<PAGE>
As filed with the Securities and Exchange Commission on ______________, 1997.
Registration No. _________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
RESOURCE ASSET INVESTMENT TRUST
(Exact name of registrant as specified in its governing instruments)
1521 Locust Street, Sixth Floor, Philadelphia, PA 19102
(Address of principal executive offices)
Jay J. Eisner
President and Chief Operating Officer
Resource Asset Investment Trust
1521 Locust Street, Sixth Floor
Philadelphia, PA 19102
(Name and address of agent for service)
COPIES TO:
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<S> <C> <C>
J. Baur Whittlesey, Esquire Robert B. Ott, Esquire Thurston R. Moore, Esquire
Ledgewood Law Firm, P.C. Arnold & Porter Hunton & Williams
1521 Locust Street, 8th Floor 555 Twelfth Street, N.W. 951 East Byrd Street
Philadelphia, PA 19102 Washington, D.C. 20004 Richmond, VA 23219
</TABLE>
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. []
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. []
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. []
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
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Calculation of Registration Fee
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Title of securities Amount being Proposed maximum Proposed maximum Amount of
being registered registered offering price per aggregate offering registration
unit price(2) fee
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Common Shares(1) 12,075,000 Shares $15.00 $181,125,000 $54,886.36
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</TABLE>
<PAGE>
(1) Includes 1,500,000 Common Shares which the Underwriters have the option
to purchase to cover over-allotments, if any, and 575,000 Common Shares
issuable upon exercise of warrants granted to the Representative of the
Underwriters.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(a) (with respect to Common Shares other than
those relating to the Representative's warrants) and Rule 457(g)(2)
(with respect to Common Shares relating to the Representative's
warrants).
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.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED ______________, 1997
PROSPECTUS
_________ Shares
RESOURCE ASSET INVESTMENT TRUST
Common Shares
----------
Resource Asset Investment Trust ("RAIT" and, together with its
subsidiaries, the "Company") is a newly organized Maryland real estate
investment trust. RAIT will elect to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). RAIT
has formed two subsidiaries that will be the general partner and initial limited
partner, respectively, of a newly-formed Delaware limited partnership, RAIT
Partnership, L.P. (the "Operating Partnership"), through which substantially all
of the Company's assets will be owned and operated.
All of the ______________ common shares of beneficial interest of the
Company (the "Common Shares") offered pursuant to this Prospectus (the
"Offering") are being offered by the Company. In addition, ____________________
Common Shares will be sold by the Company to Resource America, Inc. ("RAI") upon
the completion of this Offering at the initial public offering price net of any
underwriting discounts or commissions. After that sale, RAI will own
approximately 9.8% of the Company's outstanding Common Shares, assuming that the
Underwriters do not exercise their over-allotment option.
It is currently anticipated that the initial public offering price for
the Common Shares will be $_____ per share. Prior to this Offering, there has
been no market for the Common Shares. The public offering price will be
determined by negotiation between the Company and the Underwriters. See
"Underwriting." Application has been made for listing the Company's Common
Shares on the Nasdaq Stock Market under the symbol "________."
See "Risk Factors" beginning on page ______ for certain factors
relevant to an investment in the Common Shares including, among others:
<PAGE>
o The Company has specified uses for only ______% of the net
proceeds of the Offering (assuming the Underwriters do not
exercise their overallotment option) and, accordingly,
investors will not have an opportunity to evaluate a
substantial portion of the Company's investments.
o The Company's principal business activity will be to provide
mortgage and debt financing in situations that, generally,
will not conform to the underwriting standards of
institutional lenders or sources that provide financing
through securitization, and will emphasize wraparound loans
and other forms of junior lien or subordinate financing.
Financing provided by the Company, accordingly, will be
subject to greater risks than institutional and senior lien
financing.
o The Company's investments will be sensitive to many economic
factors over which the Company has no control.
o The Company may incur debt in furtherance of its business
activities and operations and, accordingly, will be subject to
the risks associated with the use of leverage.
o Ownership of the Common Shares by each shareholder other than
RAI is limited to 8.5% of the outstanding Common Shares, which
may deter third parties from seeking control of, or seeking to
acquire, the Company. See "Description of Shares of Beneficial
Interest - Restrictions on Ownership and Transfer."
o The Company will be taxed as a regular corporation if it fails
to qualify as a REIT.
o There are certain conflicts of interest between the Company
and RAI and its affiliates in connection with the Company's
acquisition of investments and the management of properties.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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============================================================================================================================
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Price to Underwriting
Public Discount(1) Proceeds to Company(2)
- ----------------------------------------------------------------------------------------------------------------------------
Per Share................................ $ $ $
Total(3)(4).............................. $ $ $
============================================================================================================================
</TABLE>
(1) Does not reflect: (i) reimbursement by the Company of certain
out-of-pocket expenses incurred by the Underwriters, to a maximum of
$_____; (ii) a warrant granted to
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<PAGE>
Friedman, Billings, Ramsey & Co., Inc., the representative of the
Underwriters (the "Representative") to purchase up to _______ Common
Shares at a price of $_____ per share, exercisable for a period of five
years from the completion of the Offering; and (iii) a two year right
granted to the Representative to be first offered the right to act as
financial advisor to or lead underwriter for the Company with respect
to certain transactions, including sales of assets, equity or debt
securities, mergers, acquisitions and capital markets transactions. The
Company also has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses in connection with the Offering, estimated at
$__________, including the Underwriters' expenses referred to in (1),
above, which will be payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to _________ additional Common Shares to cover over-allotments. If all
such Common Shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company before expenses of this
Offering will be $__________, $__________ and $__________,
respectively. See "Underwriting."
(4) The total Price to Public and the total Proceeds to Company reflect the
sale of ___________ Common Shares to RAI net of the Underwriting
Discount.
The Common Shares are offered by the Underwriters, subject to receipt
and acceptance by the Underwriters, approval of certain legal matters by counsel
for the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offers and to reject orders in whole or
in part. It is expected that delivery of the Common Shares will be made in New
York, New York on or about _____________, 1997.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is __________, 1997.
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<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING STABILIZATION, THE PURCHASE OF COMMON SHARES TO COVER SYNDICATE SHORT
POSITIONS, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes that (i) the transactions
relating to the formation of the Company are consummated, (ii) the Underwriters'
overallotment option is not exercised and (iii) the offering price (the
"Offering Price") of the Common Shares is $____ per share. Unless the context
otherwise requires, all references in this Prospectus to (i) the "Company" shall
mean Resource Asset Investment Trust and (a) its wholly-owned subsidiaries, RAIT
General, Inc. (the "General Partner") and RAIT Limited, Inc. (the "Initial
Limited Partner") and (b) RAIT Partnership, L.P. (the "Operating Partnership"),
in which the General Partner initially will own a 1% interest and the Initial
Limited Partner initially will own a 99% interest; and (ii) the "Common Shares"
shall mean the Company's common shares of beneficial interest, par value $.01
per share. Capitalized terms used but not defined herein shall have the meanings
set forth in the Glossary beginning on page ______.
The Company
General. RAIT is a newly-formed Maryland real estate investment trust
that will elect to be taxed as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"). The Company's principal
business activity will be to provide mortgage or other debt financing
("Financing") in situations that, generally, do not conform to the underwriting
standards of institutional lenders or sources that provide financing through
securitization. The Company believes that its anticipated Financing activity
provides it with an underserved niche market in the real estate finance
industry. The Company will rely primarily on the relationships its management
personnel have developed as a result of their many years of experience in the
mortgage lending, real estate and real estate finance industries to generate
financing opportunities.
Investment Objectives and Policies. The Company intends to purchase or
originate Financing relating to multi-family residential, office and other
commercial properties. The Company believes that, under current market
conditions, institutional lenders and lending sources that provide financing
through securitization (which the Company believes are currently the principal
sources of real property financing), require that loans made by them satisfy
certain standard criteria. Typically, these lenders will require that the
requested loan be within the institution's size parameters and bear a specified
relation to the appraised value of the property securing the loan, that the
property have historical operating results demonstrating a ratio of cash flow to
projected debt service meeting standards established by the institution and that
the loan be secured by a first lien on the property. These lenders frequently
restrict the ability of the borrower to incur junior lien loans on the property
without the lender's consent and impose substantial penalties on loan
prepayment. Lenders may also establish guidelines with respect to type of
property, type and amount of insurance, uses of funds, appraisals and loan
documentation. The Company believes that borrowers or properties needing
attention to specific or unique situations are frequently unable to obtain
financing from these sources, or cannot obtain financing
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<PAGE>
adapted to their particular needs, providing the Company with a niche market
with substantial growth potential. The Company also believes that the recent
trend towards consolidation among regulated financial services providers has
enhanced the opportunity for unregulated financial services providers, such as
the Company, to compete in this niche.
In providing Financing, the Company will emphasize wraparound loans
and, to a lesser extent, other forms of junior lien and subordinated loans with
principal amounts generally between $1 million and $8 million. The Company is
not, however, limited in the type of Financing it may provide and, accordingly,
may originate or acquire first lien loans. A wraparound loan is a junior lien or
unsecured loan having a principal amount equal to the sum of the outstanding
principal balances of loans with senior priority of lien plus the net amount
advanced by the wraparound lender. From payments it receives on the wraparound
loan, the wraparound lender pays principal and interest to holders of the senior
lien loans. Wraparound loans (and other junior loans) offer the potential for
higher yields than yields ordinarily obtained in senior lien financing (and, in
the case of wraparound loans, the possibility of increasing yields as the
principal amounts of senior loans are amortized). However, such loans carry a
greater credit risk, including a substantially greater risk of non-payment of
interest or principal, than senior lien financing. See "Risk Factors -
Investment Activity Risks - Financing Considerations:
Enhanced Credit Risks of Subordinate Financing."
As compensation for the foregoing risks, the Company will seek to
originate or acquire Financing that not only has current cash returns higher
than those obtained in typical first lien institutional financing but that also
has various features increasing the Company's potential return over the term of
the Financing. These features may include participations in any appreciation of
the value of the property underlying the Financing or participations in any
increase in property revenues (in addition to any increase in yields resulting
from amortization of the principal amount of senior debt). The Company will
typically seek a minimum participation rate of 25%. There can be no assurance
that the Company will be able to obtain that rate, or any participation
interests at all.
The Company's Financing will consist of direct loans to borrowers and
the acquisition of existing loans. In its direct Financing, the Company will
endeavor to adapt the financing terms to the needs of its borrowers, utilizing a
variety of financing techniques such as staged payments, event specific loan
advances, different rates of interest payment and interest accrual, deferred (or
"balloon") principal payments and similar techniques. In acquiring existing
Financing, the Company will focus on Financing that, because of one or more past
problems (such as complex ownership situations with respect to the property
underlying the Financing, lack of a strong operating history for the property,
historical credit or cash flow problems or other factors) can be acquired at a
discount to its outstanding balance and the appraised value of its underlying
property. The Company will not acquire any such Financing unless material steps
have been taken by prior lienholders (or others) to resolve the past problems.
As appropriate, either as part of the Company's investment strategy or
for tax planning purposes, the Company may acquire direct or indirect interests
in real property including interests
-6-
<PAGE>
in partnerships, joint ventures or limited liability companies owning real
property ("Property Interests"). Although the Company will generally seek to
obtain Property Interests which have preferences as to current distributions and
return of capital, the Company is not limited as to the kinds of Property
Interests it may acquire, and some or all of its Property Interests may not have
a preferred position. The Company believes that acquiring Property Interests
will be advantageous for three reasons. First, it will give the Company
flexibility in addressing the financial needs and tax situations of borrowers in
situations where debt financing may not be appropriate. Second, it will provide
the Company with the possibility of capital appreciation in addition to the
current income realized from its loan portfolio. Third, it will assist the
Company in tax planning. It is anticipated that certain of the Financings made
by the Company may result in recognition of income for federal income tax
purposes in advance of the receipt of the related cash flow, which will increase
the Company's distribution requirement in such year without a contemporaneous
corresponding receipt of cash by the Company. Depreciation deductions associated
with the Company's investments in Property Interests, however, should help
offset such adverse tax effects. See "Risk Factors - Legal and Tax Risks - Tax
Risks" and "Federal Income Tax Considerations - Requirements for Qualification:
Distribution Requirements."
The Company intends to fund its activities with the proceeds of this
Offering and future equity offerings. Although the Company is permitted to incur
debt to originate or acquire Financing or Property Interests, the Company
generally will not do so unless it does not have immediately available capital
sufficient to invest in a particular opportunity. The Company anticipates that,
in normal operations, it will not exceed a debt to equity ratio of 0.5:1.
However, the Company is not limited in the amount of debt which it may incur
and, accordingly, may exceed that ratio in the future. See "Investment
Objectives and Policies - Leverage" and "Risk Factors - Other Investment
Activity Considerations: Use of Leverage."
Initial Investments. The Company has identified 12 loans for
acquisition and origination at an aggregate cost estimated at $41.3 million (the
"Initial Investments"). Eleven loans, with an aggregate cost of $40.0 million,
will be purchased from RAI (representing 97.0%, by cost, of the Initial
Investments). Each of the acquired loans is being acquired at a discount to the
outstanding balance due from the borrower on the loan. The aggregate outstanding
balance was $90.5 million at June 30, 1997. The Company will also originate one
loan which, at funding, will have an aggregate balance of $7.6 million. The
Company's investment, on a cost basis, in the Initial Investments is 82% of the
appraised value of the underlying properties, and ______% of the estimated
replacement cost (as set forth in such appraisals) of such properties. There is
an aggregate of $18.8 million of debt held by third parties which is secured by
the properties underlying the Initial Investments and to which the Initial
Investments are subordinated. Subsequent to the completion of the Offering, the
Company intends to acquire $5.2 million of such senior debt. See "Investment
Objectives and Policies - Initial Investments" and "Use of Proceeds."
Management of the Company. The Company's senior management has many
years of experience in the mortgage lending, real estate and real estate finance
industries. Its Chairman and Chief Executive Officer, Betsy Z. Cohen, is the
founder and current Chairman and Chief
-7-
<PAGE>
Executive Officer of JeffBanks, Inc. ("JeffBanks"), a bank holding company with
approximately $1.2 billion in assets as of June 30, 1997. The President, Jay J.
Eisner, until he joined the Company, was the chief financial officer of several
real estate investment, financing and development firms. The Chief Financial
Officer, Ellen J. DiStefano, until she joined the Company, was the chief
financial officer of a real estate development and management firm (which is an
affiliate of RAI). See "The Company - Trustees and Executive Officers" and
"Investment Objectives and Policies - Loan Origination Sources."
Risk Factors
An investment in the Common Shares involves various material risks.
Prospective investors should carefully consider the matters set forth under
"Risk Factors" in connection with an investment in the Common Shares. Such risks
include, among others:
o The Company is a newly-formed entity with no history of
operations upon which to base an investment decision.
o The Company has specified uses for only _____% of the net
proceeds of this Offering (assuming the Underwriters do not
exercise their overallotment option) and, accordingly,
investors will not have an opportunity to evaluate a
substantial portion of the Company's investments.
o The Company's principal business activity will be to provide
mortgage and other debt financing in situations that,
generally, will not conform to the underwriting standards of
institutional lenders or sources that provide financing
through securitization. The Company intends to emphasize
wraparound loans and, to a lesser extent, other forms of
junior lien or subordinated financing. Financing provided by
the Company will, accordingly, be subject to greater risks
than institutional and senior lien financing.
o The Company may be subject to intense competition in
identifying suitable loans for acquisition or origination.
o The value of the Company's portfolio of Financings and
Property Interests, and the Company's income from them, may be
adversely affected by economic factors over which the Company
has no control.
o Geographic concentration of the Company's Financings and
Property Interests may subject them to regional economic
fluctuations.
o Environmental risks may adversely affect the value of the
Company's Financings and Property Interests.
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<PAGE>
o The Company may incur debt in furtherance of its business
activities and operations and, accordingly, will be subject to
the risks associated with the use of leverage.
o The Company's senior management lacks prior experience in
managing a REIT.
o The Company's investment policies may be revised by the Board
of Trustees without shareholder approval.
o If the Company fails to qualify or maintain its qualification
as a REIT, the Company will be taxed as a regular corporation
for federal income tax purposes which would materially
adversely affect income available for distribution to
shareholders.
o The Company may provide Financing that may result in
recognition of income for federal income tax purposes in
advance of the receipt of the related cash flow, which will
increase the Company's distribution requirement in that year
without a contemporaneous corresponding receipt of cash by the
Company. To the extent the Company does not acquire Property
Interests generating sufficient non-cash tax deductions to
offset such income, or does not generate funds for
distribution to shareholders (through cash on hand,
borrowings, asset sales, or otherwise) sufficient to meet REIT
distribution requirements under the Code, the Company could
lose its REIT qualification or could be subject to an excise
tax, either of which would materially adversely affect
shareholder distributions.
o If the Company fails to qualify for an exemption from
registration as an investment company under the Investment
Company Act of 1940 (the "Investment Company Act"), the
Company will be required to change the manner in which it
conducts operations so as to avoid the registration
requirement or register as an investment company, either of
which could have an adverse effect on the Company.
o There are certain conflicts of interest between the Company
and RAI and its affiliates in connection with the Company's
origination and acquisition of Financing and Property
Interests, and with the management of properties underlying
the Company's Financings or that may be included in the
Company's Property Interests.
o The amount of the outstanding Common Shares which any
shareholder may own is limited (for purposes of maintaining
REIT qualification) to 8.5% (except for shares owned by RAI),
which may deter third parties from seeking control of, or
seeking to acquire, the Company.
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<PAGE>
Conflicts of Interest
RAI, which is the sponsor of the Company, will own 9.8% of the
outstanding Common Shares upon consummation of this Offering, assuming the
Underwriters do not exercise their overallotment option. RAI may acquire Common
Shares after the Offering to a maximum of 15% of Common Shares outstanding. RAI,
until such time as its ownership of outstanding Common Shares is less than 5%,
has the right to nominate one member of the Board of Trustees. One of the
Company's current trustees, Jonathan Z. Cohen, is serving as RAI's nominee. Mr.
Cohen is the son of Betsy Z. Cohen, the Chairman and Chief Executive Officer of
the Company, and her spouse, Edward E. Cohen. Edward E. Cohen is the Chairman,
Chief Executive Officer and President of RAI. Of the Initial Investments, 97%,
by cost, will be purchased by the Company from RAI which will also be reimbursed
for $______ it has advanced to the Company for pre-Offering organization
expenses. See "Investment Objectives and Policies - Initial Investments" and
"The Company - Certain Relationships; Conflicts of Interest." The Company
anticipates that, subject to the limitations referred to in the next paragraph,
it will purchase additional investments from RAI. The Company also may from time
to time (but is not obligated to) retain RAI to perform due diligence
investigations on properties underlying proposed Financing (excluding Financings
being acquired from RAI) or on Property Interests the Company is considering for
acquisition. Brandywine Construction & Management, Inc. ("Brandywine"), an
affiliate of RAI, will also provide real property management or management
supervisory services to properties underlying the Company's Financings or
included in the Company's Property Interests. In addition, Mrs. Cohen is the
Chairman and Chief Executive Officer of JeffBanks, with which the Company may
have banking relations and from which the Company may initially obtain loan
administration services. Accordingly, the Company's relationship with RAI and
its affiliates, and with JeffBanks, will be subject to various conflicts of
interest.
The Company has instituted certain procedures to mitigate the effects
of any such conflicts, including (i) requiring that a majority of its Trustees
be persons who, within the past two years, have not (a) been affiliates of RAI,
Brandywine, or their affiliates, (b) been officers of the Company, or (c) had
any material business or professional relationship with the Company, RAI,
Brandywine, JeffBanks or their affilaites ("Independent Trustees"), (ii)
requiring that the acquisition price of any investment acquired from RAI (or in
which an officer or trustee of the Company has an interest) be determined based
upon independent appraisal of the underlying property, (iii) limiting the
investments which may be acquired from RAI to a maximum of 30% of the Company's
investments (excluding the Initial Investments), based upon the Company's
investment cost (the amount of the investment plus legal, filing and other
related fees and expenses), (iv) requiring that any fees for services performed
by RAI, Brandywine, JeffBanks or their affiliates be no greater than prevailing
fees in the area for similar services provided by unrelated third parties, (v)
requiring that any service arrangements with an affiliated entity provide that
services will be rendered only as and to the extent requested by the Company
from time to time and that, in any event, the arrangements be cancelable by the
Company, without penalty, on no more than 30 days' notice, (vi) requiring that
any investment acquisition or services arrangement, and every transaction with
RAI, Brandywine, JeffBanks and their affiliates, or relating to any property in
which any such persons (including Mrs. Cohen) has an interest,
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receive the prior approval of a majority of the Independent Trustees (who, in
giving such approval, may rely upon information provided by RAI, Brandywine,
JeffBanks or their affiliates), and (vii) with respect to real estate management
or management supervisory services performed by Brandywine, requiring that the
aggregate of the fee received by Brandywine and the manager being supervised may
not exceed the normal and customary fee for similar property management services
with respect to similar properties in the same area. The Company will not,
however, be required to obtain the approval of the Independent Trustees to
retain RAI to perform a due diligence investigation of a property where the
amount of the fee for such services will not exceed the lesser of 1% of the
property's appraised value or $10,000.
Since each of the Company, RAI and JeffBanks seeks to originate or, in
the case of the Company and RAI, acquire mortgage loans, there may be conflicts
of interest among the Company, RAI and JeffBanks regarding the allocation of
loan opportunities. The Company believes, however, that these conflicts are
substantially mitigated since there are significant differences between the
investment objectives of the Company, RAI and JeffBanks. RAI has advised the
Company that it seeks to acquire loans which are either in default, or at risk
of imminent default, requiring active intervention by RAI in the workout
process. The Company, however, seeks to acquire loans where the workout process
has already been initiated and there is no need for its active intervention.
JeffBanks has advised the Company that it seeks to provide customary commercial
lending services emphasizing (with respect to real estate loans) first lien
financing that is subject to specified underwriting standards. The Company seeks
to provide Financing that does not conform to JeffBanks' underwriting standards.
The Company believes that conflicts are further mitigated because the
anticipated sources of the Company's loan referrals (apart from loans acquired
from RAI) are different from those of RAI and JeffBanks.
To further limit conflicts between the Company and RAI, the Company and
RAI have agreed that, for two years following the completion of the Offering,
(i) RAI will not sponsor another REIT with investment objectives and policies
which are the same as, or substantially similar to, those of the Company; (ii)
if RAI originates a proposal to provide wraparound or other junior lien or
subordinated Financing with respect to multifamily, office or other commercial
properties to a borrower (other than to a borrower with an existing loan from
RAI), RAI must first offer the opportunity to the Company; and (iii) if RAI
desires to sell any loan it has acquired that conforms to the Company's
investment objectives and policies with respect to acquired loans, it must first
offer to sell it to the Company.
The Offering
Shares offered to the public(1)(2)........................... _____________
Shares to be outstanding after offering(1)(2)(3)............. _____________
Proposed Nasdaq symbol....................................... _____________
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(1) Assumes that the Underwriters' option to purchase up to an additional
_________ shares to cover over-allotments is not exercised.
(2) See "Description of Capital Shares" and "Capitalization."
(3) Includes _______ shares that RAI has committed to purchase in
connection with the Offering (see "Capitalization"), but excludes
shares issuable pursuant to warrants granted to the Underwriters (see
"Underwriting").
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Use of Proceeds
The Company has contracted (subject to the approval of the Independent
Trustees) to acquire or originate the Initial Investments upon completion of
this Offering for an investment cost of approximately $41.3 million, which is
equal to approximately ______% of the expected net proceeds of this Offering
(_____% if the Underwriters exercise their overallotment option). The Initial
Investments will consist of those Financings described at "Investment Objectives
and Policies - Initial Investments." Of the Initial Investments, $40.0 million,
by cost, will be acquired from RAI. In addition, the Company will reimburse RAI
for $_____________ of organizational expenses advanced by RAI to the Company
prior to the completion of the Offering.
At the time of their acquisition, the Initial Investments being
acquired from RAI will be subject to $12.5 million of loan participation
interests or other debt that is senior to the loan interests acquired from RAI.
The Company anticipates acquiring $5.2 million of such senior loan participation
interests from the proceeds of this Offering. However, the Company also
anticipates that, following acquisition, the Company will seek to sell
participations in the loans as to which it has acquired the prior senior loan
participation interests or that borrowers may seek to refinance some portion of
the loans and, accordingly, that the Company will obtain the return of some
portion or all of the funds utilized to acquire the senior loan participation
interests. For certain information concerning the senior participations to be
acquired (including interest rate and maturity date) see "Investment Objectives
and Policies - Initial Investments." There can be no assurance, however, that
any such sales or refinancings will occur.
