policy or,
if received, that the Board of Directors will determine to implement a Managed
Dividend Policy. The Board of Directors reserves the right to change the
dividend policy from time to time.

DIVIDEND REINVESTMENT PLAN

The Fund has a Dividend Reinvestment Plan (the 'Plan') commonly referred to
as an 'opt-out' plan. Each shareholder will have all distributions of dividends
and capital gains automatically reinvested in additional Common Shares by
EquiServe Trust Company, NA as agent for shareholders pursuant to the Plan (the
'Plan Agent'), unless they elect to receive cash. The Plan Agent will either
(i) effect purchases of Common Shares under the Plan in the open market or
(ii) distribute newly issued Common Shares of the Fund. Shareholders who elect
not to participate in the Plan will receive all distributions in cash paid by
check mailed directly to the shareholder of record (or if the shares are held in
street or other nominee name, then to the nominee) by the Plan Agent, as
dividend disbursing agent. Shareholders whose Common Shares are held in the name
of a broker or nominee should contact the broker or nominee to determine whether
and how they may participate in the Plan.

The Plan Agent serves as agent for the shareholders in administering the
Plan. After the Fund declares a dividend or makes a capital gain distribution,
the Plan Agent will, as agent for the participants, either (i) receive the cash
payment and use it to buy Common Shares in the open market, on the New York
Stock Exchange or elsewhere, for the participants' accounts or (ii) distribute
newly issued Common Shares of the Fund on behalf of the participants. The Plan
Agent will receive cash from the Fund with which to buy Common Shares in the
open market if, on the determination date, the net asset value per share exceeds
the market price per share plus estimated brokerage commissions on that date.
The Plan Agent will receive the dividend or distribution in newly issued Common
Shares of the Fund if, on the determination date, the market price per share
plus estimated brokerage commissions equals or exceeds the net asset value per
share of the Fund on that date. The number of shares to be issued will be
computed at a per share rate equal to the greater of (i) the net asset value or
(ii) 95% of the closing market price per share on the payment date.

Participants in the Plan may withdraw from the Plan upon written notice to
the Plan Agent. Such withdrawal will be effective immediately if received not
less than ten days prior to a distribution record date; otherwise, it will be
effective for all subsequent dividend record dates. When a participant withdraws
from the Plan or upon termination of the Plan as provided below, certificates
for whole Common Shares credited to his or her account under the Plan will be
issued and a cash payment will be made for any fraction of a Common Share
credited to such account. In the alternative, upon receipt of the participant's
instructions, Common Shares will be sold and the proceeds sent to the
participant less brokerage commissions and any applicable taxes.

The Plan Agent maintains each shareholder's account in the Plan and
furnishes confirmations of all acquisitions made for the participant as soon as
practicable but no later than 60 days. Common Shares in the account of each Plan
participant will be held by the Plan Agent on behalf of the participant. Proxy
material relating to shareholders' meetings of the Fund will include those
shares purchased as well as shares held pursuant to the Plan.

In the case of shareholders, such as banks, brokers or nominees, which hold
Common Shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of Common Shares certified from
time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are participants in the Plan. Common Shares may be
purchased through any of the underwriters, acting as broker or, after the
completion of this offering, dealer.

The Plan Agent's fees for the handling of reinvestment of dividends and
other distributions will be paid by the Fund. Each participant will pay a pro
rata share of brokerage commissions incurred with respect to the Plan Agent's
open market purchases in connection with the reinvestment of distributions.
There are no other charges to participants for reinvesting dividends or capital
gain distributions. See 'Taxation.'

The automatic reinvestment of dividends and other distributions will not
relieve participants of any income tax that may be payable or required to be
withheld on such dividends or distributions.

Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any distribution paid subsequent to written notice of the change sent
to all shareholders of the Fund at least 90 days before the record date for the
dividend or distribution. The Plan also may be amended or terminated by the Plan
Agent by at least 90 days' written notice to all shareholders of the Fund. All
correspondence concerning the Plan should be directed to the Plan Agent by
telephone at 800-426-5523.

CLOSED-END STRUCTURE

The Fund is a recently organized, non-diversified management investment
company (commonly referred to as a closed-end fund). Closed-end funds differ
from open-end funds (which are generally referred to as mutual funds) in that
closed-end funds generally list their shares for trading on a stock exchange and
do not redeem their shares at the request of the shareholder. This means that if
you wish to sell your shares of a closed-end fund you must trade them on the
market like any other stock at the prevailing market price at that time. In a
mutual fund, if the shareholder wishes to sell shares, the mutual fund will
redeem or buy back the shares at 'net asset value.' Mutual funds generally offer
new shares on a continuous basis to new investors, and closed-end funds
generally do not. The continuous inflows and outflows of assets in a mutual fund
can make it difficult to manage the fund's investments. By comparison,
closed-end funds are generally able to stay fully invested in securities that
are consistent with their investment objectives, and also have greater
flexibility to make certain types of investments, and to use certain investment
strategies, such as financial leverage and investments in illiquid securities.

Shares of closed-end funds frequently trade at a discount to their net asset
value. Because of this possibility and the recognition that any such discount
may not be in the best interest of shareholders, the Fund's Board of Directors
might consider from time to time engaging in open market repurchases, tender
offers for shares at net asset value or other programs intended to reduce the
discount. We cannot guarantee or assure, however, that the Fund's Board will
decide to engage in any of these actions. Nor is there any guarantee or
assurance that such actions, if undertaken, would result in shares trading at a
price equal or close to net asset value per share. See 'Repurchase of Shares.'
The Board of Directors might also consider converting the Fund to an open-end
mutual fund, which would also require a vote of the shareholders of the Fund.

POSSIBLE CONVERSION TO OPEN-END STATUS

The Fund may be converted to an open-end investment company at any time by a
vote of the outstanding shares. See 'Certain Provisions of the Articles of
Incorporation 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 Fund
Preferred Shares then outstanding (requiring in turn that it liquidate a portion
of its investment portfolio) and the Fund's 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.

REPURCHASE OF SHARES

Shares of closed-end investment companies often trade at a discount to net
asset value, and the Fund's shares may also trade at a discount to their net
asset value, although it is possible that they may trade at a premium above net
asset value. The market price of the Fund's shares will be determined by such
factors as relative demand for and supply of shares in the market, the Fund's
net asset value, general market and economic conditions and other factors beyond
the control of the Fund. Although Common Shareholders will not have the right to
redeem their shares, the Fund may take action to repurchase shares in the open
market or make tender offers for its shares at net asset value. During the
pendency of any tender offer, the Fund will publish how Common Shareholders may
readily ascertain the net asset value. For more information see 'Repurchase of
Shares' in the SAI. Repurchase of the Common Shares may have the effect of
reducing any market discount to net asset value.

There is no assurance that, if action is undertaken to repurchase or tender
for shares, such action will result in the shares' trading at a price which
approximates their net asset value. Although share repurchases and tenders could
have a favorable effect on the market price of the shares, you should be aware
that the acquisition of shares by the Fund will decrease the total assets of the
Fund and, therefore, have the effect of increasing the Fund's expense ratio and
may adversely affect the ability of the Fund to achieve its investment
objectives. To the extent the Fund may need to liquidate investments to fund
repurchases of shares, this may result in portfolio turnover which will result
in additional expenses being borne by the Fund. The Board of Directors currently
considers the following factors to be relevant to a potential decision to
repurchase shares: the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action on the Fund or its shareholders and
market considerations. Any share repurchases or tender offers will be made in
accordance with the requirements of the Securities Exchange Act of 1934 and the
1940 Act. See 'Taxation' for a description of the potential tax consequences of
a share repurchase.