The balance of the Offering proceeds (including any funds obtained from
sales of participations in or refinancings of loans as referred to above) will
be invested in the manner described in "Investment Objectives and Policies." It
is anticipated that the investment process will take up to 18 months after the
Offering has been completed, although there can be no assurance that the process
will not take longer. Pending such investment, the balance of the net proceeds
will be invested in readily marketable, interest-bearing securities which,
following the expiration of the one year investment period provided by the Code,
will be limited to those securities allowing the Company to continue to qualify
as a REIT. See "Federal Income Tax Considerations - Requirements for
Qualification: Asset Tests."
Distribution Policy
The Company intends to distribute to its shareholders at least 95% of
its net taxable income each year (subject to certain adjustments) so as to
qualify for the tax benefits accorded to REITs under the Code. The Company
intends to make distributions quarterly. It is anticipated that the first
distribution to shareholders will be made promptly after the first full calendar
quarter following completion of the Offering.
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Tax Status of the Company
The Company intends to qualify and will elect to be taxed as a REIT
under sections 856 through 860 of the Code, commencing with its taxable year
ending December 31, 1997. If the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income tax on its taxable
income that is distributed to its shareholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income. Although the
Company does not intend to request a ruling from the Internal Revenue Service
(the "Service") as to its REIT status, counsel to the Company has rendered its
opinion, based on certain assumptions and representations about the Company's
ongoing businesses, investment activities and other matters, that the Company
qualifies as a REIT. There can be no assurance that the Company will be able to
comply with such assumptions and representations in the future. Furthermore,
counsel's opinion is not binding on either the Service or any court. If the
Company fails to qualify as a REIT in any taxable year, it would be subject to
federal income tax at regular corporate rates and distributions to its
shareholders would not be deductible. Even if the Company qualifies for taxation
as a REIT, the Company may be subject to certain federal, state and local taxes
on its income and property. The Company will adopt the calendar year as its
taxable year. In connection with the Company's election to be taxed as a REIT,
its Declaration of Trust imposes restrictions on the transfer and ownership of
the Common Shares. See "Risk Factors - Legal and Tax Risks: REIT Tax Risks" and
"Federal Income Tax Considerations - Taxation of the Company."
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FORMATION AND STRUCTURE
RAIT, the Operating Partnership, the General Partner of the Operating
Partnership and the Initial Limited Partner of the Operating Partnership were
each formed in August, 1997. The Operating Partnership will undertake the
business of the Company, including the origination and acquisition of Financing
and the acquisition of Property Interests. The following diagram illustrates the
structure of the Company, the Operating Partnership, the General Partner and the
Initial Limited Partner, and their relationship with RAI, assuming successful
completion of the Offering:
---------------------------
| Public Shareholders |
---------------------------
|
--------------------------- (1) -------------------
| RAIT ----------- RAI |
--------------------------- -------------------
(2) | | (2) |
- --------------------- --------------------- |
| RAIT Limited, Inc.| | RAIT General, Inc.| |
- --------------------- --------------------- |
(3) | | (3) |
---------------------------- (4) |
| RAIT Partnership, L.P. ---------------
----------------------------
(1) RAIT will sell approximately ________% of its common shares to RAI and
approximately ____% to public investors.
(2) RAIT has incorporated and capitalized the General Partner and the
Initial Limited Partner.
(3) The General Partner and the Initial Limited Partner have formed and
will capitalize the Operating Partnership. The General Partner
initially owns a 1% general partnership interest and the Initial
Limited Partner initially owns a 99% limited partnership interest in
the Operating Partnership. Because RAIT owns initially 100% of each of
the General Partner, Initial Limited Partner and, indirectly, the
Operating Partnership, they should not be treated as entities separate
from RAIT for federal income tax purposes. See "Federal Income Tax
Considerations - Requirements for Qualification."
(4) RAI will sell certain of the Initial Investments to the Operating
Partnership, and may sell additional investments to the Operating
Partnership, for cash. See "The Company - Initial Investments." An
affiliate of RAI may also provide certain property management services
to properties underlying Financings or Property Interests held by the
Operating Partnership. See "The Company - Certain Relationships;
Conflicts of Interest."
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RISK FACTORS
An investment in the Common Shares involves various risks. Prospective
investors should carefully consider the following risk factors, in addition to
the other information set forth in this Prospectus, in connection with an
investment in the Common Shares. The risk factors set forth below and elsewhere
in this Prospectus should be read as accompanying forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
which can be identified by the use of forward-looking terminology such as "may,"
"will," "should," "seek," "expect," "anticipate," "estimate" or "continue" or
the negatives thereof or other comparable terminology. The Company's actual
results could differ materially from those anticipated in such forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and the other factors described elsewhere in this
Prospectus. The Company undertakes no obligation to update any such
forward-looking statements as a result of actual results of operations.
Investment Activity Risks
Financing Considerations
General Credit Risks. The Company's principal portfolio assets are
anticipated to be Financings, consisting primarily of loans relating to real
property. In the event of a default on one or more of these loans, the Company's
current return on its investments may be reduced or eliminated, adversely
affecting the overall return on the Company's investment portfolio. Moreover, a
default on a loan may require the Company to become involved in expensive and
time-consuming proceedings, including bankruptcy, reorganization or foreclosure
proceedings, in attempting to recover some portion or all of its investment. See
"Certain Legal Aspects of Real Property Loans and Investments." In many cases,
it is anticipated that the real property underlying the loan will be the primary
or sole source of any recovery for the Company. Accordingly, the Company will be
materially dependent upon the value of the real property underlying its loans,
which value may be affected by numerous factors outside the control of the
Company. See "Risk Factors - Investment Activity Risks - Real Property
Considerations." The Company intends to make a material number of loans that
will provide payment structures other than self-amortization, including
structures that defer payment of some portion of accruing interest, or defer
repayment of principal, until loan maturity. Where a borrower has an obligation
to pay a loan balance in a large lump sum payment, its ability to satisfy this
obligation may be dependent upon its ability to obtain suitable refinancing or
otherwise to raise a substantial cash amount. In addition, in some
jurisdictions, mortgage lenders can lose any priority of their lien to
mechanics', materialmen's and other liens. For these and other reasons, the
total amount which may be recovered by the Company may be less than the total
amount of the Company's loan, or its cost of acquisition, with resultant loss to
the Company.
Risks Relating to Term of Financing. Because it is anticipated that the
Company's Financings generally will have maturities between 4 and 10 years, the
Company will be unable to vary its portfolio promptly in response to changing
economic, financial and investment
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conditions. Many of these risks may be intensified by existing and potential
economic developments and uncertainties. See "Risk Factors - Investment Activity
Risks - Real Property Considerations." Moreover, certain of the Company's
Financing commitments may provide for a substantial period of time between the
commitment date and the date of funding. Such commitments may involve additional
risks, including the risk that the Financing may not be funded due to borrower
default or the ability of the borrower to secure more favorable financing.
Additionally, a commitment may require the Company to fund a Financing
notwithstanding an adverse change in the financial condition of the borrower,
although the Company does not anticipate issuing commitments so limited.
Although the Company will attempt to obtain participation features in its loans
to provide it with additional compensation and a hedge against inflation,
economic and other factors may have a material adverse effect upon the value of
any participation feature obtained or its ability to provide an inflation hedge.
Enhanced Credit Risks of Subordinate Financing. The Company will
emphasize wraparound loans and, to a lesser extent, other junior lien loans or
subordinated financing. Because of their subordinate position, these loans carry
a greater credit risk, including a substantially greater risk of non-payment of
interest or principal, than senior lien financing. Where, as part of a financing
structure, the Company has an equity or other unsecured position, the risk of
loss may be materially increased. A decline in the real estate market where the
property underlying the Financing is located could adversely affect the value of
the property such that the aggregate outstanding balances of senior liens and
the Company's Financing may exceed the value of the underlying property. See
"Risk Factors - Investment Activity Risks - Real Property Considerations." In
the event of a default on a senior loan, the Company may elect to make payments,
if it has the right to do so, in order to prevent foreclosure on the senior
loan. In the event of such foreclosure, the Company will only be entitled to
share in the proceeds after satisfaction of the amounts due to senior lienors,
which may result in the Company not being able to recover the full amount or,
indeed, any of its investment. It is also possible that in some cases, a "due on
sale" clause included in a senior mortgage, which accelerates the amount due
under the senior mortgage in case of the sale of the property, may apply to the
sale of the property upon foreclosure by the Company of its Financing, and may
accordingly increase the risks to the Company in the event of a default by the
borrower on the Company's Financing. See "Certain Legal Aspects of Real Property
Loans and Investments."
When the Company acquires a loan, it may not acquire the right to
service the senior loans. The servicers of the senior loans are responsible to
the holders of such loans, whose interests will likely not coincide with those
of the Company, particularly in the event of a default. Accordingly, the senior
loans may not be serviced in a manner which is most advantageous to the Company.
Certain of the Initial Investments are loans which are not
collateralized by recorded or perfected liens and certain future Financings may
not be collateralized by such liens. Such loans are subject to many of the same
factors that interfere with or affect the ability of a lender to exercise its
remedies against a borrower as mortgage loans. In addition, such loans generally
will be subject and subordinate not only to existing prior liens encumbering the
underlying property,
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but also to future judgment liens that may arise from litigation against a
borrower. Furthermore, in a bankruptcy, the holders of such loans have
materially fewer rights than secured creditors and their rights are subordinate
to the lien-like rights of the bankruptcy trustee. Moreover, enforcement of such
loans against the underlying properties generally involves a longer and more
complex legal process than enforcement of a mortgage loan. Management believes
that, with respect to any such loans that are part of the Initial Investments,
the following matters serve to mitigate the Company's risks as an unsecured
lender. First, the tenants of the underlying properties generally will pay their
rents directly to a lockbox controlled by the Company. Second, future liens
encumbering the underlying properties are generally prohibited by the lenders of
existing senior lien loans on these properties. Finally, the Company generally
will hold a deed-in-lieu of foreclosure that may enable it to enforce its rights
against the underlying property in an expedited fashion. However, none of these
factors will assure that these loans are collected. Moreover, filing a
deed-in-lieu of foreclosure with respect to these loans may (and, with respect
to the applicable Initial Investments, will) constitute an event of default
under related senior debt. Any such default would require the Company to acquire
or pay off the senior debt in order to protect its investment. For a discussion
of the collateral or other security pertaining to these loans, see "Investment
Objectives and Policies - Initial Investments."
Risks Relating to Interest Rate Changes. The resale value of loans in
the Company's portfolio will be affected by changes in interest rates. In
general, the resale value of a loan will change in inverse relation to an
interest rate change. Accordingly, in a period of rising interest rates, the
resale value of the loan will decrease. Moreover, in a period of declining
interest rates, real estate loans may benefit less than other fixed income
securities due to prepayments. Interest rate changes will also affect the
Company's return on new loans that it makes. In particular, during a period of
declining rates, the amounts becoming available to the Company for investment
due to repayment of its Financings may be invested at lower rates than the
Company had been able to obtain in prior investments, or than the rates on the
repaid Financings. Also, increases in interest on debt, if any, incurred by the
Company in originating or acquiring Financing or Property Interests, may not be
reflected in increased rates of return on the Financing or Property Interests
funded or acquired through such debt, thereby adversely affecting the Company's
return on such investments. Accordingly, interest rate changes may materially
affect the total return on the Company's investment portfolio, which in turn
will affect the amount available for distribution to the Company's shareholders.
Credit Risk of Non-Conforming Loans. The Company anticipates that a
material portion of its financing will be extended to borrowers or in situations
that do not conform to conventional loan criteria (see "Investment Objectives
and Policies - General" for a general description of conforming loans) due to
complex ownership situations with respect to the properties underlying the
Financings, lack of a strong operating history for the properties, historical
credit or cash flow problems or other factors. As a consequence, these loans may
be subject to a higher risk of default than conventional loans.
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Illiquidity of Non-Conforming Loans. Investments in non-conforming
loans are relatively illiquid and, accordingly, the Company may not be able to
vary its Financing portfolio in response to changes in economic or other
conditions.
Lack of Geographic Diversification. The Company intends to emphasize
Financing with respect to properties located in metropolitan areas of the United
States, and has identified certain areas in which it may concentrate its
investments. In particular, the Company anticipates that a material portion of
its loans will relate to properties located in the Philadelphia, Pennsylvania
metropolitan area (11 of the 12 Initial Investments relate to properties located
in this area). See "Investment Objectives and Policies - Locations of Properties
Securing Loans." The Company does not expect to set specific limitations on the
aggregate percentage of its portfolio relating to properties located in any one
area (whether by state, zip code or other geographic measure). Any lack of
geographic diversification that may occur could result in the Company's
investment portfolio being more sensitive to, and the Company being less able to
respond to, economic developments of a primarily regional nature, which may not
have as significant an impact on a more geographically diverse investment
portfolio.
Competition for Financing. The Company may encounter significant
competition in seeking to originate or acquire suitable real estate loans from
banks, insurance companies, savings and loan associations, mortgage bankers,
pension funds, investment bankers and others, including public or private REITs
which have been or may be formed with objectives similar in whole or in part to
those of the Company. These entities or persons may have substantially greater
assets than the Company, and thus an ability to make larger loans or have a more
diversified loan portfolio. An increase in the general availability of funds to
lenders, or a decrease in the amount of borrowing activity, may increase
competition for making loans and may reduce the yields available thereon or
increase the credit risk inherent in the available loans.
Risks of Participations. In structuring its Financings, the Company
will seek to obtain agreements from borrowers to pay, in addition to the
specified rate of interest, additional interest measured by the appreciation of
the property subject to such loan or by increases in such property's revenues.
The Company may, in certain cases, accept a lower minimum interest rate in order
to obtain such a participation and the potentially greater benefit that could
result from a share in the appreciation in value or revenues of the property.
The value of any such participation will depend on the factors inherent in any
real estate investment and, accordingly, there can be no assurance that any
benefits will be realized from participations. See "Risk Factors - Investment
Activity Risks - Real Property Considerations." The Company does not anticipate
that amounts (if any) it may receive as a result of participations will be
significant in the early years of any investment. Moreover, there can be no
assurance that the Company will be able to negotiate participation provisions in
any of its loans.
There may be uncertainty as to the treatment of participations for
purposes of state usury laws, and, accordingly, any such provisions obtained by
the Company in connection with its Financings may increase the possibility that
a loan may be deemed to be usurious. See "Risk
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Factors - Investment Activity Risks - Financing Considerations: Interest
Ceilings Under Usury Statutes."
Additionally, as a result of the Company's interest in revenues from or
proceeds of a sale, financing or refinancing of a property underlying a
Financing, a court in a bankruptcy, arrangement or similar situation could treat
the Company as a partner of, or joint venturer with, the borrower, and the
Company would, accordingly, lose the priority of any security interest it might
otherwise have in such situations.
Risks Relating to Loans Secured by Interests in Entities Owning Real
Property. The Company may originate or acquire Financing which is secured by
interests in entities that own real properties rather than a direct security
interest in the underlying property. Although the Company does not anticipate
that it will originate or acquire a material number of Financings so secured, to
the extent it does so, it will be subject to the risk that the interests pledged
as security will be illiquid, or otherwise have features that may make it
difficult for the Company to obtain a return of its investment in the event of a
default on its Financing. See "Risk Factors Investment Activity Risks - Real
Property Considerations: Investments in Joint Ventures, Partnerships or Other
Real Properties." Loans secured by interests in such entities may also not be
deemed to be "Qualified Interests" for Investment Company Act purposes. See
"Risk Factors - Legal and Tax Risks: Investment Company Act Risks."
Interest Ceilings Under Usury Statutes. Interest charged on loans made
by the Company (which may include amounts received in connection with
participations) may be subject to state usury laws imposing maximum interest
rates and penalties for violation, including restitution of excess interest and
unenforceability of debt. The Company will seek to structure its Financings so
as not to violate applicable usury laws, but uncertainties in determining the
legality of rates of interest and other borrowing charges under some statutes
may result in inadvertent violations.
Acquisition of Loans at Discount. The Company anticipates that it will
acquire loans at purchase prices that represent a discount from both the
outstanding balance of principal and accrued interest on the loan, as well as
from the appraised value of the property underlying the loan. These discounts
typically will arise from problems involving the loans or their underlying
properties, including an inability to generate sufficient revenues to service
loans in accordance with their original terms. Accordingly, acquiring loans at a
discount may involve a substantially higher degree of risk of collection than
loans which conform to institutional underwriting criteria. The Company does not
presently intend to acquire a loan unless the prior loan holder (or some other
party or parties) has taken material steps toward resolving problems to which
the loan, or its underlying property, are subject. However, there can be no
assurance that the loans or their underlying properties will not be subject to
recurrence of previously existing problems, or that other problems will not
arise.
Risks Relating to Financing in Construction Situations. Although the
Company does not anticipate making construction loans, the Company anticipates
making loans in situations where construction is involved, generally either (i)
as financing that repays a third party's construction
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loan, or (ii) where the loan is secured by property with a pre-construction
value that is within the Company's investment guidelines. However, the Company
is permitted to depart from its guidelines and, accordingly, if pre-construction
property value is not within the Company's guidelines, the Company may require
other assurances of payment, such as personal guarantees from the developers.
See "Investment Objectives and Policies - Certain Financial Guidelines" and "-
Types of Properties Relating to Financings." Loans in construction situations
may involve a higher degree of risk than other lending, to the extent that
repayment is dependent upon successful completion of the project, or as a result
of the lack of an operating history on the project as constructed or
rehabilitated upon which to base a loan's underwriting, difficulties in
estimating construction costs and timing, and other reasons.
Real Property Considerations
General. Although the Company will emphasize originating or acquiring
Financing, the Company will also acquire Property Interests. See "Investment
Objectives and Policies Acquisition of Real Property Interests." Real property
investments are subject to varying degrees of risk. The yields available from
real properties depend on the amount of income earned and capital appreciation
generated by the related properties as well as the expenses incurred in
connection therewith. If the properties do not generate income sufficient to
meet operating expenses, including debt service and capital expenditures, the
ability to make distributions to the Company's shareholders could be adversely
affected. Income from, and the value of, the properties may be adversely
affected by general and local economic conditions, neighborhood values,
competitive overbuilding, weather, casualty losses and other factors beyond the
Company's control. Revenues from, and values of real properties are also
affected by such factors as the cost of compliance with regulations and the
potential for liability under applicable environmental laws, changes in interest
rates and the availability of financing. Income from a property would be
adversely affected if a significant number of tenants were unable to pay rent or
if available space could not be rented on favorable terms. Certain significant
expenditures associated with an investment in real property (such as mortgage
payments, real estate taxes and maintenance costs) generally are not reduced
when circumstances cause a reduction in income from the investment.
Illiquidity of Real Estate. Real estate investments are relatively
illiquid and, therefore, the Company may be limited in its ability to vary its
portfolio of Property Interests quickly in response to changes in economic or
other conditions. In addition, a prohibition in the Code and related regulations
on a REIT holding property primarily for sale in the ordinary course of business
may affect the Company's ability to sell Property Interests without adversely
affecting distributions to the Company's shareholders. See "Federal Income Tax
Considerations."
Uninsured and Underinsured Losses. The Company intends to maintain (or
cause to be maintained) comprehensive insurance on the properties underlying its
Property Interests (as well as on properties underlying its Financings),
including liability and fire with extended coverage, in amounts sufficient to
permit the replacement of the properties in the event of a total loss, subject
to applicable deductibles. There are certain types of losses, however, generally
of a
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catastrophic nature, such as earthquakes, floods and hurricanes, that may be
uninsurable or not economically insurable. Inflation, changes in building codes
and ordinances, environmental considerations, and other factors also might make
it infeasible to use insurance proceeds to replace a property if it is damaged
or destroyed. Under such circumstances, the insurance proceeds received by the
Company might not be adequate to restore its economic position with respect to
the affected property.
Investments in Joint Ventures, Partnerships or Other Real Property
Interests. The Company anticipates that, from time to time, its investment
activities may take the form of an equity interest in entities which own real
property, rather than acquiring or making a real property loan or acquiring a
property directly. While the Company anticipates that any equity interest it
acquires will be senior in right of payment to existing and future equity
interests, the Company is not limited as to the kind of equity interests it may
acquire, and it may acquire equity interests which are not senior or preferred
interests. Since an equity interest is subordinate to all creditors, where the
Company purchases equity interests, the Company's risk of loss may be increased.
Moreover, acquisition of equity interests provides certain risks not present in
real property loans or direct property ownership. For example, there is the
possibility that the other equity owners in the entity holding the property
might have economic or business interests or goals which are inconsistent with
the business interests or goals of the Company or be in a position to take
action contrary to the instructions or requests of the Company or contrary to
its policies or objectives. While the Company will seek to obtain sufficient
contractual rights with respect to a property in which it obtains an equity
interest to allow it to protect the value of its interest, there can be no
assurance that any rights obtained will, in fact, enable it to do so. Moreover,
in limited partnerships, even if the Company is a limited partner, if its rights
under the partnership agreement allow it sufficient control over the partnership
or its property, it might be deemed to be a general partner and, in such a case,
could incur liability for the debts of the partnership beyond the amount of its
investment.
Compliance with Americans with Disabilities Act and Other Changes in
Governmental Rules and Regulations. Under the Americans with Disabilities Act of
1990 (the "ADA"), all public properties are required to meet certain federal
requirements related to access and use by disabled persons. Properties acquired
by the Company (or properties underlying Financings which may be made or
acquired by the Company) may not be in compliance with the ADA. If a property is
not, the Company (or its borrowers) will be required to make modifications to
such property to bring it into compliance, or face the possibility of an
imposition of fines or an award of damages to private litigants. In addition,
changes in other governmental rules and regulations, including changes to
building codes and fire and life-safety codes, may occur. If the Company (or its
borrowers) were required to make substantial modifications to the properties to
comply with the ADA or other changes in governmental rules and regulations, the
Company's ability to make expected distributions to its shareholders could be
adversely affected.
Property Taxes Decrease Returns on Real Property. All properties
included in the Company's Property Interests or underlying its Financings will
be subject to real, and in some instances, personal property taxes. Such real
and personal property taxes may increase or
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decrease as property tax rates change and as the properties are assessed or
reassessed by taxing authorities. An increase in property taxes on these
properties could materially adversely affect the Company's income and ability to
make distributions to its shareholders.
Environmental Risks May Adversely Affect Value of Underlying Properties
Contamination of real property by hazardous substances or toxic wastes
may give rise to a lien on that property to assure payment of the cost of
remediation or, in certain circumstances, result in liability of the owners or
operators of, or lenders to, the property for that cost under various federal,
state and local environmental laws. Many of these laws impose liability whether
or not such persons knew of, or were responsible for, the contamination, and
such liability may be substantial. Accordingly, environmental contamination
could materially adversely affect the value of the property and its cash flow.
It is possible that such costs could become a liability of the Company, reducing
the return to holders of the Company's Common Shares if such remedial costs were
incurred or if property vacancy resulted. See "Certain Legal Aspects of Real
Property Loans and Investments - Environmental Risks."
Other Investment Activity Considerations
Partially Unspecified Use of Proceeds. Other than the Initial
Investments, the Financing and Property Interests to be originated or acquired
by the Company have not been identified. Investors must rely upon the ability of
Company management to identify appropriate investment opportunities, and will
not have an opportunity to evaluate relevant economic, financial and other
information regarding the Company's future investments at the time they are
made. There can be no assurance that the Company will identify Financing or
Property Interests that meet its investment criteria, or that any such assets,
once acquired, will produce a return on the Company's investment. A delay may
occur between the time the Common Shares are sold in this Offering and the time
the proceeds of this Offering are utilized by the Company, which could result in
a delay in the receipt by a shareholder of the benefits, if any, of an
investment in the Company. Pending investment in Financing and Property
Interests, the Offering proceeds will be held in temporary investments that the
Company believes will have low investment risk but which the Company does not
anticipate will produce substantial investment returns. See "Use of Proceeds."
Management Experience. The Company is a newly-formed entity with no
prior operating history, and its operating strategies and policies are untried.
The Company will be dependent for the monitoring of its day-to-day operations,
including, but not limited to, the selection, structuring and monitoring of its
investments and associated borrowings (if any), on the diligence and skill of
its senior management. Although senior management has extensive experience in
the mortgage lending, real estate and real estate finance industries, none of
such persons has any prior experience in managing a REIT. There can be no
assurance that the Company and its management will be able to implement
successfully the policies and strategies the Company intends to pursue.