TAXATION

The following brief tax discussion assumes you are a U.S. shareholder and
that you hold your shares as a capital asset. In the SAI we have provided more
detailed information regarding the tax consequences of investing in the Fund.
Dividends paid to you out of the Fund's current and accumulated earnings and
profits will, except in the case of capital gain dividends described below, be
taxable to you as ordinary income. Distributions of net capital gain (the excess
of net long-term capital gain over net short-term capital loss), if any,
designated as capital gain dividends are taxable to you as long-term capital
gains, regardless of how long you have held your Fund shares. A distribution of
an amount in excess of the Fund's current and accumulated earnings and profits
is treated as a non-taxable return of capital that reduces your tax basis in
your Fund shares; any such distributions in excess of your basis are treated as
gain from a sale of your shares. The tax treatment of your dividends and
distributions will be the same regardless of whether they were paid to you in
cash or reinvested in additional Fund shares.

A distribution will be treated as paid to you 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 during January of the following
year.

Each year, we will notify you of the tax status of dividends and other
distributions.

If you sell your Fund shares, or have shares repurchased by the Fund, you
may realize a capital gain or loss which will be long-term or short-term,
depending generally on your holding period for the shares.

We may be required to withhold U.S. federal income tax on all taxable
distributions and redemption proceeds payable if you

fail to provide us with your correct taxpayer identification number;

fail to make required certifications; or

have been notified by the Internal Revenue Service that you are subject to
backup withholding.

Backup withholding is not an additional tax. Any amounts withheld may be
credited against your U.S. federal income tax liability.

The Fund intends to qualify as a regulated investment company under federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of the sum of its investment company taxable income
(as that term is defined in the Code, but without regard to the deduction for
dividends paid) and net tax-exempt interest, the Fund will not be required to
pay federal income taxes on any income it distributes to shareholders. If the
Fund distributes less than an amount equal to the sum of 98% of its ordinary
income for the calendar year and 98% of its capital gain net income for the
one-year period ending on October 31 of such calendar year, plus such amounts
from previous years that were not distributed, then the Fund will be subject to
a nondeductible 4% excise tax on the undistributed amounts. Fund distributions
also may be subject to state and local taxes. You should consult with your own
tax adviser regarding the particular consequences of investing in the Fund.

DESCRIPTION OF SHARES

COMMON SHARES

The Fund is authorized to issue 100,000,000 shares of Common Shares, $0.001
par value. The Common Shares have no preemptive, conversion, exchange or
redemption rights. Each share has equal voting, dividend, distribution and
liquidation rights. The Common Shares outstanding are, and those offered hereby
when issued, will be, fully paid and nonassessable. Common Shareholders are
entitled to one vote per share. All voting rights for the election of Directors
are noncumulative, which means that, assuming there are no Fund Preferred Shares
outstanding, the holders of more than 50% of the Common Shares can elect 100% of
the Directors then nominated for election if they choose to do so and, in such
event, the holders of the remaining Common Shares will not be able to elect any
Directors. Whenever Fund Preferred Shares or borrowings are outstanding, holders
of Common Shares will not be entitled to receive any distributions from the Fund
unless all accrued dividends on the Fund Preferred Shares and interest and
principal payments on borrowings have been paid, and unless the applicable asset
coverage requirements under the 1940 Act would be satisfied after giving effect
to the distribution. See 'Fund Preferred Shares' below. The Fund's Common Shares
have been approved for listing on the New York Stock Exchange upon notice of
issuance under the symbol 'RQI.' Under the rules of the New York Stock Exchange
applicable to listed companies, the Fund will be required to hold an annual
meeting of shareholders in each year. The foregoing description and the
descriptions below under 'Fund Preferred Shares' and 'Certain Provisions of the
Articles of Incorporation and By-Laws' and above under 'Possible Conversion to
Open-End Status' are subject to the provisions contained in the Fund's Articles
of Incorporation and By-Laws.

FUND PREFERRED SHARES

The Fund's Articles of Incorporation authorize the Board of Directors,
without approval of the Common Stockholders, to classify any unissued shares of
the Fund's common stock into preferred shares, par value $0.001 per share, in
one or more classes or series, with rights as determined by the Board of
Directors.

The Fund's Board of Directors has indicated its intention to authorize an
offering of Fund Preferred Shares (representing approximately 33 1/3% of the
Fund's capital immediately after the time the Fund Preferred Shares are issued)
approximately one to three months after completion of the offering of Common
Shares. Any such decision is subject to market conditions, the Fund's receipt of
a AAA/aaa credit rating on the Fund Preferred Shares and to the Board's
continuing belief that leveraging the Fund's capital structure through the
issuance of Fund Preferred Shares is likely to achieve the benefits to the
Common Shareholders described in this prospectus. The Board of Directors has
indicated that the preference on distribution, liquidation preference, and
redemption provisions of the Fund Preferred Shares will likely be as stated
below.

Limited Issuance of Fund Preferred Shares. Under the 1940 Act, the Fund
could issue Fund Preferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total assets less liabilities other than
borrowings, measured immediately after issuance of the Fund Preferred Shares.
'Liquidation value' means the original purchase price of the shares being
liquidated plus any accrued and unpaid dividends. In addition, the Fund is not
permitted to declare any cash dividend or other distribution on its Common
Shares unless the liquidation value

of the Fund Preferred Shares is less than one-half of the value of the Fund's
total assets less liabilities other than borrowings (determined after deducting
the amount of such dividend or distribution) immediately after the distribution.
If the Fund sells all the Common Shares and Fund Preferred Shares discussed in
this prospectus, the liquidation value of the Fund Preferred Shares is expected
to be approximately 33 1/3% of the value of the Fund's total assets less
liabilities other than borrowings. The Fund intends to purchase or redeem Fund
Preferred Shares, if necessary, to keep that fraction below one-half.

Distribution Preference. The Fund Preferred Shares will have complete
priority over the Common Shares.

Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
Fund Preferred Shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares.

Voting Rights. Fund Preferred Shares are required to be voting shares and to
have equal voting rights with Common Shares. Except as otherwise indicated in
this Prospectus or the SAI and except as otherwise required by applicable law,
holders of Fund Preferred Shares will vote together with Common Shareholders as
a single class.

Holders of Fund Preferred Shares, voting as a separate class, will be
entitled to elect two of the Fund's Directors. The remaining Directors will be
elected by Common Shareholders and holders of Fund Preferred Shares, voting
together as a single class. In the unlikely event that two full years of accrued
dividends are unpaid on the Fund Preferred Shares, the holders of all
outstanding Fund Preferred Shares, voting as a separate class, will be entitled
to elect a majority of the Fund's Directors until all dividends in arrears have
been paid or declared and set apart for payment. In order for the Fund to take
certain actions or enter into certain transactions, a separate class vote of
holders of Fund Preferred Shares will be required, in addition to the combined
single class vote of the holders of Fund Preferred Shares and Common Shares.