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Importance of Key Personnel. The Company's future success will depend
upon the continued services of the Company's senior management (Mrs. Cohen, Mr.
Eisner and Ms. DiStefano). The unexpected loss of the services of any of these
persons could have a material adverse effect upon the Company. See "The Company
- - Trustees and Executive Officers." While the Company anticipates that it will
enter into employment agreements with its Chairman and Chief Executive Officer,
Mrs. Cohen, and its President and Chief Operating Officer, Mr. Eisner, it will
not maintain key person life insurance on any officer.
Use of Leverage. The Company is permitted to leverage its portfolio
through borrowings although, in general, it will not do so unless it does not
have immediately available capital sufficient to make a particular investment.
If and when used, the Company's leverage ratio will vary depending on the
Company's estimate of the stability of the portfolio's cash flow. To the extent
that changes in market conditions cause the cost of such financing to increase
relative to the income that can be derived from the investments acquired, the
Company may reduce the amount of leverage it utilizes. The Company may also
borrow to the extent necessary to meet REIT distribution requirements imposed by
the Code. See "Federal Income Tax Considerations Requirements for Qualification:
Distribution Requirements" and "Risk Factors - Legal and Tax Risks: Tax Risks."
In general, the Company expects that the ratio of the Company's overall
indebtedness to its equity will not exceed 0.5 to 1. See "Investment Objectives
and Policies Leverage." However, the Company's Declaration of Trust does not
limit the amount of indebtedness the Company can incur, and the Board of
Trustees has the discretion to deviate from or change this indebtedness policy
at any time, without consent from or notice to the Company's shareholders.
Leverage creates an opportunity for increased net income, but at the same time
creates risks. For example, leverage can reduce the net income available for
distributions to shareholders in periods of rising interest rates where the
increase in rates paid by the Company on its borrowings is not matched by
corresponding increases in the rates of return on its investments. The Company
will leverage assets only when there is an expectation that the use of leverage
will enhance returns, although there can be no assurance that the Company's use
of leverage will prove to be beneficial. The Company may be required to mortgage
or otherwise pledge some portion or all of its assets as collateral security in
order to obtain debt financing. There can be no assurance that the Company will
be able to meet its debt service obligations on any debt financing so secured
and, to the extent that it cannot, the Company risks the loss of some or all of
its assets.
Legal and Tax Risks
REIT Tax Risks. The Company intends to operate in a manner that permits
it to qualify as a REIT for federal income tax purposes. Although the Company
does not intend to request a ruling from the Service as to its REIT status, it
has received an opinion of counsel that, based on certain assumptions and
representations, it so qualifies. Investors should be aware, however, that
opinions of counsel are not binding on the Service or any court. The opinion
only represents the view of counsel based on counsel's review and analysis of
existing law. Furthermore, both the validity of the opinion and the continued
qualification of the Company as a REIT will depend on the Company's satisfaction
of certain asset, income, organizational, distribution and
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shareholder ownership requirements on a continuing basis. If the Company were to
fail to qualify as a REIT in any taxable year, it would be subject to federal
income tax (including any applicable alterative minimum tax) on its taxable
income at regular corporate rates, and distributions to shareholders would not
be deductible by the Company in computing its taxable income. Any such corporate
tax liability could be substantial and would reduce the amount of cash available
for distribution to shareholders, which in turn could have an adverse impact on
the value of, and trading prices for, the Common Shares. Unless entitled to
relief under certain Code provisions, the Company also would be disqualified
from taxation as a REIT for the four taxable years following the year during
which it ceased to qualify as a REIT.
Risks of "Phantom Income." The Company must distribute at least 95% of
its annual net taxable income (excluding any net capital gain) in order to avoid
corporate income taxation of the earnings that it distributes. In addition, the
Company will be subject to a 4% nondeductible excise tax on the amount, if any,
by which certain distributions paid by it with respect to any calendar year are
less than the sum of (i) 85% of its ordinary income for that year, (ii) 95% of
its capital gain net income for that year, and (iii) 100% of its undistributed
taxable income from prior years. The Company intends to make distributions to
its shareholders to comply with the 95% distribution requirement and to avoid
the nondeductible excise tax. However, the Company may originate or acquire
Financings that may be deemed to have original issue discount ("OID") for
federal income tax purposes, which is generally equal to the difference between
an obligation's issue price and its redemption price. For example, mortgages
with participation features generally will be considered to have OID and will
accrue OID at a rate based on the expected overall yield on the mortgage, which
generally will exceed the stated rate. The income generated by such instruments
for federal income tax purposes will consist of amortization of the OID discount
and the coupon interest associated with the instruments. The Company will be
required to recognize as income in each year the portion of the OID that accrues
during that year, which will increase the REIT distribution requirement for that
year, notwithstanding the fact that there may be no corresponding
contemporaneous receipt of cash by the Company.
In addition, the Company may acquire or originate wraparound loans
pursuant to which it will receive payments of principal and interest that do not
coincide with the payments of principal and interest on underlying senior liens.
Even if, as expected, there is positive cash flow to the Company from the
transaction, it may be that the amount of principal the Company is required to
pay on the senior obligations will exceed the amount of principal it receives
from the obligor on the wraparound loan, and that the amount of interest it
receives from the obligor will exceed the amount of interest it pays on the
senior obligations. This could create a situation where the Company's taxable
income exceeds the Company's cash flow from the investments. REIT taxable income
in excess of cash received may also arise in certain property sales,
participations and where a "significant" modification is made to a loan. See
"Federal Income Tax Consequences - Distribution Requirements." The occurrence of
any such situation could have the effect of requiring the Company, in order to
meet the 95% distribution requirement and to avoid the nondeductible excise tax,
(i) to borrow funds, (ii) to sell assets at times which may not be advantageous
to the Company, (iii) to distribute amounts that represent a return of capital,
or (iv) to distribute amounts that would otherwise be spent on future
acquisitions, unanticipated capital
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expenditures, or repayment of debt. To offset these risks, the Company intends,
as appropriate, to invest in Property Interests so that the non-cash
depreciation deductions associated with Property Interest investments may help
offset any non-cash income.
Risks Relating to Sales of Assets. With respect to any sale of assets
by the Company, there is risk that the sale will be deemed to be the disposition
of an asset held primarily for sale to customers in the ordinary course of
business. Gain from the sale of any asset so characterized generally will be
subject to a 100% tax. Whether an asset is held "primarily for sale to customers
in the ordinary course of a trade or business" depends on the facts and
circumstances in effect from time to time, including those related to a
particular asset. Nevertheless, the Company will attempt to comply with the
terms of safe-harbor provisions in the Code prescribing when asset sales will
not be so characterized. Complete assurance cannot be given, however, that the
Company can comply with the safe-harbor provisions of the Code or avoid owning
property that may be characterized as property held "primarily for sale to
customers in the ordinary course of a trade or business." See "Federal Income
Tax Considerations - Income Tests."
Investment Company Act Risks. The Company believes that it will not be,
and intends to conduct its operations so as not to become, regulated as an
investment company under the Investment Company Act. The Investment Company Act
exempts entities that, directly or through majority-owned subsidiaries, are
"primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" ("Qualified
Interests"). Under current interpretations by Securities and Exchange Commission
(the "Commission"), in order to qualify for this exemption, the Company, among
other things, must maintain at least 55% of its assets in Qualifying Interests
and also may be required to maintain an additional 25% in Qualifying Interests
or other assets related to real property. The assets that the Company may
acquire, therefore, may be limited by the provisions of the Investment Company
Act. In connection with its origination or acquisition of Financing, the Company
will seek, where appropriate, to obtain foreclosure rights with respect to the
underlying property, although there can be no assurance that it will be able to
do so on acceptable terms. If the Company does not obtain such rights, the
Financing may not constitute a Qualifying Interest for the purpose of the
Investment Company Act. If the Company obtains such rights, the Company believes
that the Financing will constitute a Qualifying Interest for the purpose of the
Investment Company Act. The Company does not intend, however, to seek an
exemptive order, no-action letter or other form of interpretive guidance from
the Commission on this position. If the Commission were to take a different
position with respect to whether any such Financing constitutes a Qualifying
Interest, the Company could, among other things, be required either (a) to
change the manner in which it conducts its operations to avoid being required to
register as an investment company under the Investment Company Act or (b) to
register as an investment company, either of which could have an adverse effect
on the Company and the market price for the Common Shares.
Benefit Plan Risks. The Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and section 4975 of the Code prohibit certain
transactions that involve (i) certain pension, profit-sharing, employee benefit,
or retirement plans or individual retirement accounts
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(each a "Plan") and (ii) the assets of a Plan. A "party in interest" or
"disqualified person" with respect to a Plan will be subject to (x) an initial
15% excise tax on the amount involved in any prohibited transaction involving
the assets of the Plan and (y) an excise tax equal to 100% of the amount
involved if any prohibited transaction is not corrected. Consequently, the
fiduciary of a Plan contemplating an investment in the Common Shares should
consider whether the Company, any other person associated with the issuance of
the Common Shares, or any affiliate of the foregoing is or might become a "party
in interest" or "disqualified person" with respect to the Plan. In such a case,
the acquisition or holding of Common Shares by or on behalf of the Plan could be
considered to give rise to a prohibited transaction under ERISA and the Code.
See "Benefit Plan Considerations - Employee Benefits Plans, Tax Qualified
Retirement Plans and IRAs."
Ability of Board of Trustees to Change Certain Policies Without
Shareholder Consent. The policies of the Company, including its investment
policy and other policies with respect to acquisition, financing, growth,
operations, debt and distributions, are determined by its Board of Trustees. The
Board of Trustees may amend or revise these and other policies, or approve
transactions that deviate from these policies, from time to time, without a vote
of the shareholders. The effect of any such changes may be positive or negative.
The Company cannot change its policy of seeking to maintain its qualification as
a REIT without the approval of the holders of two-thirds of the outstanding
Common Shares.
Limitation of Liability of Officers and Trustees of the Company. The
Declaration of Trust of the Company contains a provision which, subject to
certain exceptions, eliminates the liability of a trustee or officer to the
Company or its shareholders for monetary damages for any breach of duty as a
trustee or officer. This provision does not eliminate the liability of a trustee
to the extent that it is proved that the trustee actually received an improper
benefit in money, property or services or engaged in active and deliberate
dishonesty established by a final judgment as being material to the cause of
action. See "Certain Provisions of Maryland Law and of the Company's Declaration
of Trust and Bylaws."
Conflicts of Interest in the Business of the Company. The Company will
be subject to various conflicts of interest arising from its relationship with
RAI, Brandywine, JeffBanks and their affiliates. See "The Company - Certain
Relationships; Conflicts of Interest."
Risk that Market for Common Shares Will Not Develop. Prior to this
Offering, there has been no public market for the Common Shares offered hereby.
The initial public offering price will be determined by the Company and
Friedman, Billings, Ramsey & Co., Inc., as the representative of the
Underwriters (the "Representative"). There can be no assurance that the price at
which the Common Shares will sell in the public market after the Offering will
not be lower than the price at which they are sold by the Underwriters.
Application has been made to list the Common Shares on the Nasdaq Stock Market.
There can be no assurance that such application will be approved or that, even
if approved, an active market will develop for the Common Shares. In addition,
one of the requirements for continued listing is the presence of two market
makers for the Common Shares. The Company has been advised by the Representative
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that it and certain of the Underwriters intend to make a market in the Common
Shares. However, neither the Representative nor any other Underwriter is
obligated to do so and market making by any of them may be interrupted or
discontinued at any time without notice at their sole discretion. Accordingly,
there can be no assurance of the continued presence of two market makers for the
Common Shares or as to the development or liquidity of any market for the Common
Shares.
Ownership Limitation May Restrict Business Combination Opportunities.
In order for the Company to maintain its qualification as a REIT, not more than
50% in value of its outstanding capital shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year, other than the
Company's taxable year ending December 31, 1997. For the purpose of preserving
the Company's REIT qualification, the Declaration of Trust generally prohibits
direct or indirect ownership of more than 8.5% (or, with respect to RAI, 15%) of
the outstanding Common Shares (the "Ownership Limitation"). The Ownership
Limitation will likely have the effect of discouraging a takeover or other
transaction in which holders of some, or a majority, of the Common Shares might
receive a premium for their Common Shares over the then prevailing market price
or which such holders might believe to be otherwise desirable. See "Description
of Shares of Beneficial Interest - Restrictions on Ownership and Transfer" and
"Federal Income Tax Considerations - Requirements for Qualification."
Preferred Shares May Prevent Change in Control. The Company's
Declaration of Trust authorizes the Board of Trustees to issue preferred shares
("Preferred Shares"), to establish the preferences and rights of any Preferred
Shares issued, to classify any unissued Preferred Shares and reclassify any
previously classified but unissued Preferred Shares. Although the Company has no
current intention to issue any series of Preferred Shares in the foreseeable
future, the issuance of any series of Preferred Shares could have the effect of
delaying or preventing a change in control of the Company (apart from the
Ownership Limitation) even if a majority of the Company's shareholders believe
such change of control is desirable. See "Description of Shares of Beneficial
Interest - Preferred Shares."
Maryland Anti-Takeover Statutes May Restrict Business Combination
Opportunities. As a Maryland real estate investment trust, the Company is
subject to various provisions of Maryland law which impose certain restrictions
and require certain procedures with respect to certain takeover offers and
business combinations, including, but not limited to, combinations with
interested holders and share repurchases from certain holders. While the Company
has elected to "opt out" of these provisions, the Board of Trustees has the
right to rescind such election at any time without notice to the shareholders.
See "Certain Provisions of Maryland Law and the Company's Declaration of Trust
and Bylaws - Business Combinations" and "- Control Share Acquisitions."
USE OF PROCEEDS
The Company has contracted (subject to the consent of the Independent
Trustees) to acquire or originate the Initial Investments upon completion of
this Offering for an investment
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cost of approximately $41.3 million, which is equal to approximately ______% of
the expected net proceeds of this Offering (_____% if the Underwriters exercise
their overallotment option). The Initial Investments will consist of those
Financings described at "Investment Objectives and Policies - Initial
Investments." Of the Initial Investments, $40.0 million, by cost, will be
acquired from RAI. The purchase price for each of the Initial Investments was
negotiated based upon the appraised value of the property underlying the loan,
current yield, lien position of the loan and the Company's analysis of the
long-term prospects for the property. In addition, the Company will reimburse
RAI for $__________ of organizational expenses advanced by RAI to the Company
prior to the completion of the Offering.
At the time of their acquisition, the Initial Investments being
acquired from RAI will be subject to $12.5 million of loan participation
interests or other debt that is senior to the loan interests acquired from RAI.
The Company anticipates acquiring $5.2 million of such senior loan participation
interests from the proceeds of this Offering. However, the Company also
anticipates that, following acquisition, the Company will seek to sell
participations in the loans as to which it has acquired the prior senior loan
participation interests or that borrowers may seek to refinance some portion of
the loans and, accordingly, that the Company will obtain the return of some
portion or all of the funds utilized to acquire the senior loan participation
interests. For certain information concerning the senior participations to be
acquired (including interest rate and maturity date) see "Investment Objectives
and Policies - Initial Investments." There can be no assurance, however, that
any such sales or refinancings will occur.
The balance of the Offering proceeds (including any funds obtained from
sales of participations in or refinancings of loans as referred to above) will
be invested in the manner described in "Investment Objectives and Policies." It
is anticipated that the investment process will take up to 18 months after the
Offering has been completed, although there can be no assurance that the process
will not be longer. Pending such investment, the balance of the net proceeds
will be invested in readily marketable, interest-bearing securities which,
following the expiration of the one year investment period provided by the Code,
will be limited to those securities allowing the Company to continue to qualify
as a REIT. See "Federal Income Tax Considerations - Requirements for
Qualification: Asset Tests."
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INVESTMENT OBJECTIVES AND POLICIES
General
The Company's principal business activity will be to provide mortgage
or other debt financing in situations that do not conform to the underwriting
standards of institutional lenders or sources which provide financing through
securitization. The Company's Financing will consist of direct loans to
borrowers and the acquisition of existing loans. The Company anticipates that it
also will acquire Property Interests. The Company will seek to generate income
for distribution to its shareholders from a combination of interest, rents,
distributions in respect of rents (where the Company owns an equity interest in
a real property), proceeds from participations and proceeds from the sale of
portfolio investments.
The Company believes that, under current market conditions,
institutional lenders and lending sources that provide financing through
securitization (which the Company believes are currently the principal sources
of real property financing), require that loans made by them satisfy certain
standard criteria. Typically, these lenders will require that the requested loan
be within the institution's size parameters and bear a specified relation to the
appraised value of the property securing the loan, that the property have
historical operating results demonstrating a ratio of cash flow to projected
debt service meeting standards established by the institution and that the loan
be secured by a first lien on the property. These lenders frequently restrict
the ability of the borrower to incur junior lien loans on the property without
the lender's consent and impose substantial penalties on loan prepayment.
Lenders may also establish guidelines with respect to type of property, type and
amount of insurance, uses of funds, appraisals and loan documentation. The
Company believes that borrowers or properties needing attention to specific or
unique situations are frequently unable to obtain financing from these sources,
or cannot obtain financing adapted to their particular needs, providing the
Company with a niche market with substantial growth potential. The Company also
believes that the recent trend towards consolidation among regulated financial
services providers has enhanced the opportunity for unregulated financial
services providers, such as the Company, to compete in this niche.
The Company believes that its tax and corporate structure as a REIT
will provide it with an advantage over certain other financial institutions and
commercial mortgage originators. As a REIT, the Company generally will be able
to pass through earnings as dividends to shareholders without payment of
corporate level federal income tax. Thus, the Company expects to be able to pay
higher dividends than traditional commercial mortgage lending institutions,
which are subject to corporate level federal income tax. In addition, management
believes that the Company, as an unregulated company, provides a more attractive
method of investing in loans than regulated financial institutions, and more
flexibility in pursuing investment opportunities, because the Company will not
be subject to the costs and restrictions associated with federal and state
regulations imposed upon insured financial institutions.
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Types of Financing
The Company will emphasize wraparound mortgage loans and, to a lesser
extent, other forms of junior lien and subordinated financing. The Company is
not, however, limited as to the types of financing it may provide, and it may
also acquire or provide first lien financing. In originating new Financing, the
Company will endeavor to adapt the terms of its financing to the needs of its
borrowers, utilizing a variety of financing techniques such as staged payments,
event specific loan advances, different rates of interest payment and interest
accrual, deferred (or "balloon") principal payments and similar techniques. The
Company will also from time to time provide subordinated financing through a
direct purchase of a Property Interest. See "Investment Objectives and Policies
- - Acquisition of Real Property Interests." It is not anticipated that the
Company's financings will be insured by the Federal Housing Administration or
guaranteed by the Veterans Administration or otherwise guaranteed (except by
borrowers or their affiliates, in certain cases) or insured.
Wraparound and other junior lien loans and subordinated financing
generally will be secured by mortgages on properties already subject to the
liens of other mortgage loans. A wraparound loan is a junior lien loan having a
principal amount equal to the sum of the outstanding principal balances of
senior loans plus the net amount advanced by the wraparound lender. From
payments it receives on the wraparound loan, the wraparound lender pays
principal and interest to the holders of the senior loans, but ordinarily only
to the extent that payments are received from the borrower. Wraparound loans
(and other junior loans) offer the potential for higher yields than yields
ordinarily obtained in senior lien financing (and, in the case of wraparound
loans, the possibility of increasing yields as the principal amounts of senior
loans are amortized). However, such loans carry greater credit risk, including
substantially greater risk of non-payment of interest or principal, than senior
lien financing. See "Risk Factors - Investment Activity Risks - Financing
Considerations: Enhanced Credit Risks of Subordinate Financing."
The Company will seek to originate or acquire Financing that not only
has current cash returns higher than those obtained in typical first lien
institutional financing but that also has various features designed to increase
the return over the term of the Financing. In particular, the Company will seek
to obtain participations. These participations typically will be one of two
types, as follows: (i) a grant of an interest in the appreciated value of the
financed real property (that is, an interest in the value of the property,
typically determined by sales price, refinancing amount or appraisal, which
exceeds a specified amount, usually the appraised value of the property at the
time of the Company's Financing or the principal amount of the Financing),
payable at the maturity of the loan or the time the property is sold or
refinanced, or (ii) a grant of an interest in the revenues from the property,
whether or not in excess of a specified amount. The Company typically will seek
not less than a 25% participation rate, and may seek to obtain either or both
types of participations. The Company believes that obtaining participations may
be advantageous to it since the Company will thus have the opportunity of
participating in the growth in value of the real property being financed (and,
therefore, the opportunity of gaining additional compensation). However,
obtaining participations may limit or, possibly, reduce the amount of interest
which the Company might otherwise be able to obtain on a loan. There can
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be no assurance that the Company will be able to obtain participations in any
loan, or as to the final terms (including the participation rate) under which
they may be granted. Moreover, since participations are more usually associated
with subordinated loans to compensate the lender for its subordinated position,
the Company may not be able to find borrowers willing to give participations in
first mortgage loans (to the extent acquired by the Company) on terms acceptable
to the Company.
Loan Origination Sources
To generate loan originations, the Company will rely primarily upon the
relationships senior management has developed as a result of its experience in
the mortgage lending, real estate and real estate finance industries with
developers, commercial real estate brokers, mortgage bankers, real estate
investors and other direct borrowers or referral sources. See "The Company
Trustees and Executive Officers." For sources of loans for acquisition (in
addition to RAI), the Company will focus on senior management's existing
knowledge of and relationships with institutional holders (primarily banks and
insurance companies) who may wish to dispose of underperforming loans in their
existing portfolios that meet the Company's Financing criteria. The Company's
focus on smaller properties makes it a niche buyer for loans held by these
institutions as the Company believes that others seeking to purchase
subordinated loan positions typically will focus on large size loans or pools of
loans. These institutional lenders may also refer to the Company loan
opportunities presented to them that they do not wish to underwrite.
Certain Financial Guidelines
The Company has established financial guidelines for use in evaluating
financing proposals subsequent to the Initial Investments. The Company may
depart from one or more of the guidelines in underwriting any particular
Financing, provided that the Company's Financing portfolio, in the aggregate, is
in compliance. The guidelines provide as follows: (i) the property underlying
the Financing will have a current appraised value of not less than 25% below the
property's appraised replacement cost, (ii) the size of the Financing will be
between $1 million and $8 million, (iii) the ratio of current cash flow to debt
service on senior lien loans with respect to the underlying property will be at
least 1.25 to 1, (iv) the ratio of current cash flow to debt service on both
senior loans and the Company's Financing will be at least 1.1 to 1, (v) the cash
flow from the underlying property will be sufficient to yield a current return
on the Company's investment of no less than 10% per year, (vi) the aggregate of
all outstanding senior debt may not exceed 75% of the appraised value of the
underlying property, and (vii) the aggregate of outstanding senior debt plus the
amount of the Company's Financing may not exceed 90% of the appraised value of
the underlying property. In departing from a particular guideline for any
Financing, the Company will typically consider factors that would cause the
underlying property to be in compliance with the guideline within a reasonable
time following initial funding of the Financing. For example, the Company may
depart from the cash flow guidelines where the borrower can demonstrate (through
new lease placements or otherwise) that historical cash flow will not be
representative of cash flow during the term of the loan, and may depart from
loan-to-value guidelines where the borrower can demonstrate that the application
of the loan proceeds
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will result in an increase in property value. Notwithstanding the foregoing,
these guidelines may be changed by the Board of Trustees of the Company without
notice to or approval by the shareholders.
Location of Properties Relating to Financing
The Company intends to finance properties located in metropolitan areas
of the United States where there is a significant amount of small, multi-family
residential, office and other commercial properties. Initially, the Company
anticipates that it will focus its financing activities in Philadelphia,
Pennsylvania and the Baltimore/Washington corridor, with a particular emphasis
on the Philadelphia metropolitan area as a result of senior management's
existing experience and relationships. Of the 12 loans included within the
Company's Initial Investments, 11 relate to properties located in the
Philadelphia metropolitan area, and one is located in the Washington, D.C.
metropolitan area. See "Investment Objectives and Policies - Initial
Investments." The Company is not, however, limited as to the geographic areas in
which it may provide Financing and, accordingly, it may provide Financing in
metropolitan areas other than Philadelphia and the Baltimore/Washington
corridor, in metropolitan areas that do not readily fit the Company's targeted
characteristics, or in geographic areas that are outside of metropolitan areas,
as appropriate opportunities are identified, and such Financings may (although
it is not currently anticipated that they will) constitute a material portion of
the Company's investment portfolio.
Types of Properties Relating to Financings
The Company will focus its financing activities on multi-family
residential, office and other commercial properties with property values
generally between $2 million and $20 million. The Company may, in appropriate
circumstances as determined by the Board of Trustees, provide financing to
properties with values outside this range, as is the case with one of the loans
included within the Company's Initial Investments. See "Investment Objectives
and Policies Initial Investments." It is not anticipated, however, that a
significant number of properties will be outside the targeted range. The Company
will not normally finance undeveloped property or make loans in situations where
construction is involved except where the underlying property (and any
additional real property collateral which the Company may require as security)
meets the Company's loan-to-value guidelines. See "Investment Objectives and
Policies - Certain Financial Guidelines" and "Risk Factors - Investment Activity
Risks." In situations where an underlying property does not meet the Company's
cash flow guidelines, the Company will typically require that the developers and
their controlling persons personally guarantee the Financing, and that some or
all of such persons have net worth sufficient to repay the Financing in the
event of default. Any such Financing may also condition funding of the Financing
upon the satisfaction of certain property income or occupancy criteria. The
Company is not limited in the amount or percentage of its assets it may lend
against any category of property. The Company does not, however, intend to make
loans or investments (including Property Interest investments) the amount of
which (together with all other loans or investments by the Company) exceeds (i)
with respect to any one property, 5% of its total assets, or (ii) with respect
to any one person or his or its affiliates, 10% of its total assets in
subordinated Financings to and Property
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Interests controlled by such person or his or its affiliates, excluding from
each such guideline the Initial Investments. One of the Initial Investments
(loan 109) exceeds such limitations, and will constitute _____% of the Company's
total assets, by cost, upon completion of this Offering (assuming the
Underwriters do not exercise their over-allotment option).
Acquisition of Loans at Discount
In acquiring existing Financing, the Company will focus on Financing
that, because of one or more past problems, can be acquired at a discount to its
outstanding balance and the appraised value of its underlying property due to
complex ownership situations with respect to the underlying property, lack of a
strong operating history for the underlying property, historical credit or cash
flow problems, or other factors. The Company will not acquire any such loan,
however, unless the prior loanholder, property owner or some other party or
parties, have taken material steps to resolve the problems to which the loan and
its underlying property have been subject and where completion of the resolution
process will not involve active intervention by the Company. The Company will
seek to acquire loans for which completion of the resolution process will
enhance the Company's total return through increased yields or realization of
some portion or all of the discount at which they were acquired.
The Company anticipates that a substantial portion of the loans it
acquires will be obtained from RAI, the Company's sponsor, which specializes in
acquiring and resolving mortgage loans. However, the investments that may be
acquired from RAI are limited to a maximum of 30% of the Company's investments
based upon the Company's cost (excluding the Initial Investments, of which $40.0
million, by cost, will be acquired from RAI). See "The Company - Certain
Relationships; Conflicts of Interest," "Use of Proceeds" and "Investment
Objectives and Policies Initial Investments."
Lending Procedures
Prior to making or acquiring any Financing, the Company will conduct an
acquisition review. The value of the underlying property will be estimated by
the Company based upon a recent independent appraisal obtained by the borrower,
an independent appraisal obtained by the Company, or upon valuation information
obtained by the Company and thereafter confirmed by an independent appraisal.
The Company will make an on-site inspection of the property and, where
appropriate, the Company will require further inspections by engineers,
architects or property management consultants. The Company may also retain
environmental consultants to review potential environmental issues. See "Risk
Factors - Investment Activity Risks - Financing Considerations: Environmental
Risks May Adversely Affect Value of Underlying Properties." The Company will
obtain and review available rental, expense, maintenance and other operational
information regarding the property and prepare cash flow and debt service
analyses. For acquired loans, the Company will also evaluate the adequacy of the
loan documentation (for example, the existence and adequacy of notes, mortgages,
collateral assignments of rents and leases, and title policies insuring lien
positions) and other available information (such as credit and collateral
files), and will evaluate the status and efficacy of programs to resolve
problems to which the loan
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<PAGE>
or its underlying property may have been subject. The amount which the Company
is willing to lend, or the amount of the Company's offer to purchase, will be
based upon the foregoing evaluations and analyses. The Company may modify these
procedures as it deems appropriate in particular situations.
After originating or acquiring any Financing, the Company will follow
specified procedures to monitor Financing performance and compliance. On
performing Financing originated by the Company, the borrower will be required to
supply monthly operating statements and yearly certification of compliance with
the terms of the loan. With respect to acquired loans, or non-performing
Company-originated Financing (and in addition to the above procedures), the
Company generally will require that all revenues from the underlying property be
paid into an operating account on which the Company is the sole signatory. All
expenditures with respect to a property (including debt service, taxes,
operational expenses and maintenance costs) will be paid from that account and
will be subject to review and approval by the Company prior to payment. The
Company may also require that its approval be obtained before any material
contract or commercial lease with respect to the property is executed and that
the borrower prepare a budget for the property not less than sixty days prior to
the beginning of a year, which must be reviewed and approved by the Company.
Acquisition of Real Property Interests
As appropriate, either as part of the Company's investment strategy or
for tax planning purposes, the Company may acquire Property Interests. The
Company believes that acquiring Property Interests will be advantageous for
three primary reasons. First, it gives the Company flexibility in addressing the
financial needs and tax situations of borrowers in situations where debt
financing may not be appropriate. Second, it will provide the Company with the
possibility of capital appreciation in addition to the current income realized
from its loan portfolio. Third, it will assist the Company in its tax planning.
It is anticipated that certain of the Financings made by the Company may result
in timing differences between (i) the actual receipt of income and the actual
payment of deductible expenses and (ii) the inclusion of that income and
deduction of such expenses in arriving at its REIT taxable income. This may
increase the REIT distribution requirement in such year, although there may be
no contemporaneous corresponding receipt of cash by the Company. Depreciation
deductions associated with the Company's investments in Property Interests,
however, should help offset such adverse tax effects. See "Risk Factors Legal
and Tax Risks - Tax Risks" and "Federal Income Tax Considerations - Requirements
for Qualification: Distribution Requirements."
The Company is not limited in the amount it may invest in Property
Interests, although the Company will not make loans or investments (including
Financings) the amount of which (together with all other loans or investments by
the Company) exceeds (i) with respect to any one property, 5% of its total
assets, or (ii) with respect to any one person or his or its affiliates, 10% of
its total assets in Property Interests controlled by and subordinated Financings
to such person or his or its affiliates, excluding from each such guideline the
Initial Investments. One of the Initial Investments (loan 109) exceeds such
limitations, and will constitute ____% of the
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Company's total assets, by cost, upon completion of this Offering (assuming that
the Underwriters do not exercise their over-allotment option). See "Investment
Objectives and Policies - Initial Investments." Each acquisition of a Property
Interest will be supported by an appraisal prepared by an independent appraiser.
Prior to acquisition, the Company will require satisfactory evidence (generally
in the form of title insurance) that the Company (if the Company is acquiring
the Property Interest directly), or the entity owning the property in which the
Company is acquiring an interest, has or will acquire good and marketable title
to the property subject only to such encumbrances as are acceptable to the
Company.
The Company will not manage any such Property Interests, but will
retain the services of third-party management companies, including (subject to
approval by a majority of the Company's Independent Trustees) Brandywine, an
affiliate of RAI. See "The Company - Certain Relationships; Conflicts of
Interest". Brandywine may also be retained by the Company to supervise a local
property manager. In instances where Brandywine is managing or supervising a
local manager, the fees paid to Brandywine and the local manager, in the
aggregate, may not exceed the amount customarily charged by property managers in
the area for management of comparable properties.
In addition to acquiring a property directly, the Company may also
acquire interests in a property, typically in the form of an interest in a
partnership, joint venture or limited liability company owning the property. The
Company anticipates that any such interests would be acquired either to provide
Financing in situations where further debt financing cannot be used, where
further debt financing is inappropriate (as, for example, where senior lienors
have imposed covenants against further borrowing or against the imposition of
junior liens), or where the Company is seeking an equity interest in a property
(similar to a participation) as part of a financing package. The Company will
typically require that its interests in any property or entity be preferred over
the interests of other owners both as to current distributions and repayment of
invested capital. The Company will also typically require that the owners incur
no further debt and issue no equity interest of equal rank with or senior to the
Company's interest without the Company's consent. However, the Company is not
limited in the kinds of equity interests that it may acquire and can,
accordingly, acquire interests that are not preferred or permit co-owners of the
properties to incur further debt without the Company's consent. See "Risk
Factors - Real Property Considerations: Investments in Joint Ventures,
Partnerships or Other Real Property Interests."
Leverage
The Company intends to finance its investment activity with the
proceeds of this Offering and future equity offerings. Although the Company is
permitted to incur debt to originate Financing or acquire Property Interests
(including seller or purchase money debt for both acquired loans and Property
Interests), the Company generally will not do so unless it does not have
immediately available capital sufficient to enable it to acquire a particular
investment. The Company may also incur debt in order to prevent default under
loans senior to the Company's Financing or to discharge senior loans entirely if
this becomes necessary to protect the Company's
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<PAGE>
Financing. This may occur if foreclosure proceedings are instituted by the
holder of a mortgage interest which is senior to the Company's Financing. The
Company may incur indebtedness in order to assist in the operation of any
property financed by the Company and as to which the Company has subsequently
taken over operations as a result of default, or to protect its Financing. The
Company may also borrow to the extent the Company deems it necessary to meet
REIT distribution requirements imposed by the Code. See "Federal Income Tax
Considerations Requirements for Qualification: Distribution Requirements." Debt
incurred by the Company may be collateralized by some or all of the Company's
assets. The Company anticipates that, in normal operations, it will not exceed a
debt to equity ratio of 0.5:1. For purposes of calculating this ratio, the
Company's indebtedness will include all indebtedness of the Company, whether or
not with recourse to the Company, and equity will be equal to the value of the
Company's portfolio based upon the most recent appraised value of the properties
underlying the portfolio. The Company is not limited as to the amount of debt
that it may incur, and may have a debt to equity ratio that may from time to
time vary substantially from 0.5 to 1, if appropriate investment opportunities
are presented. See "Risk Factors - Other Investment Activity Considerations; Use
of Leverage." The Company currently has no arrangements for loans or lines of
credit.
Portfolio Turnover
The Company will not purchase investments with the intention of
engaging in short-term trading. The Company may, however, sell any particular
investment and reinvest proceeds (subject to distribution requirements and
limitations on asset sales imposed on a REIT by the Code; see "Federal Income
Tax Considerations") when it is deemed prudent by the Company's management,
regardless of the length of the holding period.
Other Policies
The Company will not invest in the securities of other issuers for the
purpose of exercising control, except to the extent set forth in "Investment
Objectives and Policies Acquisition of Real Property Interests," nor will it
underwrite securities of other issuers. The Company will not repurchase or
otherwise reacquire its Common Shares or other securities, except to the extent
set forth in "Description of Shares of Beneficial Interest - Restrictions on
Ownership and Transfer" with respect to certain transfers in violation of the
Ownership Limitation. These policies may be changed by majority vote of the
Board of Trustees, including a majority of the Independent Trustees. The
Company, however, does not currently anticipate any such changes.
Initial Investments
The Company has contracted to purchase 11 loans at an aggregate cost of
approximately $40.0 million (the "Initial Purchased Loans") and has identified
one loan for direct origination with a funding requirement of $1.3 million (the
"Initial Direct Loan"). All of the Initial Purchased Loans will be purchased
from RAI. Assuming the Company acquired the Initial Purchased Loans as of June
30, 1997, RAI would realize a book gain of
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<PAGE>
approximately $7.6 million as a result of the Company's purchase of the Initial
Purchased Loans. See Note 7 to the below table and "The Company - Certain
Relationships; Conflicts of Interest."
The Initial Purchased Loans consist of (i) 9 loans purchased at
discounts of between 12.9% and 55.9% from the outstanding loan receivable
balances, and at ratios of between 69% to 97% of investment cost to appraised
values of the underlying properties (the "Discounted Loans") and (ii) two loans
purchased at par or at a slight (5% or less) discount to the outstanding loan
receivable balance (the "Non-Discounted Loans"). The Discounted Loans are
subject to an aggregate of approximately $8.5 million of senior financing ($5.2
million of senior loan participation interests that the Company intends to
purchase and $3.3 million of senior financing with respect to the underlying
properties that the Company does not intend to purchase and to which the
Company's loans are subordinate), as set forth in the table below. Each of the
Discounted Loans is in default with respect to its terms as originally
underwritten, but is subject to a forbearance agreement pursuant to which the
holder of the loan (the Company, upon acquisition) has agreed not to foreclose
provided that the borrower pays (subject to a stated minimum) all revenues from
the underlying property (after operating expenses) to the Company. Accordingly,
the Company will receive all the increase, if any, in the revenues from the
underlying properties, after payment of operating expenses, to a maximum
aggregate amount equal to the then outstanding balance of the loan as originally
underwritten and accrued interest. In addition, these loans permit the Company
to capture (upon a sale or refinancing of the property) any increase in the
value of the underlying property to a maximum amount equal to the then
outstanding balance of the loan as originally underwritten and accrued interest.
Since debt service on these loans is in excess of payments currently being made,
the Company anticipates that the outstanding balances will increase.
The Non-Discounted Loans consist of two subordinated loans, one with a
current return of 18% and the other with a current return of 17.7% (based upon
the Company's cash investment). The Non-Discounted Loans are wraparound loans
and are subordinate to an aggregate of approximately $4.1 million of senior debt
held by third parties that is secured by the underlying properties, as set forth
in the table below. There are no senior loan participation interests in either
Non-Discounted Loan.
The aggregate outstanding loan receivable balance of the Initial
Purchased Loans, as of June 30, 1997 was $82.9 million. The appraised value of
the properties underlying the Initial Purchased Loans is $58.4 million and their
estimated replacement cost (as set forth in such appraisals) is $________
million.
The Initial Direct Loan is a wraparound, participating loan which
provides for the Company to receive current annual interest payments of 11% on
the funds advanced by the Company, plus all amortization of the senior debt, and
a participation in the appreciation of the property in excess of the current
appraised value. The Initial Direct Loan is subordinate to an aggregate of
approximately $6.3 million of senior debt held by third parties that is secured
by the underlying property, as set forth in the table below.
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The following table sets forth certain information regarding each of the Initial
Investments as of June 30, 1997:
<TABLE>
<CAPTION>
Maturity of Cost of Investment
Loan/Expiration to Company
of Forbearance Type of Outstanding Including Amount of
Loan Number(1) Agreement(2) Property Location Loan Receivable(3) Senior Debt(4) Senior Debt(5)
- ----------- ---------------- -------- -------- ------------------ ------------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Initial Purchased Loans:
Discounted Loans
101 10/31/98 Multifamily Philadelphia, PA $ 1,530,948 $ 782,416 $ 600,000
102 10/31/98 Multifamily Philadelphia, PA 1,472,814 1,153,639 896,000
103 10/31/98 Office Arlington, VA 5,704,180 2,517,502 882,162
104 07/31/98 Multifamily Philadelphia, PA 5,351,234 3,094,354 1,105,318
105 09/02/99 Multifamily Philadelphia, PA 1,558,489 707,089 600,000
106 12/02/99 Multifamily Philadelphia, PA 3,025,791 2,007,804 1,261,016
107 10/31/98 Multifamily Philadelphia, PA 4,601,055 3,093,204 2,675,000
108 03/28/01 Multifamily Philadelphia, PA 715,581 623,601 450,000
109 01/01/02 Office Philadelphia, PA 52,348,480 27,000,000 -
----------- ----------- ------------
Total Discounted Loans 76,308,572 40,979,609 8,469,496
----------- ----------- ------------
Non-Discounted Loans
110 10/31/97 Multifamily Philadelphia, PA 1,623,560 1,589,246 889,246
111 12/29/00 Multifamily Philadelphia, PA 4,953,111 4,752,865 3,190,865
----------- ----------- ------------
Total Non-Discounted Loans 6,576,671 6,342,111 4,080,111
----------- ----------- ------------
Total Initial Purchased Loans 82,885,243 47,321,720 12,549,607
----------- ----------- ------------
Initial Direct Loans:
112 08/31/02 Retail/Office Philadelphia, PA 7,630,000 7,580,000 6,280,000
----------- ----------- ------------
Total Initial Direct Loans 7,630,000 7,580,000 6,280,000
----------- ----------- ------------
Total Initial Investments $90,515,243 $54,901,720 $18,829,607
=========== =========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratio of Senior
Debt to Appraised Monthly
Ratio of Cost of Value After Revenues from Ratio of
Appraised Value the Company's Certain Senior Operations Cash Flow to
of Underlying Investment to Debt Acquisitions Company's Net or Monthly Senior Debt
Loan Number(1) Property(6) Appraised Value(7) by the Company(8) Investment(9) Debt Service(10) Service(11)
- ----------- ------------------ ------------------ ----------------- ----------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Initial Purchased Loans:
Discounted Loans
101 $ 900,000 87% 0% $ 782,416 $ 6,400 n/a
102 1,300,000 89% 0% 1,153,639 8,900 n/a
103 2,800,000 90% 32% 1,635,340 16,100 2.90
104 3,200,000 97% 38% 1,989,036 14,578 2.27
105 855,000 83% 0% 707,089 6,185 n/a
106 2,320,000 87% 54% 746,788 7,211 1.63
107 3,600,000 86% 0% 3,093,204 24,800 n/a
108 900,000 69% 0% 623,601 5,700 n/a
109 34,000,000 79% 0% 27,000,000 238,084 n/a
----------- ---- ---- ----------- --------
Total Discounted Loans 49,875,000 82% 7% 37,731,113 327,958
----------- ---- ---- ----------- --------
Non-Discounted Loans
110 2,210,000 72% 40% 700,000 10,500 2.98
111 6,300,000 75% 51% 1,562,000 23,077 1.83
----------- ---- ---- ----------- --------
Total Non-Discounted Loans 8,510,000 75% 48% 2,262,000 33,577
----------- ---- ---- ----------- --------
Total Initial Purchased Loans 58,385,000 81% 13% 39,993,113 361,535 6.85
----------- ---- ---- ----------- -------- ----
Initial Direct Loans:
112 8,400,000 90% 75% 1,300,000 17,952 1.23
----------- ---- ---- ----------- --------
Total Initial Direct Loans 8,400,000 90% 75% 1,300,000 17,952
----------- ---- ---- ----------- --------
Total Initial Investments $66,785,000 82% 20% $41,293,113 $379,487 4.32
============ ==== ==== =========== ======== ====
</TABLE>
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(1) Loan 112 has not yet been funded. Information set forth herein with
respect to such loans is based upon the Company's loan commitment and
information supplied by the borrower.
(2) Loans 101, 102 and 105 through 109 are subject to forbearance agreements
which expire on the specified dates. Pursuant to these forbearance
agreements, (i) the lender (the Company once it has acquired the loans)
has agreed, subject to receiving specified minimum monthly payments, to
defer exercise of existing rights to proceed on the loan (which is in
default relative to its initial underwriting), including the right of
foreclosure, (ii) the Company directly receives rents from the underlying
property and (iii) the borrower has agreed to retain a property management
company acceptable to the Company. Brandywine currently acts as the
property manager for each such property. Loans 103, 104 and 110 through
112 are not subject to forbearance agreements; the dates specified are the
maturity dates of the loans (or, with respect to Loan 112, the maturity
date set forth in the loan commitment).
(3) Consists of the outstanding principal balance of the obligations plus (i)
accrued interest and penalties, and (ii) the outstanding balance of senior
indebtedness relating to the underlying property, each as of June 30,
1997.
(4) Consists of the purchase price to be paid by the Company plus the
outstanding balance, as of June 30, 1997, of senior indebtedness relating
to the underlying property. Does not include costs and expenses relating
to the acquisition or origination of the loan, and related professional
fees, estimated at $_________________ for such loans in the aggregate.
(5) Outstanding balance of all senior indebtedness relating to the underlying
property as of June 30, 1997.
(6) The Company retained independent appraisal firms (Joseph Dennis
Pasquarella & Co. with respect to loans 101, 102, 104, 107, 108, 110 and
111, Johnson, McClellan, Sullins & Page with respect to loan 103, M.
Richard Cohen with respect to loans 106 and 109, and Louis A. Iatrola
Realty Appraisal Group, Ltd. with respect to loan 112) to appraise the
properties underlying the Initial Investments. The appraisals were
conducted in July, August and September 1997. The appraised values
generally were developed based on consideration of the cost, market and
income valuation approaches. The cost approach considers the land value of
the properties and depreciated replacement cost of the improvements. The
market approach analyzes sales of other going-concern properties in
comparison to the subject properties. The income approach develops a
going-concern value of the subject properties by capitalizing the
projected operating income. Operating data, financial data and legal
descriptions of the properties provided to the appraisers by the Company
or the prior or current owners thereof were assumed by the appraisers to
be accurate and correct, and no audit verification thereof was undertaken
by the appraisers. Further, the appraisers did not assume responsibility
for matters of title. Caution should be exercised in evaluating appraisal
results. An appraisal is only an estimate of value and should not be
relied upon as a precise measure of realizable value. The appraisals
assume that the properties would be sold on an
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<PAGE>
orderly basis under stable market conditions. See "Risk Factors - Real
Property Considerations" and "Experts."
(7) The purchase price paid by RAI for each loan acquired from RAI, and RAI's
cost basis (as of June 30, 1997) in each loan, is as follows:
Loan No. RAI's Cost Basis RAI's Purchase Price
-------- ---------------- --------------------
101 $ 783,024 $ 569,513
102 1,135,478 859,547
103 2,505,572 2,325,558
104 2,028,992 1,614,174
105 727,734 456,356
106 1,985,619 1,299,780
107 3,512,705 2,427,221
108 573,255 474,064
109 20,949,927 19,201,778
110 1,445,016 1,362,884
111 4,116,293 3,757,701
----------- -----------
Total $39,763,615 $34,348,576
=========== ===========
For purposes of this table, (i) "RAI's Cost Basis" consists of the cost
of the investment as carried on the books and records of RAI (after
allocation of gains from the sale of a participation in the loan, or
borrower refinancing of the underlying property), including (a) all
acquisition costs and expenses, (b) subsequent advances, if any, made
by RAI in connection with its acquisition of the loan, and (c) amounts
representing accretion of discount by RAI; and (ii) "RAI's Purchase
Price" consists of the original cost of the investment to RAI, plus the
amounts referred to in clauses (i) (a) and (b), above, plus the amount,
as of the date of RAI's acquisition of the loan, of any senior
indebtedness to which the underlying property was subject. Accretion of
discount by RAI subsequent to June 30, 1997 will increase RAI's cost
basis in, and thus decrease RAI's book profit from the sale of, the
loans to the Company. For July 1997 and August 1997, RAI's accretion of
discount resulted in increases of approximately $283,000 and $ ,
respectively, in RAI's aggregate cost basis in the loans. RAI's gain
from the sale of the loans to the Company would also be reduced to the
extent of any gain realized upon a sale of a participation in a loan
prior to sale to the Company.
(8) The Company will acquire senior loan participation interests previously
sold by RAI in connection with loans 101, 102, 105, 107 and 108. See
"Use of Proceeds." In connection with the sale of these senior loan
participation interests, RAI had subordinated its interests in the
loans to the interests of the participant. After acquisition of the
senior loan participation interests, the Company will hold the entire
lender's interest in each such loan.
(9) The Company's net investment is calculated as the difference between
the amount set forth in the column "Cost of Investment to Company
Including Senior Debt," less the amount set forth in the column "Amount
of Senior Debt," except for loans 101, 102, 105, 107 and 108 where,
because the Company anticipates acquiring the senior indebtedness
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(see note (8), above), the amount is that set forth in the column "Cost
of Investment to Company Including Senior Debt" only.
(10) Amounts set forth with respect to loans 101 through 109 represent the
monthly revenues from operations for the underlying properties. Amounts
set forth for loans 110 through 112 represent the monthly debt service
required to be paid on the loans. With respect to loans 110 through
112, the monthly revenues from operations with respect to the
underlying properties are $24,500, $21,900 and $46,350, respectively.