Redemption, Purchase and Sale of Fund Preferred Shares. The terms of the
Fund Preferred Shares may provide that they are redeemable at certain times, in
whole or in part, at the original purchase price per share plus accumulated
dividends. The terms may also state that the Fund may tender for or purchase
Fund Preferred Shares and resell any shares so tendered. Any redemption or
purchase of Fund Preferred Shares by the Fund will reduce the leverage
applicable to Common Shares, while any resale of shares by the Fund will
increase such leverage. See 'Use of Leverage.'

The discussion above describes the Board of Directors' present intention
with respect to a possible offering of Fund Preferred Shares. If the Board of
Directors determines to authorize such an offering, the terms of the Fund
Preferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Articles of Incorporation.

As of the date of this prospectus, Cohen & Steers Capital Management, Inc.
owned of record and beneficially 7,000 shares of the Fund's Common Shares,
constituting 100% of the outstanding shares of the Fund, and thus, until the
public offering of the shares is completed, will control the Fund.

CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BY-LAWS

The Fund has provisions in its Articles of Incorporation and 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 shareholders,
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 shareholders
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 the votes entitled to be cast thereon by the
shareholders of the Fund 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 shareholders 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 votes entitled to be cast
thereon by shareholders of the Fund will be required to amend the Articles of
Incorporation 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 the votes entitled to be cast thereon by the
shareholders of the Fund and (ii) in the case of a Business Combination (as
defined below), 66 2/3% of the votes entitled to be cast thereon by the
shareholders of the Fund other than votes held 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 (a) issuances or transfers of debt securities of the Fund,
(b) sales of securities of the Fund in connection with a public offering,
(c) issuances of securities of the Fund pursuant to a dividend reinvestment
plan adopted by the Fund, (d) issuances of securities of the Fund upon the
exercise of any stock subscription rights distributed by the Fund and
(e) 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 Articles of Incorporation 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 (as
defined above). 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.

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 Articles of Incorporation and By-Laws of the Fund,
on file with the Commission, 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. On the other hand, these provisions 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.

UNDERWRITING

Subject to the terms and conditions stated in the purchase agreement dated
February 25, 2002 each underwriter named below has severally agreed to purchase,
and the Fund has agreed to sell to such underwriter, the number of Common Shares
set forth opposite the name of such underwriter.

NUMBER OF
UNDERWRITER COMMON SHARES
----------- -------------

Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................
A.G. Edwards & Sons, Inc. ..................................
Prudential Securities Incorporated..........................
Raymond James & Associates, Inc. ...........................
CIBC World Markets Corp. ...................................
Deutsche Banc Alex. Brown Inc. .............................
First Union Securities, Inc. ...............................
Legg Mason Wood Walker, Incorporated........................
U.S. Bancorp Piper Jaffray Inc. ............................
Wells Fargo Securities, LLC.................................
Robert W. Baird & Co. Incorporated..........................
Fahnestock & Co. Inc. ......................................
Janney Montgomery Scott LLC.................................
Morgan Keegan & Company, Inc. ..............................
Quick & Reilly, Inc. .......................................
------
Total............................................
------
------

The purchase agreement provides that the obligations of the underwriters to
purchase the shares included in this offering are subject to the approval of
certain legal matters by counsel and to certain other conditions. The
underwriters are obligated to purchase all the Common Shares sold under the
purchase agreement if any of the Common Shares are purchased. In the purchase
agreement, the Fund and the Investment Manager have agreed to indemnify the
underwriters against certain liabilities, including liabilities arising under
the Securities Act of 1933, or to contribute payments the underwriters may be
required to make for any of those liabilities.

The underwriters propose to initially offer some of the Common Shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the Common Shares to certain dealers at the
public offering price less a concession not in excess of $ per share. The
sales load investors in the Fund will pay of $ per share is equal to % of
the initial offering price. The underwriters may allow, and the dealers may
reallow, a discount not in excess of $ per share on sales to other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.

The following table shows the public offering price, sales load and proceeds
before expenses to the Fund. The information assumes either no exercise or full
exercise by the underwriters of their over-allotment option.

PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------

Public offering price............................ $15.00 $ $
Sales load....................................... $ $ $
Proceeds, before expenses, to the Fund........... $ $ $

The expenses of the offering are estimated at and are payable by
the Fund. The Investment Manager has agreed to pay (i) all organizational
expenses and (ii) offering costs of the Fund (other than sales load) that exceed
$0.03 per share of the Fund's Common Shares.

The Fund has granted the underwriters an option to purchase up to
additional Common Shares at the public offering price, less the sales load,
within 45 days from the date of this prospectus solely to cover any
over-allotments. If the underwriters exercise this option, each will be
obligated, subject to conditions contained in the purchase agreement, to
purchase a number of additional shares proportionate to that underwriter's
initial amount reflected in the above table.

Until the distribution of the Common Shares is complete, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
Common Shares. However, the representatives may engage in transactions that
stabilize the price of our Common Shares, such as bids or purchases to peg, fix
or maintain that price.

If the underwriters create a short position in our Common Shares in
connection with the offering, i.e., if they sell more Common Shares than are
listed on the cover of this prospectus, the representatives may reduce that
short position by purchasing Common Shares in the open market. The
representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above. Purchases of our Common
Shares to stabilize its price or to reduce a short position may cause the price
of our Common Shares to be higher than it might be in the absence of such
purchases.

Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transaction
described above may have on the price of our Common Shares. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.

The Fund has agreed not to offer or sell any additional Common Shares for a
period of 180 days after the date of the purchase agreement without the prior
written consent of the underwriters, except for the sale of the Common Shares to
the underwriters pursuant to the purchase agreement.

The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions after they
have ceased to be underwriters. 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 the Fund.

The Fund will use % of the net proceeds of this offering (excluding the
over-allotment option) to purchase, immediately after the closing of this
offering, REIT common and preferred stock issued in transactions for which
Merrill Lynch has served as placement agent for the issuer. See 'Direct
Payments'. A portion of the placement agent fees payable to Merrill Lynch by the
issuers

in connection with these Direct Placements has been applied as a credit against
sales loads that would otherwise be paid by investors in the Fund. The effect of
this sales load credit is to reduce the sales load payable by Fund investors
from 4.5% to and will result in an initial net asset value of $ , before
deduction of organization and offering expenses. However, the underwriters will
in any case receive compensation equal to 4.5% of the initial offering price as
a result of receiving a combination of the actual sales load paid by Fund
investors and the portion of the placement agent fees paid from Merrill Lynch to
the underwriters.

The Investment Manager has also agreed to pay from its own assets an
additional commission to Merrill Lynch. This additional commission will be
payable quarterly at the annual rate of 0.10% of the Fund's managed assets
during the continuance of the Investment Management Agreement or other advisory
agreement between the Investment Manager and the Fund. The total amount of these
additional commission payments will not exceed 5% of the total price to public
of the Common Shares offered hereby; provided, that in determining when the
maximum additional commission amount has been paid, the value of each of the
quarterly payments shall be discounted at the annual rate of 10% to the closing
date of this offering. Merrill Lynch has agreed to provide certain after-market
support services designed to maintain the visibility of the Fund on an ongoing
basis, and Merrill Lynch has additionally agreed to (i) provide to the
Investment Manager relevant information, studies or reports regarding general
trends in the closed-end investment company and asset management industries and
(ii) at the request of the Investment Manager, provide information to and
consult with representatives of the Investment Manager with respect to
applicable strategies designed to address market value discounts, if any.