For purposes of this table, (i) "monthly revenues from operations"
consist of the monthly rent roll as of June 30, 1997 with respect to
the underlying property less operating expenses, including real estate
and other taxes pertaining to the underlying property and its operation
and less interest on senior debt (to the extent not being acquired by
the Company), but before depreciation, amortization and capital
expenditures; and (ii) "monthly debt service" is the stated amount of
interest and principal payable monthly under the terms of the loan.
Monthly revenues from operations are set forth where, pursuant to
forbearance agreements or the terms of the loan documents, the holder
of the loan has the right to receive all net cash flow from the
underlying properties as payment of debt service on the loans while
monthly debt service is set forth where the stated monthly debt service
under the terms of the loan is less than monthly revenues from
operations.
(11) Consists of monthly revenues from operations before interest on the
senior indebtedness divided by the monthly payment of principal and
interest required under the senior indebtedness.
The following is a description of certain of the material terms of the
loans included in the Initial Investments, and assumes the acquisition by the
Company of all senior loan participation interests as set forth in Note 8 to the
above table:
Loan 101. Loan evidenced by a note in the original principal amount of
$1,080,000, secured by a first mortgage on multi-family residential property
located in Philadelphia, Pennsylvania, bearing interest at 12% per year until
October 31, 1998 when all principal, accrued interest and other amounts become
due and payable. The loan documents provide that the holder of the loan (i)
holds a deed-in-lieu of foreclosure, which may be recorded upon default by the
borrower, and (ii) may replace the manager of the property. Tenants at the
property currently pay rents directly to the holder of this loan.
Loan 102. Loan evidenced by a note in the original principal amount of
$1,312,000, secured by a first mortgage on multi-family residential property
located in Philadelphia, Pennsylvania, bearing interest at an annual rate of
2.5% over the monthly national median annualized cost of funds for SAIF-insured
institutions as announced by the Federal Deposit Insurance Corporation with a
minimum rate of 8.5% (which, as of June 30, 1997, resulted in an interest rate
of 8.5%) until October 31, 1998 when all principal, accrued interest and other
amounts become due and payable. The loan documents provide that the holder of
the loan (i) holds a deed-in-lieu of foreclosure, which may be recorded upon
default by the borrower, and
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(ii) may replace the manager of the property. Tenants at the property currently
pay rents directly to the holder of this loan.
Loan 103. Loan evidenced by a note in the original principal amount of
$4,165,000, bearing interest at an annual rate of 0.5% over the Maryland
National Bank prime rate (which, as of June 30, 1997, resulted in an interest
rate of 9.0%) until October 31, 1998 when all principal, accrued interest and
other amounts become due and payable. The loan is subject to senior indebtedness
held by an unaffiliated third party in the form of a first mortgage loan on an
office property located in Arlington, Virginia, in the amount of $882,162. The
loan documents provide that the holder of the loan (i) holds a deed-in-lieu of
foreclosure with respect to the property, which may be recorded upon default by
the borrower, and (ii) may replace the manager of the property. Moreover, the
terms of the senior indebtedness restrict the borrower from incurring any other
indebtedness (except trade indebtedness) or encumbrances upon the Property
without the consent of the senior lender. Tenants of the property currently pay
rents directly to the holder of this loan.
Loan 104. Loan evidenced by a note in the original principal amount of
$3,559,000, bearing interest at annual rate of 2% over the yield of one-year
United States Treasury Securities (which, as of June 30, 1997, resulted in an
interest rate of 7.5%) until July 31, 1998 when all principal, accrued interest
and other amounts become due and payable. The loan is subject to senior
indebtedness held by an unaffiliated third party in the form of a first mortgage
loan on a multi-family residential property located in Philadelphia,
Pennsylvania, in the amount of $1,105,318. The loan documents provide that the
holder of the loan (i) holds a deed-in-lieu of foreclosure with respect to the
property, which may be recorded upon default by the borrower, and (ii) may
replace the manager of the property. Moreover, the terms of the senior
indebtedness restrict the borrower from incurring any other indebtedness (except
trade indebtedness) or encumbrances upon the Property without the consent of the
senior lender. Tenants of the property currently pay rents directly to the
holder of this loan.
Loan 105. Loan evidenced by a note in the original principal amount of
$1,211,000, secured by a first mortgage on a multi-family residential property
located in Philadelphia, Pennsylvania, bearing interest at 12.2% until September
2, 1999 when all principal, accrued interest and other amounts become due and
payable. In addition, the loan documents provide that the holder of the loan (i)
holds a deed-in-lieu of foreclosure with respect to the underlying property,
which may be recorded upon default by the borrower, and (ii) may replace the
manager of the property. Tenants at the property currently pay rents directly to
the holder of this loan.
Loan 106. Loan evidenced by notes in the original aggregate principal
amount of $1,695,000, bearing interest at varying annual rates from 12% to 14%
per year until December 2, 1999 when all principal, accrued interest and other
amounts become due and payable. The loan is subject to senior indebtedness held
by an unaffiliated third party in the form of a first mortgage loan on a
multi-family residential property located in Philadelphia, Pennsylvania, in the
amount of $1,261,016. The loan documents provide that the holder of the loan (i)
holds a deed-in-lieu
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of foreclosure with respect to the property, which may be recorded upon default
by the borrower, and (ii) may replace the manager of the property. Moreover, the
terms of the senior indebtedness restrict the borrower from incurring any other
indebtedness (except trade indebtedness) or encumbrances upon the Property
without the consent of the Senior Lender. Tenants of the property currently pay
rents directly to the holder of this loan.
Loan 107. Loan evidenced by a note in the original principal amount of
$3,250,000, secured by a first mortgage on a multi-family residential property
located in Philadelphia, Pennsylvania, bearing interest at an annual rate equal
to 85% of the sum of the rate of interest paid by major money market banks on
new issues of negotiable certificates of deposit usually on principal amounts of
$1 million or more, with a minimum unit of $100,000, for a term to maturity of
one month, plus 2.75% (which, as of June 30, 1997, resulted in an interest rate
of 6.779%), until October 31, 1998 when all principal, accrued interest and
other amounts become due and payable. In addition, the loan documents provide
that the holder of the loan (i) holds a deed-in-lieu of foreclosure, which may
be recorded upon default by the borrower, and (ii) may replace the manager of
the property. Tenants at the property currently pay rents directly to the holder
of this loan.
Loan 108. Loan evidenced by a note in the original principal amount of
$600,000, secured by a first mortgage on a multi-family residential property
located in Philadelphia, Pennsylvania, bearing interest at an annual rate of 12%
until March 28, 2001 when all principal, accrued interest and other amounts
become due and payable. The loan documents provide that the holder of the loan
(i) holds a deed-in-lieu of foreclosure, which may be recorded upon default by
the borrower, and (ii) may replace the manager of the property. Tenants at the
property currently pay rents directly to the holder of this loan.
Loan 109. Loan evidenced by notes in the original aggregate principal
amount of $40,906,000, secured by a first mortgage on an office property located
in Philadelphia, Pennsylvania, bearing interest at an annual rate of 8% until
January 1, 2002 (or January 1, 2009 if the borrower exercises an option to
extend) when all principal, accrued interest and other amounts become due and
payable. The loan documents provide that (i) the holder of the loan may record a
deed to the property, which is held in escrow, on the occurrence of certain
defaults, (ii) the holder of the loan may assume operating control of the
property under certain conditions and (iii) certain principals of the borrower
may be subject to limited personal recourse under certain circumstances.
Loan 110. Loan evidenced by a note in the original principal amount of
$765,000, bearing interest at an annual rate of 18% until October 31, 1997 when
all principal, accrued interest and other amounts become due and payable. The
loan is subject to senior indebtedness held by an unaffiliated third party in
the form of a first mortgage loan on a multi-family residential property located
in Philadelphia, Pennsylvania, in the amount of $889,000. The loan documents
provide that the holder of the loan (i) holds a deed-in-lieu of foreclosure with
respect to the property, which may be recorded upon default by the borrower, and
(ii) may replace the manager of the property. Moreover, the terms of the senior
indebtedness restrict the borrower
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<PAGE>
from incurring any other indebtedness (except trade indebtedness) or
encumbrances upon the property without the consent of the senior lender. Tenants
of the property currently pay rents directly to the holder of this loan.
Loan 111. Loan evidenced by a note in the original principal amount of
$4,627,000, bearing interest at annual rate of 7.75% until December 29, 2000
when all principal, accrued interest and other amounts become due and payable.
The loan is subject to senior indebtedness held by an unaffiliated third party
in the form of a first mortgage loan on a multi-family residential property
located in Philadelphia, Pennsylvania in the amount of $3,192,000. The loan
documents provide that the holder of the loan (i) holds a deed-in-lieu of
foreclosure with respect to the property, which may be recorded upon default by
the borrower, and (ii) may replace the manager of the property. Moreover, the
terms of the senior indebtedness restrict the borrower from incurring any other
indebtedness (except trade indebtedness) or encumbrances upon the property
without consent of the senior lender. Tenants of the property currently pay
rents directly to the holder of this loan.
Loan 112. Loan to be evidenced by a wraparound note in the original
principal amount of $7,580,000, secured by a second mortgage on a retail/office
property located in Philadelphia, Pennsylvania. The loan will be subordinated to
senior indebtedness held by an unaffiliated third party in the form of a first
mortgage on the property in the amount of $6,280,000, bearing interest at 8.55%,
due August 3, 2002 when the holder of this loan will have an option to purchase
the property (which such option will be recorded and title insured) by assuming
the senior debt. The loan bears a stated annual rate of interest of 11% on the
funds advanced by the Company, plus amortization of the senior debt, resulting
in an annual return on the Company's net investment of 16.7% in the first year
growing to 19% in the fifth year. The borrower must make a payment of $50,000 at
the time the loan is repaid as additional interest. In addition, the loan will
provide for the holder to receive a participation in the increase in value of
the property over the current appraised value equal to 25% of the first $600,000
of such appreciation and 15% of any additional appreciation, payable on the sale
or refinancing of the underlying property or at maturity of the loan. Moreover,
the terms of the senior indebtedness restrict the borrower from incurring any
other indebtedness (except trade indebtedness) or encumbrances upon the
property. All tenants of the property will pay rents directly to the holder of
this loan.
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<PAGE>
THE COMPANY
RAIT was formed as a real estate investment trust in the State of
Maryland in August, 1997 and will elect to be taxed as a REIT under the Code.
The principal executive offices of the Company are located at 1521 Locust
Street, 6th Floor, Philadelphia, Pennsylvania 19102. The Company's telephone
number is (215) 546-5119.
Management
The Company will be self-administered and self-managed with respect to
its investments in Financings and Property Interests. While the Company will
supervise the management of the properties underlying its Financings and
Property Interests, the leasing, operational and tenant improvement services
will be provided by third-party managers, including Brandywine, an affiliate of
RAI. The Company will internally service its Financing, although it has the
right to retain third-party servicers, including affiliates. The Company may
also utilize property due diligence investigation services provided by RAI. See
"The Company - Certain Relationships; Conflicts of Interest."
Trustees and Executive Officers
The following sets forth certain information regarding the trustees and
executive officers of the Company:
Name Age Position with the Company
- ---- --- -------------------------
Betsy Z. Cohen 55 Chairman, Chief Executive Officer and Trustee
Jay J. Eisner 40 President, Chief Operating Officer and Secretary
Ellen J. DiStefano 32 Chief Financial Officer
Jonathan Z. Cohen 27 Trustee*
Jerome S. Goodman 62 Trustee**
Joel R. Mesznik 51 Trustee**
Daniel Promislo 64 Trustee**
Jack L. Wolgin 80 Trustee**
* Trustee nominated by RAI
** Independent Trustee
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<PAGE>
Betsy Z. Cohen was elected on ______________, 1997 to serve as
Chairman, Chief Executive Officer and trustee of the Company. Mrs. Cohen has
served as Chairman, Chief Executive Officer and a director of JeffBanks, a bank
holding company with $1.2 billion in total assets as of June 30, 1997, since its
founding in 1981, and of its subsidiaries Jefferson Bank (since its founding in
1974) and Jefferson Bank of New Jersey (since its founding in 1988). Mrs. Cohen
is also a director of Aetna USHealthcare and Life Technologies, Inc. Mrs. Cohen
is married to Edward E. Cohen, Chairman, Chief Executive Officer and President
of RAI. Jonathan Z. Cohen, a trustee of the Company, is Mrs. Cohen's son.
Jay J. Eisner, a certified public accountant, was elected on
_____________, 1997 to serve as President, Chief Operating Officer and Secretary
of the Company. From December 1994 to March 1997, Mr. Eisner was Chief Financial
Officer of Washington Capital Corporation, Philadelphia, Pennsylvania (a private
investment firm providing non-conforming mortgage loan financing to real estate
developers and others) and, from 1987 to December 1994, was Chief Financial
Officer of Asbell & Associates, L.P., Philadelphia, Pennsylvania, (a private
real estate development, investment and financing firm). From 1983 through 1987,
Mr. Eisner was Vice President and Controller of Ascott Investment Corporation, a
national real estate syndication and investment company and from 1979 through
November 1983 was a Supervisor with Touche Ross & Company, certified public
accountants.
Ellen J. DiStefano, a certified public accountant, was elected on
_______________, 1997 to serve as Chief Financial Officer of the Company. From
1992 to August 1997, Ms. DiStefano was Chief Financial Officer of Brandywine, a
Philadelphia, Pennsylvania based national manager and developer of commercial,
multifamily, office and hotel properties, and an affiliate of RAI. From 1987 to
1992, Ms. DiStefano was a Senior Associate at Coopers & Lybrand, certified
public accountants.
Jonathan Z. Cohen was elected on ____________, 1997 to serve as a
trustee of the Company, and is the nominee of RAI. From 1994 to present, Mr.
Cohen has been a founder and the Chief Executive Officer of Blue Guitar Films,
Inc., a New York based feature film production company. Mr. Cohen received his
J.D. from the American University with honors in May 1995 and his B.A. from the
University of Pennsylvania. From 1989 to 1991, Mr. Cohen was President and
founder of a group of neighborhood advertising supplements/magazines called "In
Walking Distance." Mr. Cohen is the son of Betsy Z. Cohen.
Jerome S. Goodman was elected on _________________, 1997 to serve as a
trustee of the Company. Mr. Goodman has been Chairman of Travel One (a
commercial travel management company) since 1971, and was the sole stockholder
of Travel One from 1971 to 1994. Mr. Goodman was a member of the New Jersey
Sports Exposition Authority from 1991 to 1994, and its Chairman from 1992 to
1994. He has also served as Chairman, President and Chief Executive Officer of
First Peoples Financial Corporation (a bank holding company) from 1987 to 1992
and President and Chief Executive Officer of First Peoples Bank of NJ from 1983
to 1987. He was a member of the Board of Directors of GBC Technologies, Inc.
from 1992 to
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<PAGE>
1995. Mr. Goodman has been a director of Aetna US Healthcare (and its
predecessor, US Healthcare) since 1988.
Joel R. Mesznik was elected on ___________, 1997 to serve as a trustee
of the Company. From 1990 to date, Mr. Mesznik has been President of Mesco Ltd.,
New York, New York (a corporate financial advisory firm). From 1976 to 1990, Mr.
Mesznik was affiliated with Drexel Burnham Lambert, Inc. including, from 1976 to
1987, service as head of its Public Finance Department. Mr. Mesznik is the
general partner of several private limited partnerships which have acquired real
estate assets from the Resolution Trust Corporation, the Federal Deposit
Insurance Corporation and institutional lenders.
Daniel Promislo was elected on ______________, 1997 to serve as a
trustee of the Company. Mr. Promislo has been Of Counsel (from 1994 to date) and
a partner (from 1977 to 1994) of Wolf, Block, Schorr and Solis-Cohen, a
Philadelphia, Pennsylvania law firm, principally involved in corporate and real
estate finance matters. He currently is also President and a director of
Historic Documents Co. and Historical Souvenir Co. (of which he is also a
founder), which manufacture souvenirs of American history, and a director of
U.S. Physicians, Inc., a physicians' practice management company. From 1994 to
date he has been a director, and from 1996 to date, Chairman of the Board of
Directors, of WHYY, Inc., the principal public television station in the
Philadelphia metropolitan area.
Jack L. Wolgin was elected on ________________, 1997 to serve as a
trustee of the Company. For over 50 years, Mr. Wolgin has been extensively
involved in the development and financing of real estate, as a founder and
director of Industrial Valley Bank (where he was a member of the Executive,
Audit and Real Estate Loan Committees), founder, Chairman, President and Chief
Executive Officer of Atlas Credit Corporation (a Philadelphia home improvement
lender) and Colonial Mortgage Company (a mortgage origination and servicing
company), a founder of the Pennsylvania Real Estate Investment Trust, a past
director and member of the Executive Committee of the board of directors of
Brooks Harvey Realty Investors (a REIT sponsored by Morgan Stanley & Co.) and as
a developer, for his own account, of in excess of $340 million of commercial,
multifamily residential, office and other properties.
All trustees (except trustees appointed to fill vacancies) will be
elected at each annual meeting of shareholders for a term of one year, and will
hold office until their successors are elected and qualified. All officers serve
at the discretion of the Board of Trustees. The Company will pay an annual
trustee's fee to each Independent Trustee equal to $3,000 plus $1,000 for each
meeting of the Board of Trustees, and $500 for each meeting of a committee
thereof, attended in person. Chairmen of committees will receive an additional
$500 for each meeting of a committee attended in person. All trustees will be
reimbursed for their costs and expenses in attending all meetings of the Board
of Trustees and any committee thereof. Affiliated trustees will not be
separately compensated by the Company.
The following table sets forth certain information concerning the
compensation that will be paid to the Company's Chief Executive Officer and each
of the Company's other most highly compensated executive officers whose
aggregate compensation will exceed $100,000 in the Company's first full fiscal
year:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
- ------------------------------------------------------------------------------------------------------------------
Restricted Securities
Stock Underlying LTIP All
Name and Principal Position Salary Bonus Other Award Options Payouts Other
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Betsy Z. Cohen,
Chairman and
Chief Executive
Officer(1)
Jay J. Eisner, President,
Chief Operating Officer
and Secretary (1)
Ellen J. DiStefano
Chief Financial
Officer
</TABLE>
- ---------------
(1) The Company anticipates that it will enter into employment agreements with
Mrs. Cohen and Mr. Eisner upon completion of the Offering. No such
agreements have been negotiated as of the date hereof, and there can be no
assurance as to the final terms of any such agreements.
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<PAGE>
Except for Mrs. Cohen, all executive officers of the Company are
required to devote substantially all of their business time to the Company's
operations. Mrs. Cohen is required to devote only so much of her time as may be
required for the effective discharge of her duties. Mrs. Cohen currently has
substantial business interests apart from the Company which the Company
anticipates will require a material amount of her time. The trustees and
officers (subject to the requirement that the officers, with the exception of
Mrs. Cohen, devote substantially all of their business time to the Company's
operations) generally are not limited or restricted from engaging in any
business or rendering services of any kind to any other person, including the
acquisition or origination of real properties or loans that meet the Company's
investment objectives and policies. Except as set forth in "The Company -
Certain Relationships; Conflicts of Interest," the trustees and officers of the
Company and their affiliates may not be participants in the Company's
investments.
The Company's Declaration of Trust provides that, except in the case of
a vacancy, a majority of the members of the Board of Trustees, and of any
committee of the Board of Trustees, will at all times be Independent Trustees.
Vacancies occurring on the Board of Trustees among the Independent Trustees will
be filled by the vote of a majority of the trustees, including a majority of the
Independent Trustees.
Option Plan
The Company intends to adopt a qualified share option plan (the "Option
Plan"), which provides for options to purchase Common Shares (or, at the
election of the Company, units in the Operating Partnership that may be redeemed
for cash, or, at the election of the General Partner, Common Shares on a
one-for-one basis). See "Operating Partnership Agreement - Redemption Rights."
The maximum aggregate number of Common Shares that may be issued pursuant to
options granted under the Option Plan is ___________________. The purpose of the
Option Plan is to provide a means of performance-based compensation in order to
provide incentive for the Company's key employees. The following table sets
forth the options the Company currently anticipates granting under the Option
Plan:
Option/SAR Grants
<TABLE>
<CAPTION>
Number of Percent of Total Potential Realizable
Securities Options/SARs Value at Assumed
Underlying Granted to Exercise Rates of Stock Price
Name and Options/SARs Employees in Price Expiration Appreciation for
Principal Position Granted(1) Fiscal Year ($/Sh) Date Option Term
- ----------------------------------------------------------------------------------------------------------------------------
@5% @10%
----------------------
<S> <C> <C> <C> <C> <C> <C>
Betsy Z. Cohen,
Chairman and
Chief Executive
Officer
Jay J. Eisner,
President, Chief
Operating Officer
and Secretary
Ellen J. DiStefano
Chief Financial
Officer
</TABLE>
- ---------------
(1) Options expire ten years from the date of issuance and will be granted at an
exercise price equal to the initial offering price of the Common Shares.
Options vest at a rate of 25% of the option shares on each anniversary of
the date of grant, beginning with the first anniversary.
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<PAGE>
Indemnification of Trustees and Executive Officers
The Company's Declaration of Trust provides for the indemnification of
the trustees and officers of the Company to the full extent permitted by
Maryland law. See "Description of Shares of Beneficial Interest -
Indemnification." The Declaration of Trust also provides that the personal
liability of any trustee or officer of the Company to the Company or its
shareholders for money damages is limited to the fullest extent allowed by
Maryland law. See "Description of Shares of Beneficial Interest - Limitation of
Liability."
Certain Relationships; Conflicts of Interest
The Company, on the one hand, and RAI, JeffBanks and their affiliates,
on the other, will enter into several relationships which may give rise to
conflicts of interest. RAI, which is the sponsor of the Company, will own 9.8%
of the Company's Common Shares at the completion of the Offering (assuming the
Underwriters do not exercise their overallotment option), acquired at the public
offering price net of underwriting discounts and commissions. RAI may acquire
Common Shares after the Offering to a maximum of 15% of the Common Shares
outstanding. RAI will have the right to nominate one person for election to the
Company's Board of Trustees until such time as its ownership of outstanding
Common Shares is less than 5% Currently, Jonathan Z. Cohen is serving as RAI's
nominee. Mr. Cohen is the son of Betsy Z. Cohen, the Chairman and Chief
Executive Officer of the Company, and her spouse, Edward E. Cohen. Edward E.
Cohen is the Chairman, Chief Executive Officer, President, a director and a
principal shareholder of RAI. RAI has advanced $_________ to the Company for
pre-Offering organization expenses. These advances are without interest and will
be repaid from the proceeds of this Offering. See "Use of Proceeds."
Of the Initial Investments, 97%, by cost, will be purchased by the
Company from RAI. See "Investment Objectives and Policies - Initial
Investments." The Company anticipates that, subject to the limitations referred
to below in this section, it will purchase additional investments from RAI. The
Company may from time to time (but is not obligated to) retain RAI to perform
due diligence investigations on properties underlying Financing (excluding
Financing being acquired from RAI) or on Property Interests that the Company is
considering for acquisition. It is also anticipated that Brandywine, which is an
affiliate of RAI, may provide real estate management and or management
supervisory services to a material number of properties for which the Company
has provided Financing or which are included in the Company's Property
Interests. Brandywine currently manages, or supervises the management of 11 of
the properties underlying the Initial Investments.
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<PAGE>
The Company anticipates that it will have customary banking
relationships with the bank affiliates of JeffBanks, although it is not
currently anticipated that the Company will establish a borrowing relationship.
JeffBanks may, as needed and requested by the Company, provide loan
administration services to the Company. JeffBanks may also refer to the Company
for its consideration financing proposals which are not within JeffBanks' normal
underwriting criteria. The Company anticipates that it may, in the future,
sublease office space from JeffBanks. Mr. and Mrs. Cohen are principal
stockholders of JeffBanks, Mrs. Cohen is the Chairman and Chief Executive
Officer of JeffBanks and Mr. Cohen is Chairman of its Executive Committee.