First Union Securities, Inc., a subsidiary of Wachovia Corporation, conducts
its investment banking, institutional, and capital markets businesses under the
trade name of Wachovia Securities. Any references to 'Wachovia Securities' in
this prospectus, however, do not include Wachovia Securities, Inc., a separate
broker-dealer subsidiary of Wachovia Corporation and sister affiliate of First
Union Securities, Inc., which may or may not be participating as a separate
selling dealer in the distribution of the Common Shares.

DIRECT PLACEMENTS

As of the date of this prospectus, the Fund has entered into binding Direct
Placement contracts with the following companies:

NAME OF ISSUER PRICE PER SHARE TO PORFOLIO TOTAL COST TO PORTFOLIO
-------------- --------------------------- -----------------------

CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR

State Street Bank and Trust Company, whose principal business address is 225
Franklin Street, Boston, MA 02110, has been retained to act as custodian of the
Fund's investments and EquiServe Trust Company, NA, whose principal business
address is 150 Royall Street, Canton, MA 02021 to serve as the Fund's transfer
and dividend disbursing agent and registrar. Neither State Street Bank nor
EquiServe Trust Company, NA has any part in deciding the Fund's investment
policies or which securities are to be purchased or sold for the Fund's
portfolio.

REPORTS TO SHAREHOLDERS

The Fund will send unaudited semi-annual and audited annual reports to its
shareholders, including a list of investments held.

VALIDITY OF THE SHARES

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

TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION

Investment Objectives and Policies.......................... 3
Use of Leverage............................................. 4
Investment Restrictions..................................... 7
Management of the Fund...................................... 9
Compensation of Directors and Certain Officers.............. 10
Investment Advisory and Other Services...................... 11
Portfolio Transactions and Brokerage........................ 13
Determination of Net Asset Value............................ 13
Repurchase of Shares........................................ 14
Taxation.................................................... 15
Performance Information..................................... 20
Counsel and Independent Accountants......................... 22
Additional Information...................................... 22
Statement of Assets and Liabilities......................... 23
Ratings of Investments (Appendix A)......................... A-1

[THIS PAGE INTENTIONALLY LEFT BLANK]

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

COHEN & STEERS
--------------------------
QUALITY INCOME REALTY FUND

COMMON SHARES

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

MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES
RAYMOND JAMES
CIBC WORLD MARKETS
DEUTSCHE BANC ALEX. BROWN
LEGG MASON WOOD WALKER
INCORPORATED
U.S. BANCORP PIPER JAFFRAY
WACHOVIA SECURITIES
WELLS FARGO SECURITIES, LLC
ROBERT W. BAIRD & CO.
FAHNESTOCK & CO. INC.
JANNEY MONTGOMERY SCOTT LLC
MORGAN KEEGAN & COMPANY, INC.
QUICK & REILLY, INC.

February , 2002
==============================================================================

SUBJECT TO COMPLETION, DATED FEBRUARY 25, 2002

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
--------------------------
QUALITY INCOME REALTY FUND

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

STATEMENT OF ADDITIONAL INFORMATION
February , 2002

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS OF COHEN & STEERS INCOME REALTY FUND, INC.,
DATED FEBRUARY , 2002, AS SUPPLEMENTED FROM TIME TO TIME (THE 'PROSPECTUS').
THIS STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED BY REFERENCE IN ITS
ENTIRETY INTO THE PROSPECTUS. COPIES OF THE STATEMENT OF ADDITIONAL INFORMATION
AND PROSPECTUS MAY BE OBTAINED FREE OF CHARGE BY WRITING OR CALLING THE ADDRESS
OR PHONE NUMBER SHOWN ABOVE.

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

TABLE OF CONTENTS

PAGE
----

STATEMENT OF ADDITIONAL INFORMATION

Cohen & Steers Quality Income Realty Fund, Inc. (the 'Fund') is a recently
organized, non-diversified, closed-end management investment company organized
as a Maryland corporation on August 22, 2001. 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

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

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. At least 80% of our total assets will be invested in income
producing equity securities of REITs.

PREFERRED STOCKS

Preferred stocks pay fixed or floating dividends to investors, and have a
'preference' over common stock in the payment of dividends and the liquidation
of a company's assets. This means that a company must pay dividends on preferred
stock before paying any dividends on its common stock. Preferred stockholders
usually have no right to vote for corporate directors or on other matters. Under
current market conditions, the Investment Manager expects to invest
approximately 67% of our total assets in common shares of real estate companies
and approximately 33% in preferred shares of REITs. The actual percentage of
common and preferred stocks in our

investment portfolio may vary over time based on the Investment Manager's
assessment of market conditions.

LOWER-RATED SECURITIES

Securities rated non-investment grade (lower than Baa by Moody's Investors
Service Inc. ('Moody's') or lower than BBB by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc. ('S&P')), are sometimes
referred to as 'high yield' or 'junk' bonds. We may only invest in securities
rated CCC or higher by S&P, or rated Caa or higher by Moody's, or equivalent
unrated securities. The issuers of these securities have a currently
identifiable vulnerability to default and the issues may be in default or there
may be present elements of danger with respect to principal or interest. We may
invest no more than 25% of our total assets in preferred stock or debt
securities rated below investment grade or unrated securities of comparable
quality. This is a fundamental investment policy. We will not invest in
securities which are in default at the time of purchase. For a description of
bond ratings, see Appendix A.

ILLIQUID SECURITIES

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

CASH RESERVES

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

Money market instruments in which the Fund may invest its cash reserves will
generally consist of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and such obligations which are subject to
repurchase agreements. Repurchase agreements may be entered into with member
banks of the Federal Reserve System or 'primary dealers' (as designated by the
Federal Reserve Bank of New York) in U.S. Government securities. Other
acceptable money market instruments include commercial paper rated by any
nationally recognized rating agency, such as 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.

USE OF LEVERAGE

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. If
Fund Preferred Shares are issued, the Fund intends, to the extent possible, to
purchase or redeem Fund Preferred Shares from time to time to the extent
necessary in order to maintain coverage of any Fund Preferred Shares of at least
200%. If the Fund has Fund Preferred Shares outstanding, two of the Fund's
Directors will be elected by the holders of Fund Preferred Shares, voting
separately as a class. The remaining Directors of the Fund will be elected by
holders of Common Shares and Fund Preferred Shares voting together as a single
class. In the event the Fund failed to pay dividends on Fund Preferred Shares
for two years, Fund Preferred Shareholders would be entitled to elect a majority
of the Directors of the Fund. The failure to pay dividends or make distributions
could result in the Fund ceasing to qualify as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the 'Code'), which could
have a material adverse effect on the value of the Common Shares. See
'Description of Shares -- Fund Preferred Shares' in the Prospectus.

LEVERAGE RISK

Fund were not so leveraged. On the other hand, to the extent that the then
current cost of any leverage, together with other related expenses, approaches
the net return on the Fund's investment portfolio, the benefit of leverage to
holders of Common Shares will be reduced, and if the then current cost of any
leverage were to exceed the net return on the Fund's portfolio, the Fund's
leveraged capital structure would result in a lower rate of return to Common
Shareholders than if the Fund were not so leveraged.

In addition, such redemption or prepayment 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.

Unless and until the borrowings for leverage or Fund Preferred Shares are
issued, the Common Shares will not be leveraged and the disclosure regarding
these strategies will not apply.