The Company has instituted certain procedures to mitigate the effects
of any such conflicts, including (i) requiring that a majority of its trustees
be Independent Trustees, (ii) requiring that the acquisition price of any
investments acquired from RAI (or in which an officer or trustee of the Company,
including Mrs. Cohen, has an interest) be determined based upon independent
appraisal of the underlying property, (iii) limiting the investments which may
be acquired from RAI to a maximum of 30% of the Company's investments (excluding
the Initial Investments), based upon the Company's investment cost (the amount
of the investment plus legal, filing and other related fees and expenses), (iv)
requiring that any fees for services performed by RAI, Brandywine, JeffBanks or
their affiliates be no greater than prevailing fees in the area for similar
services provided by unrelated third parties, (v) requiring that any service
arrangements with an affiliated entity provide that services will be rendered
only as and to the extent requested by the Company from time to time and that,
in any event, the arrangements be cancelable by the Company, without penalty, on
no more than 30 days' notice, (vi) requiring that any investment acquisition or
services arrangement, and every transaction with RAI, Brandywine, JeffBanks and
their affiliates, or relating to any property in which any such persons has an
interest, receive the prior approval of a majority of the Independent Trustees
(who, in giving such approval, may rely upon information supplied by RAI,
Brandywine, JeffBanks or their affiliates), and (vii) with respect to real
estate management or management supervisory services performed by Brandywine,
requiring that the aggregate of the fee received by Brandywine and the manager
being supervised may not exceed the normal and customary fee for similar
property management services with respect to similar properties in the same
area. The Company will not, however, be required to obtain the approval of the
Independent Trustees to retain RAI to perform a due diligence investigation of a
property where the amount of the fee for such services will not exceed the
lesser of 1% of the property's appraised value or $10,000.
Since each of the Company, RAI and JeffBanks seeks to originate or, in
the case of the Company and RAI, acquire mortgage loans, there may be conflicts
of interest among the Company, RAI and JeffBanks regarding the allocation of
loan opportunities. The Company believes, however, that these conflicts are
substantially mitigated since there are significant differences between the
investment objectives of the Company, RAI and JeffBanks. RAI has advised the
Company that it seeks to acquire loans which are either in default, or at risk
of imminent default, requiring active intervention by RAI in the workout
process. The Company, however, seeks to acquire loans where the workout process
has already been initiated and there is no need for its active intervention.
JeffBanks has advised the Company that it seeks to provide customary commercial
lending services emphasizing (with respect to real estate loans) first lien
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financing that is subject to specified underwriting standards. The Company seeks
to provide Financing that does not conform to JeffBanks' underwriting standards.
The Company believes that conflicts are further mitigated because the
anticipated sources of the Company's loan referrals (apart from loans acquired
from RAI) are different from those of RAI and JeffBanks. See "Investment
Objectives and Policies - Certain Relationships; Conflicts of Interest."
To further limit conflicts between the Company and RAI, the Company and
RAI have agreed that, for two years following the completion of the Offering,
(i) RAI will not sponsor another REIT with investment objectives and policies
which are the same as, or substantially similar to, those of the Company; (ii)
if RAI originates a proposal to provide wraparound or other junior lien or
subordinated Financing with respect to multifamily, office or other commercial
properties to a borrower (other than to a borrower with an existing loan from
RAI), RAI must first offer the opportunity to the Company; and (iii) if RAI
desires to sell any loan it has acquired that conforms to the Company's
investment objectives and policies with respect to acquired loans, it must first
offer to sell it to the Company.
Subject only to the limitations referred to above, to the extent that
an investment opportunity is presented to one entity which may be deemed
appropriate for either entity, the entity to which the opportunity is presented
may invest without offering the other entity the right to participate. However,
each entity reserves the right, in its sole discretion, to refer to the other
appropriate investment opportunities, or to offer a participation to the other
entity in investments that may be deemed appropriate for both.
Ledgewood Law Firm, P.C., which has acted as counsel to the Company in
connection with its organization and the Offering, also has in the past acted as
counsel to RAI, Brandywine, JeffBanks and their affiliates (including Messrs.
Jonathan Z. and Edward E. Cohen and Mrs. Cohen) and anticipates that it will
continue to do so in the future. Until April 1996, Edward E. Cohen was Of
Counsel to such firm, of which he was previously a member, and receives certain
debt service payments from such firm in connection with his withdrawal from such
firm as a member and its redemption of his interest. There is a possibility
that, in the future, the interests of the Company, RAI, Brandywine, JeffBanks or
their affiliates may become adverse. In the event that a dispute were to arise
between the Company and any of such entities, either the Company or such entity
(or both), as appropriate, will retain separate counsel for such matters.
DISTRIBUTION POLICY
In order to avoid corporate income taxation on the earnings that it
distributes, the Company must distribute to its shareholders an amount at least
equal to (i) 95% of its REIT taxable income (determined before the deduction for
dividends paid and excluding any net capital gain) plus (ii) 95% of the excess
of its net income from foreclosure property over the tax imposed on such income
by the Code less (iii) any excess non-cash income (as determined under the
Code). See "Federal Income Tax Considerations." The actual amount and timing of
distributions, however, will be at the discretion of the Board of Trustees and
will depend upon the financial condition of the Company in addition to the
requirements of the Code. It is
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<PAGE>
anticipated that the first distribution will be made after the first full fiscal
quarter following the completion of this Offering.
Subject to the distribution requirements referred to in the immediately
preceding paragraph, the Company intends, to the extent practicable, to invest
substantially all of the principal from repayments, sales and refinancings of
the Company's assets in Financings and Property Interests. The Company may,
however, under certain circumstances, make a distribution of principal. Such
distributions, if any, will be made at the discretion of the Board of Trustees.
It is anticipated that distributions generally will be taxable as
ordinary income, although a portion of such distributions may be designated by
the Company as long-term capital gain or may constitute a return of capital. The
Company will furnish annually to each of its shareholders a statement setting
forth distributions paid during the preceding year and their federal income tax
status. For a discussion of the federal income tax treatment of distributions by
the Company, see "Federal Income Tax Considerations - Taxation of the Company"
and "- Taxation of Taxable U.S.
Shareholders."
CAPITALIZATION
The capitalization of the Company, as of ____________, 1997, and as
adjusted to reflect the sale of the Common Shares offered hereby, is as follows:
Actual As Adjusted(1)
------ --------------
Preferred Shares, par value $.01;
25,000,000 shares authorized; no shares
outstanding; no shares outstanding,
as adjusted.................................. $ -0- $ -0-
Common Shares, par value $.01;
200,000,000 shares authorized; ___________
shares outstanding; ___________ shares
outstanding, as adjusted(2).................. --------- ------
Additional paid-in capital................... --------- ------
Total................................... $ $
========= ======
- ----------
(1) Includes ________ Common Shares to be purchased by RAI at the initial
public offering price, less underwriting discounts and commissions, and
is stated after deducting Offering and organizational expenses,
estimated to be $________________, payable by the Company.
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<PAGE>
(2) Assumes no exercise of the Underwriters' over-allotment option to
purchase up to an additional _______________ Common Shares, and
excludes ______ shares issuable pursuant to warrants granted to the
Representative and ____________ shares issuable to executive officers
of the Company pursuant to employee options.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
The Company has not yet commenced operations and will be dependent upon
the proceeds of the Offering of the Common Shares to carry on its proposed
activities. See "Use of Proceeds." The Company intends to use the net proceeds
of the Offering, together with the proceeds of borrowed funds, if any, obtained
by the Company, to provide Financings and acquire Property Interests, including
the Initial Investments. See "Investment Objectives and Policies."
After commencement of operations, the Company's principal sources of
funds will be interest paid on Financings, rents received from Property
Interests (or, where the Company owns an equity interest in a property,
distributions in respect of rents), the proceeds of any sales of loans or
properties, proceeds from any participations and borrowings (if any; see
"Investment Objectives and Policies - Leverage"). Since the Company will elect
to qualify as a REIT under the Code, it will be required to distribute annually
at least 95% of its taxable income, subject to certain adjustments, and,
accordingly, the Company anticipates that substantially all of its operating
cash flow will be utilized to make distributions to shareholders. Cash received
from sales of assets will be reinvested in further Financings or Property
Interests.
The Company intends to establish working capital reserves, to a maximum
of 3% of the Offering proceeds, which, together with funds derived from
operations representing a return of principal, is anticipated to be sufficient
to satisfy liquidity requirements. Liquidity may be adversely affected by costs
of operating the Company and administering its portfolio investments. To the
extent that working capital reserves and cash from operations are insufficient
to satisfy the Company's cash requirements, the Company will be required to
obtain financing from third parties or raise additional capital. There can be no
assurance that any such financing or capital will be available when needed.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
General
The Declaration of Trust provides that the Company may issue up to
200,000,000 Common Shares, $.01 par value per share, and 25,000,000 preferred
shares ("Preferred Shares"), $.01 par value per share of beneficial interest.
Upon completion of this Offering, ______ Common Shares will be issued and
outstanding and no Preferred Shares will be issued and outstanding.
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Common Shares
Each outstanding Common Share will entitle the holder to one vote on
all matters presented to shareholders for a vote, including the election of
trustees, and, except as otherwise required by law or as provided in any
resolution adopted by the Board of Trustees with respect to any other class or
series of shares establishing the designation, powers, preferences and relative,
participating, optional or other special rights and powers of such series, the
holders of such shares will possess the exclusive voting power, subject to the
provisions of the Company's Declaration of Trust regarding the ownership of
Common Shares in excess of the Ownership Limitation or as otherwise may be
permitted by the Board of Trustees, as described below. Holders of Common Shares
will have no conversion, exchange, sinking fund, redemption or appraisal rights
and have no preemptive rights to subscribe for any securities of the Company or
cumulative voting rights in the election of trustees. All Common Shares to be
issued and outstanding following the completion of the Offering will be duly
authorized, fully paid and non-assessable. Subject to the preferential rights of
any other shares or series of shares and to the provisions of the Declaration of
Trust regarding ownership of Common Shares in excess of the Ownership Limitation
or as otherwise may be permitted by the Board of Trustees, as described below,
distributions may be paid to the holders of Common Shares if and when authorized
and declared by the Board of Trustees out of funds legally available therefor.
The Company intends to make quarterly distributions, beginning with
distributions for the first full quarter following the consummation of the
Offering. See "Distribution Policy."
Under Maryland law, shareholders of a business trust are generally not
liable for the Company's debts or obligations. If the Company is liquidated,
subject to the right of any holders of Preferred Shares to receive preferential
distributions, each outstanding Common Share will be entitled to participate pro
rata in the assets remaining after payment of, or adequate provision for, all
known debts and liabilities of the Company.
Subject to the provisions of the Declaration of Trust regarding the
ownership of Common Shares in excess of the Ownership Limitation or as otherwise
permitted by the Board of Trustees, as described below, all Common Shares will
have equal distribution, liquidation and voting rights, and will have no
preference or exchange rights.
Under the Declaration of Trust, the Company cannot dissolve, amend its
trust agreement (except as described in this paragraph), merge, consolidate or
sell, lease, exchange or otherwise transfer all or substantially all of its
assets, unless approved by the affirmative vote of shareholders holding at least
two-thirds of the shares entitled to vote on the matter. As permitted under
Maryland law, the Company's Declaration of Trust permits the Board of Trustees,
without any action by the shareholders of the Company, to (i) amend the
Declaration of Trust by a two-thirds vote to allow the Company to qualify, or
continue its qualification, as a REIT under the Code or Maryland law and (ii)
amend the Declaration of Trust by a majority vote to increase or decrease the
aggregate number of shares of beneficial interest or the number of shares of any
class of shares of beneficial interest that the Company has the authority to
issue.
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The Declaration of Trust authorizes the Board of Trustees to reclassify
any unissued Common Shares into other classes or series of classes of shares and
to establish the number of shares in each class or series and to set the
preferences, conversion and other rights, voting powers, restrictions,
limitations and restrictions on ownership, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
such class or series.
Preferred Shares
Preferred Shares may be issued from time to time, in one or more
series, as authorized by the Board of Trustees. No Preferred Shares are
currently issued or outstanding. Prior to the issuance of shares of each series,
the Board of Trustees is required to fix for each series the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
distributions, qualifications and terms or conditions of redemption, as
permitted by Maryland law. Because the Board of Trustees has the power to
establish the preferences, powers and rights of each series of Preferred Shares,
it may afford the holders of any series of Preferred Shares preferences, powers
and rights, voting or otherwise, senior to the rights of holders of Common
Shares. Apart from the effect of the Ownership Limitation (see "Description of
Shares of Beneficial Interest - Restrictions on Ownership and Transfer"), the
issuance of Preferred Shares could have the effect of delaying or preventing a
change of control of the Company that might involve a premium price for holders
of Common Shares or that they otherwise may deem to be desirable. The Board of
Trustees has no present plans to issue any Preferred Shares.
Restrictions on Ownership and Transfer
For the Company to qualify as a REIT under the Code, no more than 50%
in value of its outstanding shares of beneficial interest may be owned, actually
or constructively, by five or fewer individuals (as defined in the Code to
include certain entities) at any time during the last half of a taxable year
(other than the first year for which an election to be treated as a REIT has
been made). In addition, if the Company, or an owner of 10% or more of the
Company's shares, actually or constructively owns 10% or more of a tenant of the
Company (or a tenant of any partnership in which the Company is a partner), the
rent received by the Company (either directly or through any such partnership)
from such tenant will not be qualifying income for purposes of the REIT gross
income tests of the Code. The Company's shares must also be beneficially owned
by 100 or more persons during at least 335 days of a taxable year of twelve
months or during a proportionate part of a shorter taxable year (other than the
first year for which an election to be treated as a REIT has been made).
Because the Company believes it to be essential to qualify as a REIT,
the Declaration of Trust, subject to certain exceptions described below,
contains restrictions on the ownership and transfer of Common and Preferred
Shares which are intended to assist the Company in complying with these
requirements. The Ownership Limitation set forth in the Company's Declaration of
Trust provides that, subject to certain specified exceptions, no person or
entity may own, or be deemed to own by virtue of the applicable constructive
ownership provisions of the Code, (i) more than 8.5% of the number of
outstanding Common Shares, except for RAI which may own
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up to 15% of the number of outstanding Common Shares (and which will own 9.8% of
the outstanding Common Shares at the conclusion of the Offering, assuming the
Underwriters do not exercise their over-allotment option), or (ii) more than
9.8% of the number of outstanding Preferred Shares of any class or series (the
"Ownership Limitation"). The constructive ownership rules are complex, and may
cause shares owned actually or constructively by a group of related individuals
and/or entities to be owned constructively by one individual or entity. As a
result, the acquisition or ownership of less than 8.5% of the Common Shares or
9.8% of the Preferred Shares (or the acquisition of an interest in an entity
that owns, actually or constructively, Common or Preferred Shares) by an
individual or entity, could nevertheless cause that individual or entity, or
another individual or entity, to own constructively in excess of 8.5% of the
outstanding Common Shares or 9.8% of the Preferred Shares, and thus violate the
Ownership Limitation, or such other limit as provided in the Company's
Declaration of Trust or as otherwise established by the Board of Trustees. The
Board of Trustees may, but in no event will be required to, waive the Ownership
Limitation with respect to a particular shareholder if it determines that such
ownership will not jeopardize the Company's status as a REIT and the Board of
Trustees otherwise decides such action would be in the best interest of the
Company. As a condition of such waiver, the Board of Trustees may require an
opinion of counsel satisfactory to it or undertakings or representations from
the applicant with respect to preserving the REIT status of the Company.
The Company's Declaration of Trust further prohibits (i) any person
from actually or constructively owning Common or Preferred Shares that would
cause in the Company to be "closely held" under Section 856(h) of the Code, to
own constructively 10% or more of the ownership interests in a tenant of the
Company's real property (within the meaning of Code section 856(d)(2)(B)), or
otherwise cause the Company to fail to qualify as a REIT, and (ii) any person
from transferring Common or Preferred Shares if the transfer would cause the
Company's shares to be owned by fewer than 100 persons. Any person who acquires
or attempts or intends to acquire actual or constructive ownership of the
Company's shares that will or may violate any of the foregoing restrictions on
transferability and ownership is required to give notice immediately to the
Company and provide the Company with such other information as the Company may
request in order to determine the effect of the transfer on the Company's status
as a REIT. The foregoing restrictions on transferability and ownership will not
apply if the Board of Trustees determines that it is no longer in the best
interest of the Company to attempt to qualify, or to continue to qualify, as a
REIT. Except as otherwise described above, the Ownership Limitation can only be
changed by an amendment to the Declaration of Trust requiring the affirmative
vote of two-thirds of the outstanding shares.
Pursuant to the Declaration of Trust, if any purported transfer of
Common or Preferred Shares or any other event would otherwise result in any
person violating the Ownership Limitation or such other limit as provided in the
Declaration of Trust, or as otherwise permitted by the Board of Trustees, the
transfer will be void and of no force or effect with respect to the purported
transferee (the "Prohibited Transferee") as to that number of shares in excess
of the Ownership Limitation or such other limit, and the Prohibited Transferee
will acquire no right or interest (or, in the case of any event other than a
purported transfer, the person or entity holding
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record title to any such excess shares (the "Prohibited Owner") shall cease to
own any right or interest) in the excess shares. Excess shares will be
transferred automatically, by operation of law, to a trust, the beneficiary of
which will be a qualified charitable organization selected by the Company (the
"Beneficiary"). The automatic transfer will be deemed to be effective as of the
close of business on the business day prior to the date of the violative
transfer. The trustee of the trust (who shall be designated by the Company and
be unaffiliated with the Company and any Prohibited Transferee or Prohibited
Owner) will be required to sell the excess shares to a person who could own the
shares without violating the Ownership Limitation, or such other limit as
provided in the Company's Declaration of Trust or as otherwise permitted by the
Board of Trustees, and distribute to the Prohibited Owner the sales proceeds
received by the trust for such excess shares. Where excess shares result from an
event other than a transfer, or from a transfer for no consideration (such as a
gift), the trustee will be required to sell the excess shares to a qualified
person and distribute to the Prohibited Owner an amount equal to the lesser of
the Market Price (as defined in the Company's Declaration of Trust) of the
excess shares as of the date of such event or the sales proceeds received by the
trust for the excess shares. In either case, any proceeds in excess of the
amount distributable to the Prohibited Transferee or Prohibited Owner, as
applicable, will be distributed to the Beneficiary. Prior to sale, the trustee
will be entitled to receive, in trust for the Beneficiary, all dividends and
other distributions paid by the Company with respect to the excess shares, and
also will be entitled to exercise all voting rights with respect to the excess
shares. Subject to Maryland law, effective as of the date that the shares have
been transferred to the trust, the trustee has the right (i) to rescind any vote
cast by a Prohibited Transferee or Prohibited Owner prior to the discovery by
the Company that such shares have been transferred to the trust and (ii)
thereafter to vote the shares at its discretion. However, if the Company has
already taken irreversible corporate action, then the trustee shall not have the
authority to rescind and revote such vote. Any dividend or other distribution
paid to the Prohibited Transferee or Prohibited Owner (prior to the discovery by
the Company that such shares had been automatically transferred to a trust as
described above) will be required to be repaid to the trustee, upon demand, for
distribution to the Beneficiary. In the event that transfer to the trust as
described above is not automatically effective (for any reason) to prevent
violation of the Ownership Limitation or such other limit as provided in the
Company's Declaration of Trust or as otherwise permitted by the Board of
Trustees, then the Declaration of Trust provides that the transfer of the excess
shares will be void.
In addition, Common Shares held in the trust shall be deemed to have
been offered for sale to the Company, or its designee, at a price per share
equal to the lesser of (i) the price per share in the transaction that resulted
in such transfer to the trust (or, in the case of a gift, the Market Price at
the time of gift) and (ii) the Market Price on the date the Company, or its
designee, accepts such offer. The Company may accept the offer until the trustee
has sold the shares. Upon that sale, the interest of the Beneficiary in the
shares terminates and the trustee must distribute the net sale proceeds to the
Prohibited Transferee or Prohibited Owner.
If any purported transfer of Common Shares would cause the Company to
be beneficially owned by fewer than 100 persons, the transfer will be null and
void in its entirety and the intended transferee will acquire no rights to the
Common Shares.
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All certificates evidencing Common Shares will bear a legend referring
to the restrictions described above. The foregoing ownership limitations could
delay, defer or prevent a transaction or a change in control of the Company that
might involve a premium price for the Common Shares or otherwise be desired by
shareholders.
Under the Declaration of Trust, every owner of a specified percentage
(or more) of the outstanding Common Shares must file a completed questionnaire
with the Company containing information regarding his ownership of such shares,
as set forth in the Treasury Regulations. Under current Treasury Regulations,
the percentage will be set between 0.5% and 5.0%, depending upon the number of
record holders of the Common Shares. In addition, each shareholder shall, upon
demand, be required to disclose to the Company in writing such information as
the Company may request in order to determine the effect, if any, of such
shareholder's actual and constructive ownership of Common Shares on the
Company's status as a REIT and to ensure compliance with the Ownership
Limitation, or such other limit as provided in the Company's Declaration of
Trust or as otherwise permitted by the Board of Trustees.
Dividend Reinvestment Plan
The Company intends to implement a dividend reinvestment plan whereby
shareholders may automatically reinvest their dividends in the Common Shares.
Details about any such plan will be sent to the Company's shareholders following
adoption thereof by the Board of Trustees.
Reports to Shareholders
The Company will furnish its shareholders with annual reports
containing audited financial statements certified by independent public
accountants and distribute quarterly reports containing unaudited financial
information for each of the three remaining quarters of the year.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Shares will be
____________________.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S DECLARATION OF TRUST AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law
relating to REITs and of the Company's Declaration of Trust and Bylaws. The
summary does not purport to be complete and is subject to and qualified in its
entirety by reference to Maryland law and to the Declaration of Trust and Bylaws
of the Company.
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Board of Trustees
The Declaration of Trust provides that the number of trustees of the
Company may be established by the Board of Trustees but may not be fewer than
three nor more than nine. There are currently six trustees. The trustees may
increase or decrease the number of trustees by a majority vote of the Board of
Trustees, provided that (i) the number of trustees may be increased above nine
or decreased below three only by a vote of at least 75% of the trustees then in
office, (ii) the number of trustees shall never be less than the number required
by Maryland law and (iii) the tenure of office of a trustee shall not be
affected by any decrease in the number of trustees. Any vacancy will be filled,
including any vacancy created by an increase in the number of trustees, at any
regular meeting or at any special meeting called for that purpose, by a majority
of the remaining trustees, provided that Independent Trustees shall nominate
replacements for vacancies in Independent Trustee positions.
The Company's Declaration of Trust provides that a trustee may be
removed with or without cause by the affirmative vote of at least two-thirds of
the votes entitled to be cast in the election of trustees. This provision, when
coupled with the provision in the Bylaws authorizing the Board of Trustees to
fill vacant trusteeships, precludes the Company's shareholders, as a practical
matter, from removing incumbent trustees and filling the vacancies created by
such removal with their own nominees.
Business Combinations
Under the Maryland General Corporation Law ("MGCL"), as applicable to
REITs, certain "business combinations" (including a merger, consolidation, share
exchange, or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between the Company and any person who
beneficially owns, directly or indirectly, 10% or more of the voting power of
the Company's shares, or an affiliate of the Company who, at any time within the
previous two years was the beneficial owner of 10% or more of the voting power
of the Company's then outstanding shares (an "Interested Shareholder") or an
affiliate of an Interested Shareholder are prohibited for five years after the
most recent date on which the Interested Shareholder became an Interested
Shareholder. Thereafter, a proposed business combination must be recommended by
the Board of Trustees and approved by the affirmative vote of at least (i) 80%
of the votes entitled to be cast by holders of outstanding voting shares and
(ii) two-thirds of the votes entitled to be cast by holders of outstanding
voting shares excluding shares held by the Interested Shareholder unless, among
other conditions, the Company's shareholders receive a minimum price (as defined
in the MGCL) for their shares and the consideration is received in cash or in
the same form as previously paid by the Interested Shareholder for its shares.
These provisions of the MGCL do not apply, however, to business combinations
that are approved or exempted by the Board of Trustees prior to the time that
the Interested Shareholder becomes an Interested Shareholder. It is anticipated
that the Company's Board of Trustees will resolve to "opt out" of the business
combination provisions of the MGCL.
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Control Share Acquisitions
The MGCL, as applicable to REITs, provides that control shares (as
defined below) of the Company acquired in a control share acquisition (as
defined below) have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares
owned by the acquiror or by officers or trustees who are employees of the
Company. "Control Shares" are voting shares which, if aggregated with all other
such shares previously acquired by the acquiror, or in respect of which the
acquiror is able to exercise or direct the exercise of voting power (except
solely by revocable proxy), would entitle the acquiror to exercise voting power
in electing trustees within one of the following ranges of voting power: (i)
one-fifth or more but less than one-third; (ii) one-third or more but less than
a majority; or (iii) a majority of all voting power. Control Shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained shareholder approval. A "Control Share Acquisition"
means the acquisition of Control Shares, subject to certain exceptions.
A person who has made or proposes to make a Control Share Acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the Board of Trustees to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the Company may itself
present the question at any shareholders' meeting.