INTEREST RATE 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. Depending on the state of
interest rates in general, our use of interest rate swaps or caps could enhance
or harm the overall performance on the Fund's Common Shares. To the extent there
is a decline in interest rates, the value of the interest rate swap or cap could
decline, and could result in a decline in the net asset value of the Common
Shares. In addition, if short-term interest rates are lower than our rate of
payment on the interest rate swap, this will reduce the performance of the
Fund's Common Shares. If, on the other hand, short-term interest rates are
higher than our rate of payment on the interest rate swap, this will enhance the
performance of the Fund's Common Shares. Buying interest rate caps could enhance
the performance of the Fund's Common Shares by providing a ceiling on leverage
expenses. Buying interest rate caps could also decrease the net income of the
Fund's Common Shares in the event that the premium paid by the Fund to the
counterparty exceeds the additional amount the Fund would have been required to
pay had it not entered into the cap agreement. The Fund has no current intention
of selling an interest rate swap or cap. We would not enter into interest rate
swap or cap transactions in an aggregate notional amount that exceeds the
outstanding amount of the Fund's leverage.

Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the

net amount of interest payments that the Fund is contractually obligated to
make. If the counter-party defaults, the Fund would not be able to use the
anticipated net receipts under the swap or cap to offset the dividend payments
on the Fund Preferred Shares or rate of interest on borrowings. Depending on
whether the Fund would be entitled to receive net payments from the counterparty
on the swap or cap, which in turn would depend on the general state of
short-term interest rates at that point in time, such default could negatively
impact the performance of the Fund's Common Shares. Although this will not
guarantee that the counter-party does not default, the Fund will not enter into
an interest rate swap or cap transaction with any counter-party that the
Investment Manager believes does not have the financial resources to honor its
obligation under the interest rate swap or cap transaction. Further, the
Investment Manager will continually monitor the financial stability of a
counter-party to an interest rate swap or cap transaction in an effort to
proactively protect the Fund's investments. In addition, at the time the
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
performance of the Fund's Common Shares. 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.

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

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

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

9. Enter into short sales;

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

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

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

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

The investment restrictions numbered 1 through 7 in this 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 vote of
a majority of the outstanding voting securities of the Fund, as defined under
the 1940 Act. 'Majority of the outstanding voting securities' means the lesser
of (1) 67% or more of the shares present at a meeting of shareholders of the
Fund, if the holders of more than 50% of the outstanding shares of the Fund are
present or represented by proxy, or (2) more than 50% of the outstanding shares
of the Fund. Investment restrictions numbered 8 through 13 above are
non-fundamental and may be changed at any time by vote of a majority of the
Board of Directors.

MANAGEMENT OF THE FUND

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

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

POSITION(S)
HELD WITH
NAME, ADDRESS AND AGE FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
--------------------- ---- -----------------------------------------------

Robert H. Steers*............. Director, Chairman Chairman of Cohen & Steers Capital
757 Third Avenue and Secretary Management, Inc., the Fund's Investment
New York, New York Manager.
Age: 48

Martin Cohen*'D' ............. Director, President President of Cohen & Steers Capital
757 Third Avenue and Treasurer Management, Inc., the Fund' Investment
New York, New York Manager.
Age: 52

Gregory C. Clark ............. Director Private Investor. Prior thereto, President
376 Mountain Laurel Drive of Wellspring Management Group (investment
Aspen, Colorado advisory firm).
Age: 54

Bonnie Cohen'D' .............. Director Consultant. Prior thereto, Undersecretary
1824 Phelps Place, N.W. of State, United States Department of
Washington, D.C. State.
Age: 59

George Grossman .............. Director Attorney-at-law
17 Elm Place
Rye, New York
Age: 47

Richard J. Norman ............ Director Private Investor. Prior thereto,
7520 Hackamore Drive Investment Representative of Morgan
Potomac, Maryland Stanley Dean Witter.
Age: 58

Willard H. Smith Jr. ......... Director Board member of Essex Property Trust,
5208 Renaissance Avenue Inc., Highwoods Properties, Inc., Realty
San Diego, California Income Corporation and Willis Lease
Age: 64 Finance Corporation. Managing director
at Merrill Lynch & Co., Equity Capital
Markets Division from 1983 to 1995.

(table continued on next page)

(table continued from previous page)

POSITION(S)
HELD WITH
NAME, ADDRESS AND AGE FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
--------------------- ---- -----------------------------------------------

Greg E. Brooks ............... Vice President Senior Vice President of Cohen & Steers Capital
757 Third Avenue Management, Inc., the Fund's Investment
New York, New York Manager since 2002 and a Vice President since
Age: 35 2000. Prior thereto, he was an investment
analyst with another real estate securities
investment manager.

Adam M. Derechin ............. Vice President and Senior Vice President of Cohen & Steers Capital
757 Third Avenue Assistant Treasurer Management, Inc., the Fund's Investment
New York, New York Manager, since 1998, and prior to that Vice
Age: 37 President of Cohen & Steers Capital
Management, Inc.

Lawrence B. Stoller .......... Assistant Secretary Senior Vice President and General Counsel,
757 Third Avenue Cohen & Steers Capital Management, Inc., the
New York, New York Fund's Investment Manager, since 1999. Prior
Age: 38 to that, Associate General Counsel, Neuberger
Berman Management Inc. (money manager); and
Assistant General Counsel, The Dreyfus
Corporation (money manager).

---------

'D' Martin Cohen and Bonnie Cohen are unrelated.

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

TOTAL
AGGREGATE COMPENSATION
COMPENSATION COMPLEX PAID TO
NAME OF PERSON, POSITION OF FUND DIRECTORS FROM FUND DIRECTORS
------------------------------------------ --------- ---------

Gregory C. Clark*, Director................................. $7,500 $45,000
Bonnie Cohen*, Director..................................... $7,500 $11,250***
Martin Cohen**, Director and President...................... 0 0
George Grossman*, Director.................................. $7,500 $45,000
Richard J. Norman, Director................................. $7,500 $11,250***
Willard H. Smith Jr.*, Director............................. $7,500 $45,000
Robert H. Steers**, Director and Chairman................... 0 0

---------

* Member of the Audit Committee.

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

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

INVESTMENT ADVISORY AND OTHER SERVICES

THE INVESTMENT MANAGER

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

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

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

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

ADMINISTRATIVE SERVICES

Pursuant to an Administration Agreement, the Investment Manager also
performs certain administrative and accounting functions for the Fund, including
(i) providing office space, telephone, office equipment and supplies for the
Fund; (ii) paying compensation of the Fund's officers for services rendered as
such; (iii) authorizing expenditures and approving bills for payment on behalf
of the Fund; (iv) supervising preparation of the periodic updating of the Fund's
registration statement, including prospectus and statement of additional
information, for the purpose of filings with the Securities and Exchange
Commission and state securities administrators and monitoring and maintaining
the effectiveness of such filings, as appropriate; (v) supervising preparation
of periodic reports to the Fund's shareholders and filing of these reports with
the Securities and Exchange Commission, Forms N-SAR filed with the Securities
and Exchange Commission, notices of dividends, capital gains distributions and
tax credits, and attending to routine correspondence and other communications
with individual shareholders; (vi) supervising the daily pricing of the Fund's
investment portfolio and the publication of the net asset value of the Fund's
shares, earnings reports and other financial data; (vii) monitoring
relationships with organizations providing services to the 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, 0.02% of the Fund's managed assets.