If voting rights are not approved at the shareholders' meeting or if
the acquiring person does not deliver an acquiring person statement as required
by the MGCL, then, subject to certain conditions and limitations, the Company
may redeem any or all of the Control Shares (except those for which voting
rights have previously been approved) for fair value determined, without regard
to the absence of voting rights for the Control Shares, as of the date of the
last Control Share Acquisition by the acquiror or of any meeting of shareholders
at which the voting rights of such shares are considered and not approved. If
voting rights for Control Shares are approved at a shareholders' meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other shareholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the Control Share Acquisition.
The Control Share Acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the Company is a party to the
transaction or to acquisitions approved or exempted by the Declaration of Trust
or Bylaws. Under the MGCL the Company may "opt out" of the control share
provisions. The Bylaws of the Company contain a provision exempting from the
Control Share Acquisition statute any and all acquisitions by any person of the
Company's Common or Preferred Shares. There can be no assurance that such
provision will not be amended or eliminated at any time in the future.
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Amendment of the Declaration of Trust and Bylaws
The Company's Declaration of Trust may not be amended without the
affirmative vote of at least a majority of the shares entitled to vote on the
matter except that the sections of the Declaration of Trust relating to the
trustees, the Ownership Limitation, amendments to the Declaration of Trust and
the duration and termination of the Company may not be amended without the
affirmative vote of two-thirds of the shares entitled to vote on the matter. In
addition, the Declaration of Trust may be amended by a two-thirds vote of the
Board of Trustees, without any action by the shareholders of the Company, to
allow the Company to qualify, or continue its qualification, as a REIT under the
Code or Maryland law and, by a majority vote of the Board of Trustees, to
increase or decrease the aggregate number of shares of beneficial interest or
the number of shares of any class of shares of beneficial interest that the
Company has the authority to issue. See "Description of Shares of Beneficial
Interest - Common Shares." The Company's Bylaws may be amended or altered only
by the Board of Trustees.
Meetings of Shareholders
The Company's Declaration of Trust provides for annual meetings of
shareholders, commencing in 1998, to elect the Board of Trustees and transact
such other business as may properly be brought before the meeting. Special
meetings of shareholders may be called by the Chairman, the Chief Executive
Officer, the President or the Board of Trustees and shall be called at the
request in writing of the holders of 50% or more of the outstanding shares
entitled to vote.
Advance Notice of Trustee's Nominations and New Business
The Company's Declaration of Trust provides that (i) with respect to
any meeting of shareholders, the nomination of persons for election to the Board
of Trustees and the proposal of business to be considered by shareholders may be
made only (a) by the Board of Trustees or (b) by a shareholder who is entitled
to vote at the meeting and has complied with the advance notice procedures set
forth in the Bylaws, and (ii) with respect to a special meeting of shareholders,
only the business specified in the Company's notice of meeting may be brought
before the meeting.
Dissolution of the Company
Pursuant to the Company's Declaration of Trust, and subject to any
restrictions imposed by the terms of any class or series of shares of beneficial
interest of the Company then outstanding, the shareholders of the Company may
dissolve the Company by the affirmative vote of the holders of two-thirds of all
of the votes entitled to be cast on the matter.
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Indemnification; Limitation of Trustees' and Officers' Liability
Maryland law permits a Maryland REIT to include in its declaration of
trust, and the Company's Declaration of Trust includes, a provision limiting the
liability of its trustees and officers to the trust and its shareholders for
money damages except for liability resulting from (a) actual receipt of an
improper benefit or profit in money, property or services or (b) a final
judgment based upon a finding of active and deliberate dishonesty by the Trustee
that was material to the cause of action adjudicated.
The Declaration of Trust authorizes the Company, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former shareholder, trustee or officer or (b) any individual
who, while a trustee of the Company and at the request of the Company, serves or
has served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a trustee, director, officer, partner or
otherwise, from and against any claim or liability to which such person may
become subject or which such person may incur by reason thereof. The Bylaws
require the Company to indemnify each trustee or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in the foregoing capacities.
Maryland law permits a Maryland REIT to indemnify and advance expenses
to its trustees officers, employees and agents to the same extent as permitted
by the MGCL for directors and officers of Maryland corporations. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
accordance with the MGCL, the Bylaws of the Company require it, as a condition
to advancing expenses, to obtain (i) a written affirmation by the trustee or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification by the Company as authorized by the Bylaws and
(ii) a written statement by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the standard
of conduct was not met.
Indemnification Agreements
The Company will enter into indemnification agreements with each of its
officers and trustees. The indemnification agreements will require, among other
matters, that the Company indemnify its officers and trustees to the fullest
extent permitted by law and advance to the
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officers and trustees all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. Under the
agreements, the Company must also indemnify and advance all expenses incurred by
officers and trustees seeking to enforce their rights under the indemnification
agreements and may cover officers and trustees under any trustees' and officers'
liability insurance. Although the form of indemnification agreement offers
substantially the same scope of coverage afforded by the Declaration of Trust,
Bylaws and applicable Maryland law, it provides greater assurance to trustees
and officers that indemnification will be available, because, as a contract, it
cannot be modified unilaterally in the future by the Board of Trustees or the
shareholders to eliminate the rights it provides.
Possible Anti-takeover Effect of Certain Provisions of Maryland Law and of the
Declaration of Trust and Bylaws
The provisions of the Declaration of Trust regarding the removal of
Trustees and the restrictions on the transfer of shares, and the advance notice
provisions of the Bylaws, could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company that might
involve a premium price for holders of Common Shares or that they otherwise may
believe to be desirable. Also, if the resolution of the Board of Trustees opting
out of the business combination statute or the provisions of the Bylaws electing
not to be governed by the control share acquisition statute are rescinded, such
statutes could have a similar effect.
Maryland Asset Requirements
To maintain its qualification as a Maryland real estate investment
trust, Maryland law requires at least 75% of the value of the Company's assets
to be held, directly or through other entities, in real estate assets, mortgages
or mortgage related securities, government securities, cash and cash equivalent
items, including high-grade short term securities and receivables. Maryland law
also prohibits the Company from using or applying land for farming,
agricultural, horticultural or similar purposes.
COMMON SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
(or reserved for issuance upon exercise of options) _____________ Common Shares.
The Common Shares issued in the Offering will be freely tradeable by persons
other than "affiliates" of the Company without restriction under the Securities
Act of 1933, as amended (the "Securities Act"), subject to the Ownership
Limitation. See "Description of Shares of Beneficial Interest - Restrictions on
Transfer."
Common Shares issued to holders of units of limited partnership
interest in the Operating Partnership ("Units") upon exercise of the Redemption
Rights (see "Operating Partnership Agreement - Redemption Rights") will be
"restricted" securities under the meaning of Rule 144 promulgated under the
Securities Act ("Rule 144") and may not be sold in the absence of
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registration under the Securities Act unless an exemption from registration is
available, including exemptions contained in Rule 144. See "Operating
Partnership - Redemption Rights."
In general, under Rule 144 as currently in effect, if one year has
elapsed since the later of the date of acquisition of restricted shares from the
Company or any "affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding Common Shares or the average weekly
trading volume of the Common Shares during the four calendar weeks preceding the
date on which notice of the sale is filed with the Commission. Sales under Rule
144 also are subject to certain manner of sale provisions, notice requirements
and the availability of current public information about the Company. If two
years have elapsed since the date of acquisition of restricted shares from the
Company or from any affiliate of the Company, and the acquiror or subsequent
holder thereof is deemed not to have been an affiliate of the Company at any
time during the three months preceding a sale, such person would be entitled to
sell such shares in the public market under Rule 144(k) without regard to the
volume limitations, manner of sale provisions, public information requirements
or notice requirements.
No prediction can be made as to the effect, if any, that future sales
of Common Shares, or the availability of Common Shares for future sale, will
have on the market price prevailing from time to time. Sales of substantial
amounts of Common Shares, or the perception that such sales could occur, may
affect adversely prevailing market prices of the Common Shares.
OPERATING PARTNERSHIP AGREEMENT
The Operating Partnership has been organized as a Delaware limited
partnership, the general partner of which is RAIT General, Inc., and the initial
limited partner of which is RAIT Limited, Inc., each of which is a wholly-owned
subsidiary of RAIT. Because RAIT indirectly owns 100% of the partnership
interests in the Operating Partnership, the Operating Partnership will be
disregarded as a separate entity from RAIT for federal income tax purposes until
a third party is admitted as a partner of the Operating Partnership. The Company
organized the Operating Partnership in order to provide future sellers of assets
with the opportunity to transfer those assets to the Company in a tax-deferred
exchange. The Operating Partnership Agreement currently does not contain many of
the provisions described below. Instead, the following summary of the Operating
Partnership Agreement, and the descriptions of certain provisions thereof set
forth elsewhere in this Prospectus, describe certain provisions that likely will
appear in the Operating Partnership Agreement when third-party sellers of assets
who wish to achieve tax deferral are admitted as partners of the Operating
Partnership. The provisions described in this summary, however, may not appear
in the Operating Partnership Agreement that ultimately is executed.
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General
Pursuant to the Operating Partnership Agreement, the General Partner,
as the sole general partner of the Operating Partnership, will have full,
exclusive and complete responsibility and discretion in the management and
control of the Operating Partnership. The limited partners of the operating
partnership (the "Limited Partners") will have no authority in their capacity as
Limited Partners to transact business for, or participate in the management
activities or decisions of, the Operating Partnership except as required by
applicable law. Consequently, RAIT, as a result of its ownership of the General
Partner, will control the assets and business of the Operating Partnership.
However, it is anticipated that any amendment to the Operating Partnership
Agreement that would (i) convert a Limited Partner's interest in the Operating
Partnership into a General Partner interest; (ii) increase the liability of a
Limited Partner under the Operating Partnership Agreement; (iii) alter a
Partner's rights to distributions; (iv) alter or modify any aspect of a
Partners' rights with respect to redemption of his interest; or (v) cause the
early termination of the Operating Partnership (other than as set forth in the
Operating Partnership Agreement) will require the consent of the Limited
Partners affected thereby.
General Partner Not to Withdraw
It is anticipated that the General Partner will not be able to withdraw
voluntarily from the Operating Partnership or transfer or assign its interest in
the Operating Partnership unless (i) the transaction in which such withdrawal or
transfer occurs results in the liquidation of the Operating Partnership or (ii)
the Limited Partners, by majority vote, elect to continue the Operating
Partnership and to appoint a successor General Partner.
Capital Contribution
RAIT will contribute, through the General Partner and the Initial
Limited Partner, all of the net proceeds of the Offering to the Operating
Partnership. The General Partner will hold a 1% general partnership interest in
the Operating Partnership, and the Initial Limited Partner will hold a 99%
limited partnership interest in the Operating Partnership.
After the completion of the Offering, RAIT will have issued a total of
_______________ Common Shares and will own, through the General Partner and the
Initial Limited Partner, 100% of the Units in the Operating Partnership.
Although the Operating Partnership will receive the net proceeds of the
Offering, the Initial Limited Partner and the General Partner will be deemed to
have made a capital contribution to the Operating Partnership in the aggregate
amount of the gross proceeds of the Offering and the Operating Partnership will
be deemed simultaneously to have paid the underwriter's discount and other
expenses paid or incurred in connection with the Offering.
It is anticipated that the Operating Partnership Agreement will provide
that if the Operating Partnership requires additional funds at any time or from
time to time in excess of funds available to the Operating Partnership from
borrowing or capital contributions, the General
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Partner may borrow such funds from a financial institution or other lender and
lend such funds to the Operating Partnership on the same terms and conditions as
are applicable to the General Partner's borrowing of such funds. Moreover, it is
anticipated that the General Partner will be authorized to cause the Operating
Partnership to issue Units for less than fair market value if the Company has
concluded in good faith that such issuance is in the best interest of the
Company and the Operating Partnership. Under the Operating Partnership
Agreement, each of the General Partner and the Initial Limited Partner is
obligated to contribute the net proceeds of any future share offering by RAIT as
additional capital to the Operating Partnership in exchange for additional
Units. Upon such contribution, the General Partner's and the Initial Limited
Partner's percentage interests in the Operating Partnership would be increased
on a proportionate basis based upon the amount of such additional capital
contributions. The percentage interest of the Limited Partners (other than the
Initial Limited Partner) would be decreased on a proportionate basis in the
event of additional capital contributions by the General Partner and the Initial
Limited Partner. In addition, if the General Partner and the Initial Limited
Partner were to contribute additional capital to the Operating Partnership, the
General Partner would revalue the property of the Operating Partnership to its
fair market value (as determined by the General Partner) and the capital
accounts of the partners would be adjusted to reflect the manner in which the
unrealized gain or loss inherent in such property (that has not been reflected
in the capital accounts previously) would be allocated among the partners under
the terms of the Operating Partnership Agreement as if there were a taxable
disposition of such property for such fair market value on the date of the
revaluation.
Redemption Rights
It is anticipated that pursuant to the Operating Partnership Agreement,
the Limited Partners (other than the Initial Limited Partner) will have the
right (the "Redemption Rights") to cause the Operating Partnership to redeem
their Units for cash or, at the election of the General Partner, Common Shares
on a one-for-one basis. The redemption price will be paid in cash in the
discretion of the Company or in the event that the issuance of Common Shares to
the redeeming Limited Partner would (i) result in any person owning, directly or
indirectly, Common Shares in excess of the Ownership Limitation, (ii) result in
capital shares of the Company being owned by fewer than 100 persons (determined
without reference to any rules of attribution), (iii) result in the Company
being "closely held" within the meaning of section 856(h) of the Code, (iv)
cause the Company to own, actually or constructively, 10% or more of the
ownership interests in a tenant of the Company's or the Operating Partnership's
real property, within the meaning of section 856(d)(2)(B) of the Code, or (v)
cause the acquisition of Common Shares by such redeeming Limited Partner to be
"integrated" with any other distribution of Common Shares for purposes of
complying with the Securities Act.
Operations
The Operating Partnership Agreement requires that the Operating
Partnership be operated in a manner that will enable RAIT to satisfy the
requirements for being classified as a REIT for federal tax purposes, to avoid
any federal income or excise tax liability imposed by the Code, and
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to ensure that the Operating Partnership will be not classified as a "publicly
traded partnership" for purposes of section 7704 of the Code.
In addition to the administrative and operating costs and expenses
incurred by the Operating Partnership, it is anticipated that the Operating
Partnership will pay all general, operating and administrative expenses of the
Company, the General Partner and the Initial Limited Partner (collectively, the
"Company Expenses") and the Company Expenses will be treated as expenses of the
Operating Partnership. The Company Expenses generally will include (i) all
expenses relating to the organization and continuation of the Company, the
General Partner and the Initial Limited Partner, (ii) all expenses relating to
the public offering and registration of securities by the Company, (iii) all
expenses associated with the preparation and filing of any periodic reports by
the Company under federal, state or local laws or regulations, (iv) all expenses
associated with compliance by the Company, the General Partner and the Initial
Limited Partner with laws, rules and regulations promulgated by any regulatory
body and (v) all other general, operating and administrative costs of the
Company, the General Partner and the Initial Limited Partner incurred in the
ordinary course of their business on behalf of the Operating Partnership.
Distributions
It is anticipated that the Operating Partnership Agreement will provide
that the Operating Partnership will distribute cash from operations (including
net sale or refinancing proceeds, but excluding net proceeds from the sale of
the Operating Partnership's property in connection with the liquidation of the
Operating Partnership) on a quarterly (or, at the election of the General
Partner, more frequent) basis, in amounts determined by the General Partner in
its sole discretion, to the partners in accordance with their respective
percentage interests in the Operating Partnership. Upon liquidation of the
Operating Partnership, after payment of, or adequate provision for, debts and
obligations of the Operating Partnership, including partner loans, it is
anticipated that any remaining assets of the Operating Partnership will be
distributed to all partners with positive capital accounts in accordance with
their respective positive capital account balances. If the General Partner has a
negative balance in its capital account following a liquidation of the Operating
Partnership, it will be obligated to contribute cash to the Operating
Partnership equal to the negative balance in its capital account.
Allocations
It is anticipated that income, gain and loss of the Operating
Partnership for each fiscal year generally will be allocated among the partners
in accordance with their respective interests in the Operating Partnership,
subject to compliance with the provisions of Code sections 702 and 704 and
Treasury regulations ("Treasury Regulations") promulgated thereunder.
Term
The Operating Partnership shall continue until December 31, 2050, or
until sooner terminated as provided in the Operating Partnership Agreement or by
operation of law.
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Tax Matters
Pursuant to the Operating Partnership Agreement, the General Partner is
the tax matters partner of the Operating Partnership and, as such, has authority
to handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax
considerations that may be relevant to a prospective holder of Common Shares.
Ledgewood Law Firm, P.C. ("Counsel") has acted as counsel to the Company, has
reviewed this summary and has rendered an opinion that the descriptions of the
law and the legal conclusions contained herein are correct in all material
respects, and that the discussions hereunder fairly summarize the federal income
tax considerations that are likely to be material to the Company and a holder of
the Common Shares. This discussion does not purport to address all aspects of
taxation that may be relevant to particular shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers
and, except to the extent discussed below, foreign corporations and persons who
are not citizens or residents of the United States) subject to special treatment
under the federal income tax laws.
The statements in this discussion and the opinion of Counsel are based
on current provisions of the Code, existing, temporary and currently proposed
Treasury Regulations promulgated under the Code, the legislative history of the
Code, existing administrative rulings and practices of the Services, and
judicial decisions. No assurance can be given that future legislative, judicial
or administrative actions or decisions, which may be retroactive in effect, will
not affect the accuracy of any statements in this Prospectus with respect to the
transactions entered into or contemplated prior to the effective date of such
changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND SALE OF THE COMMON SHARES AND OF RAIT'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
Taxation of RAIT
RAIT plans to make an election to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ending December 31,
1997. RAIT will be organized and has represented that it will operate in such a
manner as to qualify for taxation as a REIT under the Code, but no assurance can
be given that RAIT actually will operate in a manner so as to qualify or remain
qualified as a REIT.
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The sections of the Code and the corresponding Treasury Regulations
relating to qualification and operation as a REIT are highly technical and
complex. The following discussion sets forth the material aspects of the Code
sections that govern the federal income tax treatment of a REIT and its
shareholders. The discussion is qualified in its entirety by the applicable Code
provisions, Treasury Regulations promulgated thereunder, and administrative and
judicial interpretations thereof, all of which are subject to change
prospectively or retroactively.
Counsel has acted as counsel to RAIT in connection with the Offering
and RAIT's election to be taxed as a REIT. In the opinion of Counsel, assuming
that the elections and other procedural steps described in this discussion are
completed by RAIT in a timely fashion, RAIT will qualify to be taxed as a REIT
under the Code, and RAIT's organization and proposed method of operation will
enable it to continue to meet the requirements for qualification and taxation as
a REIT under the Code. Investors should be aware, however, that opinions of
counsel are not binding upon the Service or any court. It must be emphasized
that Counsel's opinion is based on various assumptions and is conditioned upon
certain representations made by the Company as to factual matters, including
representations regarding its business, assets and future operations, as set
forth below in this discussion. Moreover, such qualification and taxation as a
REIT depends upon RAIT's ability to meet on a continuing basis, through actual
annual operating results, distribution levels, and diversity of share ownership,
the various qualification tests imposed under the Code discussed below, the
results of which will not be reviewed by Counsel. Accordingly, no assurance can
be given that the actual results of RAIT's operations for any particular taxable
year will satisfy such requirements. For a discussion of the tax consequences of
failure to qualify as a REIT, see "Federal Income Tax Considerations - Failure
to Qualify."
If RAIT qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder levels)
that generally results from an investment in a regular corporation. However,
RAIT will be subject to federal income tax in the following circumstances.
First, RAIT will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under certain
circumstances, RAIT may be subject to the "alternative minimum tax" on its
undistributed items of tax preference, if any. Third, if RAIT has (i) net income
from the sale or other disposition of "foreclosure property" (defined generally
as property acquired by RAIT through foreclosure or otherwise after a default on
a loan secured by the property or a lease of the property; see "Federal Income
Tax Considerations - Requirements for Qualification: Income Tests") that is held
primarily for sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if RAIT has net income from
prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property or property that has
been involuntarily converted) held primarily for sale to customers in the
ordinary course of business), such income will be subject to a 100% tax. Fifth,
if RAIT should fail to satisfy the 75% gross income test or the 95% gross income
test (as discussed below), and nonetheless has maintained its qualification as a
REIT because certain other requirements have been met, it will be subject to a
100% tax on an amount equal to (i) the gross
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income attributable to the greater of the amount by which RAIT fails the 75% or
95% gross income test, multiplied by (ii) a fraction intended to reflect RAIT's
profitability. Sixth, if RAIT should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, RAIT would be subject to a 4%
excise tax on the excess of such required distribution over the amounts actually
distributed. Seventh, if RAIT acquires any asset from a C corporation (i.e., a
corporation generally subject to full corporate-level tax) in a merger or other
transaction in which the basis of the asset in RAIT's hands is determined by
reference to the basis of the asset (or any other asset) in the hands of the C
corporation and RAIT recognizes gain on the disposition of such asset during the
10-year period beginning on the date on which it acquired such asset, then to
the extent of such asset's "built-in-gain" (i.e., the excess of the fair market
value of such asset at the time of acquisition by RAIT over the adjusted basis
in such asset at such time), RAIT will be subject to tax at the highest regular
corporate rate applicable (as provided in Treasury Regulations that have not yet
been promulgated). The results described above with respect to the tax on
"built-in-gain" assume that RAIT will elect pursuant to IRS Notice 88-19 to be
subject to the rules described in the preceding sentence if it were to make any
such acquisition.
Requirements for Qualification
The Code defines a REIT as a corporation, trust or association (i) that
is managed by one or more trustees or directors, (ii) the beneficial ownership
of which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation but
for Sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year other than its first
taxable year (the "5/50 Rule"); (vii) that makes an election to be a REIT (or
has made such election for a previous taxable year) and satisfies all relevant
filing and other administrative requirements established by the Service that
must be met in order to elect and maintain REIT status; (viii) that uses a
calendar year for federal income tax purposes and complies with the
recordkeeping requirements of the Code and Treasury Regulations promulgated
thereunder; and (ix) that meets certain other tests, described below, regarding
the nature of its income and assets. The Code provides that conditions (i) to
(iv), inclusive, must be met during the entire taxable year and that condition
(v) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months. Conditions
(v) and (vi) will not apply until after the first taxable year for which an
election is made by RAIT to be taxed as a REIT. For purposes of determining
share ownership under the 5/50 Rule, a supplemental unemployment compensation
benefits plan, a private foundation, or a portion of a trust permanently set
aside or used exclusively for charitable purposes generally is considered an
individual. A trust that is a qualified trust under Code section 401(a),
however, generally is not considered an individual and beneficiaries of such
trust are treated as holding shares of a REIT in proportion to their actuarial
interests in such trust for purposes of the 5/50 Rule. In addition,
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a REIT that (i) complies with certain Treasury regulations discussed in "Federal
Income Tax Considerations - Requirements for Qualification - Recordkeeping
Requirements" and (ii) does not know, or have reason to know, that it is closely
held so as to violate the 5/50 Rule, is treated as having satisfied the 5/50
Rule.
Prior to the consummation of the Offering, RAIT will not satisfy
conditions (v) and (vi) in the preceding paragraph. RAIT anticipates issuing
sufficient Common Shares with sufficient diversity of ownership pursuant to the
Offering to allow it to satisfy the share ownership requirements described in
clauses (v) and (vi) above. In addition, RAIT's Declaration of Trust provides
for restrictions regarding the transfer of the Common Shares that are intended
to assist RAIT in continuing to satisfy the share ownership requirements
described in clauses (v) and (vi) above. See "Description of Shares of
Beneficial Interest - Restrictions on Transfer." These restrictions, however,
may not ensure that RAIT will, in all cases, be able to satisfy the share
ownership requirements described above. Failure to do so will result in
termination of RAIT's status as a REIT. See "Federal Income Tax Considerations -
Failure to Qualify."
RAIT currently has two corporate subsidiaries, the General Partner and
the Initial Limited Partner, and may have additional corporate subsidiaries in
the future. Code section 856(i) provides that a corporation that is a "qualified
REIT subsidiary" shall not be treated as a separate corporation, and all assets,
liabilities and items of income, deduction and credit of a "qualified REIT
subsidiary" shall be treated as assets, liabilities and items of income,
deduction and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, all of the capital stock of which is owned by the REIT. Thus, in
applying the requirements described herein, any "qualified REIT subsidiaries" of
RAIT will be ignored, and all assets, liabilities and items of income, deduction
and credit of such "qualified REIT subsidiaries" will be treated as assets,
liabilities and items of income, deduction and credit of RAIT. The General
Partner and the Initial Limited Partner are "qualified REIT subsidiaries."