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

Under the terms of the Sub-Administration Agreement, the Fund pays State
Street Bank a monthly sub-administration fee. The sub-administration fee paid by
the Fund to State Street Bank is computed on the basis of the net assets in the
Fund at an annual rate equal to 0.040% of the first $200 million in assets,
0.030% of the next $200 million, and 0.015% of assets in excess of $400 million,
with a minimum fee of $120,000. The aggregate fee paid by the Fund and the other
funds advised by the Investment Manager to State Street Bank is computed by
multiplying the total number of funds by each break point in the above schedule
in order to determine the aggregate break points to be used in calculating the
total fee paid by the Cohen & Steers family of funds (i.e., 6 funds at $200
million or $1.2 billion at 0.040%, etc.). The Fund is then responsible for its
pro rata amount of the aggregate administration fee.

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

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

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

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

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

PORTFOLIO TRANSACTIONS AND BROKERAGE

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

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
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. 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.

REPURCHASE OF SHARES

The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead the
Fund's shares will trade in the open market at a price that will be a function
of several factors, including dividend levels (which are in turn affected by
expenses), net asset value, call protection, price, dividend stability, relative
demand for and supply of such shares in the market, market and economic
conditions and other factors. Because shares of a closed-end investment company
may frequently trade at prices lower than net asset value, the Fund's Board of
Directors may consider action that might be taken to reduce or eliminate any
material discount from net asset value in respect of shares, which may include
the repurchase of such shares in the open market, private transactions, the
making of a tender offer for such shares at net asset value, or the conversion
of the Fund to an open-end investment company. The Board of Directors may not
decide to take any of these actions. During the pendency of a tender offer, the
Fund will publish how Common Shareholders may readily ascertain the net asset
value. In addition, there can be no assurance that share repurchases or tender
offers, if undertaken, will reduce market discount.

Subject to its investment limitations, the Fund may use the accumulation of
cash to finance repurchase of shares or to make a tender offer. Interest on any
borrowings to finance share repurchase transactions or the accumulation of cash
by the Fund in anticipation of share repurchases or tenders will reduce the
Fund's income. Any share repurchase, tender offer or

borrowing that might be approved by the Board of Directors would have to comply
with the Securities Exchange Act of 1934 and the 1940 Act and the rules and
regulations under each of those Acts.

Although the decision to take action in response to a discount from net
asset value will be made by the Board of Directors at the time it considers the
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of Common Shares or a tender offer for such shares if
(1) such transactions, if consummated, would (a) result in delisting of the
common shares from the New York Stock Exchange, or (b) impair the Fund's status
as a regulated investment company under the Code (which would make the Fund a
taxable entity, causing its income to be taxed at the corporate level in
addition to the taxation of shareholders who receive dividends from the Fund) or
as a registered closed-end investment company under the 1940 Act; (2) the Fund
would not be able to liquidate portfolio securities in an orderly manner and
consistent with the Fund's investment objectives and policies in order to
repurchase shares; or (3) there is, in the Board's judgment, any (a) material
legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b) general
suspension of or limitation on prices for trading securities on the New York
Stock Exchange, (c) declaration of a banking moratorium by Federal or state
authorities or a suspension of payment by U.S. banks in which the Fund invests,
(d) material limitation affecting the Fund or the issuers of its portfolio
securities by Federal or state authorities on the extension of credit by
institutions or on the exchange of foreign currency, (e) commencement of armed
hostilities or other international or national calamity directly or indirectly
involving the United States, or (f) other event or condition which would have a
material adverse effect (including any adverse tax effect) on the Fund or its
shareholders if shares were repurchased. The Board may in the future modify
these conditions in light of experience.

The repurchase by the Fund of its shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the shares
may be the subject of repurchase or tender offers at net asset value from time
to time, or that the Fund may be converted to an open-end investment company,
may reduce any spread between market price and net asset value that might
otherwise exist.

In addition, a purchase by the Fund of its Common Shares will decrease the
Fund's total assets which would likely have the effect of increasing the Fund's
expense ratio. Any purchase by the Fund of its Common Shares at a time when
preferred shares are outstanding will increase the leverage applicable to the
outstanding common shares then remaining.

Before deciding whether to take any action, the Fund's Board of Directors
would likely consider all relevant factors, including the extent and duration of
the discount, the liquidity of the Fund's portfolio, the impact of any action on
the Fund or its shareholders and market considerations. Based on the
considerations, even if the Fund's shares should trade at a discount, the Board
may determine that, in the interest of the Fund and its shareholders, no action
should be taken.

TAXATION

Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances. This discussion is based upon present provisions of
the Code, the regulations promulgated thereunder, and judicial and
administrative ruling authorities, all of which are subject to change, which
change may be retroactive. Prospective investors should consult their own tax
advisers with regard to the federal tax consequences of the purchase, ownership,
or disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.

TAXATION OF THE FUND

The Fund intends to elect to be treated as, and to qualify annually as, a
regulated investment company under the Code.

To qualify for the favorable U.S. federal income tax treatment generally
accorded to regulated investment companies, the Fund must, among other things,
(a) derive in each taxable year at least 90% of its gross income 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 with respect to its business of investing in such stock, securities or
currencies; (b) diversify its holdings so that, at end of each quarter of the
taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash and cash items (including receivables), U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, 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 regulated investment companies) of a single issuer, or
two or more issuers which the Fund controls and are engaged in the same, similar
or related trades or businesses; and (c) distribute at least 90% of the sum of
its investment company taxable income (as that term is defined in the Code, but
without regard to the deduction for dividends paid) and net tax-exempt interest
each taxable year.

As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income (which
includes, among other items, dividends, interest and net short-term capital gain
in excess of net long-term capital loss) and net capital gain (the excess of net
long-term capital gain over net short-term capital loss), if any, that it
distributes to shareholders. The Fund intends to distribute to its shareholders,
at least annually, substantially all of its investment company taxable income
and net capital gain. Amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To prevent imposition of the excise tax, the Fund must distribute
during each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses (adjusted for certain ordinary losses) for the one-year period ending on
October 31 of the calendar year, and (3) any ordinary income and capital gains
for previous years that was not distributed 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 taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received. To prevent application of the excise tax, the Fund
intends to make its distributions in accordance with the calendar year
distribution requirement.

If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits (including distributions of net capital gain) would be taxed to
shareholders as ordinary income.

DISTRIBUTIONS

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

dividends received deduction. Distributions of net capital gain (the excess of
net long-term capital gain over net short-term capital loss), if any, designated
as capital gain dividends are taxable to a shareholder as long-term capital
gains, regardless of how long the shareholder has held Fund shares. A
distribution of an amount in excess of the Fund's current and accumulated
earnings and profits will be treated by a shareholder as a return of capital
which is applied against and reduces the shareholder's basis in his or her
shares. To the extent that the amount of any such distribution exceeds the
shareholder's basis in his or her shares, the excess will be treated by the
shareholder as gain from a sale or exchange of the shares.

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 paid out of
earnings or profits to each class for the tax year. Accordingly, the Fund
intends each year to allocate capital gain dividends between its Common Shares
and Fund Preferred Shares in proportion to the total dividends paid out of
earnings or profits to each class with respect to such tax year.

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.

The Fund may elect to retain its net capital gain or a portion thereof for
investment and be taxed at corporate rates on the amount retained. In such case,
it may designate the retained amount as undistributed capital gains in a notice
to its shareholders who will be treated as if each received a distribution of
his pro rata share of such gain, with the result that each shareholder will
(i) be required to report his pro rata share of such gain on his tax return as
long-term capital gain, (ii) receive a refundable tax credit for his pro rata
share of tax paid by the Fund on the gain and (iii) increase the tax basis for
his shares by an amount equal to the deemed distribution less the tax credit.

Shareholders will be notified annually as to the U.S. federal tax status of
distributions.

SALE OR EXCHANGE OF FUND SHARES

Upon the sale or other disposition of shares of the Fund which a shareholder
holds as a capital asset, such shareholder may realize a capital gain or loss
which 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.

Any loss realized on a sale or exchange will be disallowed to the extent the
shares disposed of are replaced (including through reinvestment of dividends)
within a period of 61 days beginning 30 days before and ending 30 days after
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a shareholder
on a disposition of Fund shares held by the shareholder for six months or less
will be treated as a long-term capital loss to the extent of any distributions
of net capital gain received by the shareholder with respect to such shares.

NATURE OF FUND'S INVESTMENTS

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

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 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 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 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

The Fund may be required to withhold U.S. federal income tax on all taxable
distributions and redemption proceeds payable to shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.

FOREIGN SHAREHOLDERS

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
'Taxation -- Investments in Real Estate Investment Trusts' above)), which tax is
generally withheld from such distributions.

Capital gain dividends and any amounts retained by the Fund which are
designated as undistributed capital gains will not be subject to U.S. tax at the
rate of 30% (or lower treaty rate) unless the foreign 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. income tax on his or her worldwide income at the graduated rates
applicable to U.S. citizens, rather than the 30% U.S. tax. In the case of a
foreign shareholder who is a nonresident alien individual, the Fund may be
required to withhold U.S. income tax on distributions of net capital gain unless
the foreign shareholder certifies his or her non-U.S. status under penalties of
perjury or otherwise establishes an exemption. See '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. 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 shares of
the Fund and the five year period ending on the date of the disposition of those
shares, the Fund was a 'U.S. real property holding corporation' and the foreign
shareholder held more than 5% of the shares of the Fund, in which event the gain
would be taxed in the same manner as for a U.S. shareholder as discussed above
and a 10% U.S. withholding tax would be imposed on the amount realized on the
disposition of such shares to be credited against the foreign shareholder's U.S.
income tax liability on such disposition. A corporation is a 'U.S. real property
holding corporation' if the fair market value of its U.S. real property
interests equals or exceeds 50% of the fair market value of such interests plus
its interests in real property located outside the United States plus any other
assets used or held for use in a business. In the case of the Fund, U.S. real
property interests include interests in stock in U.S. real property holding
corporations (other than stock of a REIT controlled by U.S. persons and holdings
of 5% or less in the stock of publicly traded U.S. real property holding
corporations) and certain participating debt securities.

Income Effectively Connected. If the income from the Fund is 'effectively
connected' with a U.S. trade or business carried on by a foreign 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. 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.

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 INFORMATION

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 SEC. The formula can be
expressed as follows:

P(1 + T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5-, or 10-year period at the
end of a 1-, 5-, or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.

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]
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.

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 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.)

INCOME POTENTIAL

REITs may offer attractive dividend yields.

Current Yield
as of December 31, 2001

30-Year 10-Year Dow Jones S&P 500
Equity REITs Treasury Treasury Utility Index Index

7.1% 5.5% 5.1% 4.2% 1.4%

Source: NAREIT, Bloomberg

TOTAL RETURN POTENTIAL

Historically, REITs have provided solid total returns.

Total Returns
as of December 31, 2001

Dow Jones S&P 500
Equity REITs Utility Index Index NASDAQ International

1 Year 14% -26% -12% -21% -21%

5 Years 6% 9% 11% 9% 1%

10 Years 12% 8% 13% 13% 5%

Source: NAREIT, Bloomberg

PORTFOLIO DIVERSIFICATION POTENTIAL

REITs can provide portfolio diversification due to their low correlation
with other assets.

Correlations
Ten Years Ended December 31, 2001

Dow Jones S&P 500
REITs Utility Index Index International NASDAQ Bonds

1.0 0.32 0.26 0.20 0.15 0.13

Source: Ibbotson

Returns are historical and include change in share price and reinvestment of
dividends and capital gains. REITs are represented by the National Association
of Real Estate Investment Trust ('NAREIT') Equity REIT Index, an unmanaged
portfolio representing the Equity REIT market. This is not the Fund's
performance and the Fund will not seek to replicate any index. You cannot invest
directly in an index. There is no guarantee that Fund performance will equal or
exceed Equity REIT Index performance.

The Standard and Poor's 500 Composite Index ('S&P 500') is an unmanaged
index of 500 large capitalization, publicly traded stocks representing a variety
of industries. The NASDAQ Composite Index is a broad based capitalization
weighted index of all NASDAQ national market and small-cap stocks. International
Index, represented by the MSCI EAFE Index (Morgan Stanley Capital International,
Europe, Australia, Far East), is a market value-weighted average of the
performance of more than 900 securities listed on the stock exchanges of
countries in Europe, Australia and the Far East. Bonds, represented by the
Salomon Brothers Broad Investment Grade

Bond Index (BIG), is designed to cover the investment grade universe of bonds
issued in the United States. The BIG index includes institutionally traded U.S.
Treasury, Government-sponsored (U.S. agency and supra-national), mortgage and
corporate securities, and provides a reliable and fair benchmark for the
investment grade bond portfolio manager. The Dow Jones Utilities Average is a
price-weighted average of 15 utility companies that are listed on the New York
Stock Exchange and are involved in the production of electrical energy.
Correlation coefficients are based on monthly return data. Treasury securities
are backed by the full faith and credit of the U.S. Government, while real
estate securities are not. Past performance is no guarantee of future results.

COUNSEL AND INDEPENDENT ACCOUNTANTS

Simpson Thacher & Bartlett serves as counsel to the Fund, and is located at
425 Lexington Avenue, New York, New York 10017-3909. PricewaterhouseCoopers LLP
have been appointed as independent accountants for the Fund. The statement of
assets and liabilities of the Fund as of February 15, 2002 and the statement of
operations of the Fund for the one day then ended included in this statement of
additional information has been so included in reliance on the report of
PricewaterhouseCoopers LLP, New York, New York, independent accountants, given
on the authority of the firm as experts in auditing and accounting.

ADDITIONAL INFORMATION

A Registration Statement on Form N-2, including amendments thereto, relating
to the shares offered hereby has been filed by the Fund with the Securities and
Exchange Commission, Washington, D.C. The Prospectus and this Statement of
Additional Information do not contain all the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Registration Statement. Statements contained in the
Prospectus and this Statement of Additional Information as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of any part thereof may be obtained from the
Commission upon the payment of fees prescribed by the Commission.

COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES AS OF FEBRUARY 15, 2002

Assets:
Cash.................................................... $100,275
Deferred Offering Costs................................. 120,000
Receivable from adviser................................. 15,000
--------
Total Assets........................................ 235,275
--------
Liabilities
Accrued expenses........................................ 120,000
Payable for organization costs.......................... 15,000
--------
Total Liabilities................................... 135,000
--------
Net Assets applicable to 7,000 shares of $.001 par value
common stock outstanding.................................. $100,275
--------
--------
Net asset value per Common Shares outstanding ($100,275
divided by 7,000 Common shares outstanding)............... $ 14.33
--------
--------

STATEMENT OF OPERATIONS
FOR THE ONE DAY ENDED FEBRUARY 15, 2002
INVESTMENT INCOME........................................... $ --
Expenses:
Organization costs...................................... 15,000
Expense reimbursement................................... (15,000)
--------
Total expenses...................................... --
--------
Net investment income....................................... $ --
--------
--------

NOTES TO FINANCIAL STATEMENTS

NOTE 1: ORGANIZATION

Cohen & Steers Quality Income Realty Fund, Inc. (the 'Fund') was
incorporated under the laws of the State of Maryland on August 22, 2001 and is
registered under the Investment Company Act of 1940 (the 'Act'), as amended, as
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 7,000 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 $0.03 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
adminstrative 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 0.85% of the
average daily managed assets. Managed asset value is the net asset value of the
Common

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

In addition to the reimbursement and waiver of organization and offering
costs discussed in Note 1, the Adviser has contractually agreed with the Fund to
waive a portion of its fees in the amount of 0.32% of average daily managed
assets for the first 5 years of the Fund's operations, 0.26% of average daily
managed assets in year 6, 0.20% of average daily managed assets in year 7, 0.14%
of average daily managed assets in year 8, 0.08% of average daily managed assets
in year 9 and 0.02% of average daily managed assets in year 10. The Adviser will
not reimburse the Fund for any portion of its fees beyond December 31, 2011.

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying statement of assets and liabilities and the
related statement of operations present fairly, in all material respects, the
financial position of Cohen & Steers Quality Income Realty Fund, Inc. (the
'Fund') at February 15, 2002 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.

PRICEWATERHOUSECOOPERS LLP
New York, New York
February 19, 2002

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

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

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

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

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

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

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

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

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

PREFERRED STOCK

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

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

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

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

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

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

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

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

A-3

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

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

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

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

PRIME RATING SYSTEM (SHORT-TERM)

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

Leading market positions in well-established industries.

High rates of return on funds employed.

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

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

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

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

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

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

A-4

PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

1) Financial Statements

Part A -- None

Part B -- Report of Independent Accountants**

Statement of Assets and Liabilities**

2) Exhibits

(a) -- (i) Articles of Incorporation.*
-- (ii) Articles of Amendment*
(b) -- (i) By-Laws.*
(c) -- Not Applicable
(d) -- (i) Form of specimen share certificate*
-- (ii) The rights of security holders are defined in the
Registrant's Articles of Incorporation (Article FIFTH and
Article EIGHTH) and the Registrant's By-Laws (Article II
and Article VI).
(e) -- Form of Dividend Reinvestment Plan*
(f) -- Not Applicable
(g) -- (i) Form of Investment Management Agreement*
-- (ii) Agreement to Waive Investment Management Fees*
(h) -- (i) Form of Purchase Agreement**
-- (ii) Form of Master Agreement Among Underwriters**
-- (iii) Form of Standard Dealer 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*
(l) -- (i) Opinion and Consent of Simpson Thacher & Bartlett**
-- (ii) Opinion and Consent of Venable, Baetjer and Howard,
LLP**
(m) -- Not Applicable
(n) -- Consent of Independent Accountants**
(o) -- Not Applicable
(p) -- Form of Investment Representation Letter*
(q) -- Not Applicable
(r) -- (i) Code of Ethics of the Fund*
-- (ii) Code of Ethics of Investment Manager*
(s) -- Power of Attorney*

---------
* Previously filed with Fund's Registration Statement

** Filed herewith.

ITEM 25. MARKETING ARRANGEMENTS

See Exhibit 2(h).

C-1

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:

SEC Registration fees....................................... $ 55,200
New York Stock Exchange listing fee*........................ 150,000
Printing and engraving expenses*............................ 400,000
Auditing fees and expenses*................................. 7,500
Legal fees and expenses*.................................... 335,000
NASD Fees*.................................................. 30,500
Miscellaneous*.............................................. 5,000
-------
Total*.................................................. $983,200
-------
-------

---------

* Estimated.

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

None.

ITEM 28. NUMBER OF HOLDERS OF SECURITIES

NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------

Common Stock, par value $.001 per share..................... None

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.

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.

C-2

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.

NAME TITLE
---- -----

Robert H. Steers................................ Chairman, Director
Martin Cohen.................................... President, Director
Joseph M. Harvey................................ Senior Vice President and Director of Research
James S. Corl................................... Senior Vice President and Director of Investment
Strategy
John J. McCombe................................. Senior Vice President
Adam M. Derechin................................ Senior Vice President
Lawrence B. Stoller............................. Senior Vice President and General Counsel
Michael J. Kozoriz.............................. Vice President
Greg E. Brooks.................................. Vice President
Jay J. Chen..................................... Vice President
Terrance R. Ober................................ Vice President
Victor M. Gomez................................. Vice President and Treasurer

Cohen & Steers Capital Management, Inc. acts as Investment Manager of, in
addition to the Registrant, the following registered investment companies:

Cohen & Steers Advantage Income Realty Fund, Inc.

Cohen & Steers Institutional Realty Shares, Inc.

Cohen & Steers Equity Income Fund, Inc.

Cohen & Steers Realty Shares, Inc.

Cohen & Steers Total Return Realty Fund, Inc.

Cohen & Steers Special Equity Fund, Inc.

Frank Russell Investment Management Company -- Real Estate Securities Fund

Russell Insurance Funds -- Real Estate Securities Fund

American Skandia Trust -- AST Cohen & Steers Realty Portfolio

Manufacturers Investment Trust -- Real Estate Securities Portfolio

ITEM 31. LOCATION OF ACCOUNTS AND RECORDS

The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940, as amended
and the Rules thereunder will be maintained as follows: journals, ledgers,
securities records and other original records will be maintained principally at
the offices of the Registrant's Administrator and Custodian, State Street Bank
and Trust Company. All other records so required to be maintained will be
maintained at the offices of Cohen & Steers Capital Management, Inc., 757 Third
Avenue, New York, New York 10017.

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.

C-3

(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

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, 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 25th day of February, 2002.

COHEN & STEERS QUALITY INCOME
REALTY 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.

SIGNATURE TITLE DATE
--------- ----- ----

By /s/ GREGORY C. CLARK Director February 25, 2002
.........................................
(GREGORY C. CLARK)

By: /s/ BONNIE COHEN Director February 25, 2002
.........................................
(BONNIE COHEN)

By: /s/ MARTIN COHEN President, Treasurer and Director February 25, 2002
.........................................
(MARTIN COHEN)

By: /s/ GEORGE GROSSMAN Director February 25, 2002
.........................................
(GEORGE GROSSMAN)

By: /s/ RICHARD J. NORMAN Director February 25, 2002
.........................................
(RICHARD J. NORMAN)

By: /s/ WILLARD H. SMITH JR. Director February 25, 2002
.........................................
(WILLARD H. SMITH JR.)

By: /s/ ROBERT H. STEERS Director, Chairman and Secretary February 25, 2002
.........................................
(ROBERT H. STEERS)

C-5

STATEMENT OF DIFFERENCES
------------------------

The dagger symbol shall be expressed as ................................ 'D'
Characters normally expressed as superscript shall be preceded by....... 'pp'