Accordingly, the General Partner and the Initial Limited Partner will not be
subject to federal income taxation, although they may be subject to state and
local taxation.
Pursuant to Treasury Regulations relating to entity classification (the
"Check-the-Box Regulations"), an unincorporated entity that has a single owner
is disregarded as an entity separate from its owner for federal income tax
purposes. Because RAIT will be deemed to own 100% of the partnership interests
in the Operating Partnership for federal income tax purposes, the Operating
Partnership will be disregarded as an entity separate from RAIT under the
Check-the- Box Regulations during the period when its only partners are the
General Partner and the Initial Limited Partner.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below. When the Operating Partnership
admits a partner other than
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RAIT or a qualified REIT subsidiary of RAIT, a proportionate share of the assets
and gross income of the Operating Partnership will be treated as assets and
gross income of RAIT for purposes of applying the requirements described herein.
Income Tests
In order for RAIT to qualify and to maintain its qualification as a
REIT, two requirements relating to RAIT's gross income must be satisfied
annually. First, at least 75% of RAIT's gross income (excluding gross income
from prohibited transactions) for each taxable year must consist of defined
types of income derived directly or indirectly from investments relating to real
property or mortgages on real property (including "rents from real property" and
interest on obligations secured by mortgages on real property or on interests in
real property) or temporary investment income. Second, at least 95% of RAIT's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property, mortgages on real
property, or temporary investments, and from dividends, other types of interest,
hedges that reduce the interest rate risk of RAIT's liabilities, and gain from
the sale or disposition of stock or securities, or from any combination of the
foregoing. The specific application of these tests to the Company is discussed
below.
There may be circumstances in which the principal amount of mortgages
on a property exceed its fair market value. In such a situation, the Service may
contend that the lender is actually the owner of the property for tax purposes.
Since RAIT may acquire loans the face amount of which exceeds the fair market
value of the underlying property, such recharacterization may occur although the
existence of a forbearance or other workout arrangement would make it less
likely. If RAIT is found to be the owner of real property rather than a
mortgagee, its income would consist of the rent from the property rather than
interest on the debt. RAIT would generally be entitled to deductions for
operating expenses of the property as well as for depreciation. Consequently, as
long as the rent qualifies as "rents from real property," it is unlikely that
such recharacterization would adversely affect RAIT's qualification under the
asset tests, income tests or distribution requirements, except as discussed
below.
The term "interest," as defined for purposes of the 75% and 95% gross
income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole or
in part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "interest" solely by reason
of being based on a fixed percentage or percentages of receipts or sales. In
addition, an amount received or accrued generally will not be excluded from the
term "interest" solely by reason of being based on the income or profits of a
debtor if the debtor derives substantially all of its gross income from the
related property through the leasing of substantially all of its interests in
the property, to the extent the amounts received by the debtor would be
characterized as rents from real property if received by a REIT. Furthermore, to
the extent that interest from a loan that is based on the cash proceeds from the
sale of the property securing the loan constitutes a "shared appreciation
provision" (as defined in the Code), income attributable to such participation
feature will be treated as gain from the sale of the secured property, which
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generally is qualifying income for purposes of the 75% and 95% gross income
tests. In addition, if RAIT receives interest income with respect to a mortgage
loan that is secured by both real property and other property and the highest
principal amount of the loan outstanding during the taxable year exceeds the
fair market value of the real property on the date RAIT purchased the mortgage
loan, the interest income will be apportioned between the real property and the
other property, which apportionment may cause RAIT to recognize income that is
not qualifying income for purposes of the 75% gross income test.
Counsel is of the opinion that the interest, OID and market discount
income that RAIT derives from its investments in loans generally will be
qualifying interest income for purposes of both the 75% and 95% gross income
tests. In some cases, however, the amount of a loan may exceed the value of the
real property securing the loan, which will result in a portion of the income
from the loan being classified as qualifying income for purposes of the 95%
gross income test, but not for purposes of the 75% gross income test. It is also
possible that, in some instances, the interest income from a loan may be based
in part on the borrower's profits or net income, which generally will disqualify
the income from the loan for purposes of both the 75% and 95% gross income
tests. In addition, it is contemplated that RAIT may purchase and originate
loans that are only indirectly secured by real estate. In situations where a
senior loan prevents a junior lender from recording a mortgage against the
property, a junior note held by RAIT may be collateralized by an unrecorded
mortgage, a deed-in-lieu of foreclosure, a pledge of equity interests of the
borrower, a purchase option or some other arrangements that RAIT believes will
enable it to obtain an interest in the underlying property upon default. It is
possible that the Service would conclude that interest on such a note does not
constitute interest "secured by mortgages on real property or on interests in
real property," so that such interest would not qualify for purposes of the 75%
gross income test. RAIT will take steps to ensure that it will always have
sufficient qualifying income to meet the 75% and 95% gross income tests.
In the case of wraparound loans, there is authority for the position
that only the interest attributable to money advanced by the wraparound lender
is income to a REIT making such a loan. That is, instead of including the
estimated amount of interest received on the wraparound loan as income, with a
deduction for interest paid to the underlying lenders, gross income would only
include the amount of interest on the money loaned by the wraparound lender; the
amounts paid to the underlying lenders would be treated as having been paid
directly by the borrower.
RAIT may originate or acquire mortgage loans that have shared
appreciation provisions. RAIT may be required to recognize income from a shared
appreciation provision over the term of the related loan using the constant
yield method pursuant to certain Treasury Regulations. This method generally
will result in RAIT recognizing at least some taxable income in advance of the
cash flow.
RAIT may receive income not described above that is not qualifying
income for purposes of the 75% and 95% gross income tests. For example, certain
fees for services which may be rendered by RAIT will not be qualifying income
for purposes of the gross income tests. It is not anticipated that RAIT will
receive a significant amount of such fees. RAIT will monitor the
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amount of nonqualifying income produced by its assets and has represented that
it will manage its portfolio in order to comply at all times with the gross
income tests.
The rent received by RAIT from the tenants of its real properties will
qualify as "rents from real property" in satisfying the gross income tests for a
REIT described above only if several conditions are met. First, the amount of
rent must not be based, in whole or in part, on the income or profits of any
person. However, an amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Second, the Code provides
that rents received from a tenant will not qualify as "rents from real property"
in satisfying the gross income tests if RAIT, or a direct or indirect owner of
10% or more of RAIT, owns 10% or more of such tenant, taking into account both
direct and constructive ownership (under constructive ownership rules found in
Section 856(d)(5) of the Code, as modified by the 1997 tax law) (a "Related
Party Tenant"). Third, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to such personal
property will not qualify as "rents from real property." Finally, for rents
received to qualify as "rents from real property," RAIT generally must not
operate or manage the real property or furnish or render services to the tenants
of such real property other than through an "independent contractor" who is
adequately compensated and from whom RAIT derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services
provided by RAIT are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not otherwise considered "rendered to
the occupant." Moreover, RAIT may render a de minimis amount (no more than 1% of
the gross income from a property) of otherwise impermissible services to tenants
or in connection with the management of such property, while still treating
amounts received with respect to such property (other than amounts attributable
to such services) as rent. For these purposes, the services may not be valued at
less than 150% of RAIT's direct costs for the services.
RAIT has represented that it will not charge rent for any portion of
any Property Interest that is based, in whole or in part, on the income or
profits of any person (except by reason of being based on a fixed percentage or
percentages of receipts of sales, as described above) to the extent that the
receipt of such rent would jeopardize RAIT's status as a REIT. In addition, RAIT
has represented that, to the extent that it receives rent from a Related Party
Tenant, such rent will not cause RAIT to fail to satisfy either the 75% or 95%
gross income test. RAIT also has represented that it will not allow the rent
attributable to personal property leased in connection with any lease of real
property to exceed 15% of the total rent received under the lease, if the
receipt of such rent would cause RAIT to fail to satisfy either the 75% or 95%
gross income test. Finally, RAIT has represented that it will not operate or
manage its Property Interests or furnish or render noncustomary services to the
tenants of its Property Interests other than through an "independent
contractor," to the extent that such operation or the provision of such services
would jeopardize RAIT's status as a REIT.
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75%
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gross income test), less expenses directly connected with the production of such
income. "Foreclosure property" is defined as any real property (including
interests in real property) and any personal property incident to such real
property (i) that is acquired by a REIT as the result of such REIT having bid in
such property at foreclosure, or having otherwise reduced such property to
ownership or possession by agreement or process of law, after there was a
default (or default was imminent) on a lease of such property or on an
indebtedness owed to the REIT that such property secured, (ii) for which the
related loan was acquired by the REIT at a time when default was not imminent or
anticipated, and (iii) for which the REIT makes a proper election to treat the
property as foreclosure property. A property generally may be treated as
foreclosure property until the last day of the third full taxable year following
the election, although the IRS may grant one extension of the period for
treating the property as foreclosure property if RAIT establishes that an
extension is necessary for the orderly liquidation of RAIT's interest in the
property. Such extension may not extend the treatment as foreclosure property
beyond six years from the date the property is acquired by RAIT. RAIT does not
anticipate that it will receive any income from foreclosure property that is not
qualifying income for purposes of the 75% gross income test, but, if RAIT does
receive any such income, RAIT will make an election to treat the related
property as foreclosure property.
If property is not eligible for treatment as foreclosure property
("Ineligible Property") because the related loan was acquired by the REIT at a
time when default was imminent or anticipated, income received with respect to
such Ineligible Property may not be qualifying income for purposes of the 75% or
95% gross income test. RAIT anticipates that any income it receives with respect
to Ineligible Property will be qualifying income for purposes of the 75% and 95%
gross income tests.
The net income from a prohibited transaction is subject to a 100% tax.
The term "prohibited transaction" generally includes a sale or other disposition
of property (other than foreclosure property) that is held primarily for sale to
customers in the ordinary course of a trade or business. The Company believes
that no asset owned by RAIT will be held for sale to customers and that a sale
of any such asset will not be in the ordinary course of RAIT's business. Whether
an asset is held "primarily for sale to customers in the ordinary course of a
trade or business" depends, however, on the facts and circumstances in effect
from time to time, including those related to a particular asset. Nevertheless,
RAIT will attempt to comply with the terms of safe-harbor provisions in the Code
prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that RAIT can comply
with the safe-harbor provisions of the Code or avoid owning property that may be
characterized as property held "primarily for sale to customers in the ordinary
course of a trade or business."
If RAIT fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if RAIT's failure to meet such tests is
due to reasonable cause and not due to willful neglect, RAIT attaches a schedule
of the sources of its income to its federal income tax return, and any incorrect
information on the schedule was not due to fraud with intent to evade tax. It is
not possible,
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however, to state whether in all circumstances RAIT would be entitled to the
benefit of those relief provisions. As discussed above in "Federal Income Tax
Considerations - Taxation of RAIT," even if those relief provisions apply, a
100% tax would be imposed on an amount equal to (i) the gross income
attributable to the greater of the amount by which RAIT fails the 75% or 95%
gross income test, multiplied by (ii) a fraction intended to reflect RAIT's
profitability.
Asset Tests
At the close of each quarter of each taxable year, RAIT must satisfy
two tests relating to the nature of its assets. First, at least 75% of the value
of RAIT's total assets must be represented by cash or cash items (including
certain receivables), government securities, "real estate assets," or, in cases
where RAIT raises new capital through offerings of shares or long-term (at least
five-year) debt, temporary investments in stock or debt instruments during the
one-year period following RAIT's receipt of such capital. The term "real estate
assets" includes interests in real property, interests in mortgages on real
property to the extent the principal balance of a mortgage does not exceed the
fair market value of the associated real property, and shares of other REITs.
For purposes of the 75% asset test, the term "interest in real property"
includes an interest in mortgage loans or land and improvements thereon, such as
buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold of real
property, and an option to acquire real property (or a leasehold of real
property). To the extent that the fair market value of the real property
securing a mortgage loan equals or exceeds the outstanding principal balance of
the loan, the loan will qualify as a real estate asset. However, if the
outstanding principal balance of a mortgage loan exceeds the fair market value
of the real property securing the loan, such loan may not be a qualifying real
estate asset to the extent that the loan amount exceeds the value of the
associated real property, although the matter is not free from doubt. An
"interest" in real property also generally includes an interest in mortgage
loans secured by controlling equity interests in entities treated as
partnerships for federal income tax purposes that own real property, to the
extent that the principal balance of the mortgage does not exceed the fair
market value of the real property that is allocable to the equity interest.
Second, of the investments not included in the 75% asset class, the value of any
one issuer's securities owned by RAIT may not exceed 5% of the value of RAIT's
total assets, and RAIT may not own more than 10% of any one issuer's outstanding
voting securities (except for its interests in the General and Initial Limited
Partners, the Operating Partnership, and any other qualified REIT subsidiary).
RAIT expects that any loans, real properties and temporary investments
that it acquires generally will be qualifying assets for purposes of the 75%
asset test, except to the extent that the principal balance of any loan exceeds
the value of the associated real property, or to the extent the asset is a loan
that is not deemed to be an interest in real property. In the case of wraparound
loans, it is uncertain whether the entire wraparound mortgage amount or only the
amount of RAIT's investment that is in excess of the principal amount of the
underlying loans will be considered an asset of RAIT. RAIT will monitor the
status of the assets that it acquires for purposes of the various asset tests
and has represented that it will manage its portfolio in order to comply at all
times with such tests. If RAIT should fail to satisfy the asset tests at the
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end of a calendar quarter, such a failure would not cause it to lose its REIT
status if (i) it satisfied the asset tests at the close of the preceding
calendar quarter and (ii) the discrepancy between the value of RAIT's assets and
the asset test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by the acquisition of one or more
non-qualifying assets. If the condition described in clause (ii) of the
preceding sentence were not satisfied, RAIT still could avoid disqualification
by eliminating any discrepancy within 30 days after the close of the calendar
quarter in which it arose. RAIT intends to maintain accurate records of the
value of its assets to ensure compliance with the assets tests and to take such
other actions within 30 days after the close of any quarter as may be required
to cure any noncompliance.
Distribution Requirements
In order to qualify as a REIT, RAIT is required to distribute with
respect to each taxable year dividends (other than capital gain dividends) to
its shareholders in an aggregate amount at least equal to (i) the sum of (A) 95%
of its "REIT taxable income" (computed without regard to the dividends paid
deduction and its net capital gain) and (B) 95% of the net income (after tax),
if any, from foreclosure property, minus (ii) the sum of certain items of
noncash income. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before RAIT timely
files its federal income tax return for such year and if paid on or before the
first regular dividend payment date after such declaration. To the extent that
RAIT does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gains corporate tax rates
(see "- Taxation of Taxable U.S. Shareholders Generally" for a discussion of an
election RAIT may make with respect to deemed distributions of long-term capital
gain). Furthermore, if RAIT should fail to distribute during each calendar year
(or, in the case of a distribution with declaration and record dates falling in
the last three months of the calendar year, by the end of the January
immediately following such year) at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain income for such
year, and (iii) any undistributed taxable income from prior periods, RAIT would
be subject to a 4% nondeductible excise tax on the excess of such required
distribution over the amounts actually distributed. If RAIT makes the election
to retain and pay income tax on its net long-term capital gains (see "Federal
Income Tax Considerations - Taxation of Taxable U.S. Shareholders Generally")
such amounts are treated as distributed for purposes of the 4% excise tax. RAIT
intends to make timely distributions sufficient to satisfy the annual
distribution requirements.
It is possible that, from time to time, RAIT may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, RAIT will
recognize taxable income in excess of its cash receipts when OID accrues with
respect to its loans. OID generally will be accrued using a constant yield
methodology that takes into account projected prepayments but that does not
allow credit losses to be reflected until they are actually incurred. Thus,
pursuant to certain Treasury Regulations, RAIT may be required
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to recognize the amount of any payment projected to be made pursuant to a
participation provision in a loan over the term of the loan using the constant
yield method. In addition, RAIT may recognize as income taxable market discount
income upon the receipt of proceeds from the disposition of, or principal
payments on, loans that are "market discount bonds" (i.e., obligations with a
stated redemption price at maturity that is greater than RAIT's tax basis in
such obligations), although such proceeds often will be used to make
non-deductible principal payments on related borrowings. RAIT may also recognize
income in excess of cash receipts if it makes wraparound loans where the
payments of nondeductible principal it must make on the underlying loans exceed
the amount of nontaxable principal it is receiving from the borrower. There is
authority, however, for the position that only the interest on the amount
advanced by the wraparound lender is included in the income of a REIT making
such a loan; this would reduce or limit the possibility of mismatching. It also
is possible that, from time to time, RAIT may recognize net capital gain
attributable to the sale of depreciated property that exceeds its cash receipts
from the sale. RAIT also may recognize taxable income without receiving a
corresponding cash distribution if it forecloses on or makes a "significant
modification" (as defined in Regulations Section 1.1001-3(e)) to a loan, to the
extent that the fair market value of the underlying property or the principal
amount of the modified loan, as applicable, exceeds RAIT's basis in the original
loan. Finally, capital losses recognized by RAIT may not be deducted from its
REIT taxable income. Therefore, RAIT may have less cash than is necessary to
meet its annual 95% distribution requirement or to avoid corporate income tax or
the excise tax imposed on certain undistributed income. In such a situation,
RAIT may find it necessary to arrange for short-term (or possibly long-term)
borrowings or to raise funds through the issuance of Preferred Shares or
additional Common Shares.
Under certain circumstances, RAIT may be able to rectify a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in RAIT's deduction
for dividends paid for the earlier year. Although RAIT may be able to avoid
being taxed on amounts distributed as deficiency dividends, it will be required
to pay to the Service interest based upon the amount of any deduction taken for
deficiency dividends.
Recordkeeping Requirements
Pursuant to applicable Treasury Regulations, RAIT must maintain certain
records and request on an annual basis certain information from its shareholders
designed to disclose the actual ownership of its outstanding shares. Failure to
request such information from shareholders in a taxable year could subject RAIT
to a penalty of $25,000 ($50,000 for intentional violations).
Failure to Qualify
If RAIT fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, RAIT will be subject to tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. Distributions to RAIT's shareholders in any year in which RAIT
fails to qualify will not be deductible by RAIT nor will
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they be required to be made. In such event, to the extent of RAIT's current and
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, RAIT also will be
disqualified from taxation as a REIT for the four taxable years following the
year during which RAIT ceased to qualify as a REIT. It is not possible to state
whether in all circumstances RAIT would be entitled to such statutory relief.
Taxation of Taxable U.S. Shareholders Generally
As long as RAIT qualifies as a REIT, distributions made to RAIT's
taxable U.S. shareholders out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken into account by
such U.S. shareholders as ordinary income and will not be eligible for the
dividends received deduction generally available to corporations. As used
herein, the term "U.S. shareholder" means a holder of Common Shares that for
United States federal income tax purposes is (i) a citizen or resident of the
United States, (ii) a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate whose income from sources without the
United States is includible in gross income for United States federal income tax
purposes regardless of its connection with the conduct of a trade or business
within the United States, or (iv) any trust with respect to which (A) a United
States court is able to exercise primary supervision over the administration of
such trust and (B) one or more United States fiduciaries have the authority to
control all substantial decisions of the trust. Distributions that are
designated as capital gain dividends will be taxed as long-term capital gains
(to the extent they do not exceed RAIT's actual net capital gain for the taxable
year) without regard to the period for which the shareholder has held his Common
Shares. However, corporate shareholders may be required to treat up to 20% of
certain capital gain dividends as ordinary income. RAIT may elect to retain and
pay income tax on net long-term capital gains it receives during the taxable
year. If RAIT makes this election, (i) its shareholders would include in their
income as long-term capital gains their proportionate share of the undistributed
long-term capital gains as designated by RAIT, (ii) each shareholder would be
deemed to have paid the shareholder's share of the tax, which would be credited
or refunded to the shareholder, and (iii) the basis of each shareholder's shares
would be increased by the amount of the undistributed long-term capital gains
(less the amount of capital gains tax paid by RAIT) included in the
shareholder's long-term capital gains. Distributions in excess of current and
accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's Common
Shares, but rather will reduce the adjusted basis of such shares. To the extent
that these distributions exceed the adjusted basis of a shareholder's Common
Shares, such distributions will be included in income as long-term capital gain
(or short-term capital gain if the Common Shares had been held for one year or
less), assuming the Common Shares are a capital asset in the hands of the
shareholder. In addition, any distribution declared by RAIT in October,
November, or December of any year and payable to a shareholder of record on a
specified date in any such month shall be treated as both paid by RAIT and
received by the shareholder on December 31 of such year, provided that the
distribution is actually paid by RAIT during January of the following calendar
year.
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Shareholders may not include in their individual income tax returns any
net operating losses or capital losses of RAIT. Instead, any such losses are
carried over by RAIT for potential offset against its future income (subject to
certain limitations). Taxable distributions from RAIT and gain from the
disposition of the Common Shares will not be treated as passive activity income
and, therefore, shareholders generally will not be able to apply any "passive
activity losses" (such as losses from certain types of limited partnerships in
which a shareholder is a limited partner) against such income. In addition,
taxable distributions from RAIT generally will be treated as investment income
for purposes of the investment interest limitations. Capital gains from the
disposition of Common Shares (or distributions treated as such), however, will
be treated as investment income only if the shareholder so elects, in which case
such capital gains will be taxed at ordinary income rates. RAIT will notify
shareholders after the close of RAIT's taxable year as to the portions of the
distributions attributable to that year that constitute ordinary income or
capital gain dividends.
RAIT's investments may cause it under certain circumstances to
recognize taxable income in excess of its economic income ("phantom income") and
to experience an offsetting excess of economic income over its taxable income in
later years. As a result, shareholders may from time to time be required to pay
federal income tax on distributions that economically represent a return of
capital, rather than a dividend. Such distributions would be offset in later
years by distributions representing economic income that would be treated as
returns of capital for federal income tax purposes. Accordingly, if RAIT
receives phantom income, its shareholders may be required to pay federal income
tax with respect to such income on an accelerated basis, i.e., before such
income is realized by the shareholders in an economic sense. Taking into account
the time value of money, such an acceleration of federal income tax liabilities
would cause shareholders to receive an after-tax rate of return on an investment
in RAIT that would be less than the after-tax rate of return on an investment
with an identical before-tax rate of return that did not generate phantom
income. For example, if an investor subject to an effective income tax rate of
30% purchased a bond (other than a tax-exempt bond) with an annual interest rate
of 10% for its face value, his before-tax return on his investment would be 10%,
and his after-tax return would be 7%. However, if the same investor purchased
shares of RAIT at a time when the before-tax rate of return was 10%, his
after-tax rate of return on his shares might be somewhat less than 7% as a
result of RAIT's phantom income. In general, as the ratio of RAIT's phantom
income to its total income increases, the after-tax rate of return received by a
taxable shareholder of RAIT will decrease. RAIT will consider the potential
effects of phantom income on its taxable shareholders in managing its
investments.
Taxation of Shareholders on the Disposition of the Common Shares
In general, any gain or loss realized upon a taxable disposition of the
Common Shares by a shareholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Shares have been held for more
than 12 months (subject to a reduction in tax rate if the Common Shares have
been held for more than 18 months; see "Federal Income Tax Considerations -
Capital Gains and Losses") and otherwise as short-term capital gain or loss.
However, any loss upon a sale or exchange of Common Shares by a shareholder who
has held
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such shares for six months or less (after applying certain holding period rules)
will be treated as a long-term capital loss to the extent of distributions from
RAIT required to be treated by such shareholder as long-term capital gain. All
or a portion of any loss realized upon a taxable disposition of the Common
Shares may be disallowed if other Common Shares are purchased within 30 days
before or after the disposition.
Capital Gains and Losses
A capital asset generally must be held for more than one year in order
for gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%.
The maximum tax rate on long-term capital gains applicable to individuals is 28%
for assets held for more than one year but not more than 18 months, and 20% for
assets held more than 18 months. Thus, the tax rate differential between capital
gain and ordinary income for individuals may be significant. In addition, the
characterization of income as capital gain or ordinary income may affect the
deductibility of capital losses. Capital losses not offset by capital gains may
be deducted against an individual's ordinary income only up to a maximum annual
amount of $3,000. Unused capital losses may be carried forward indefinitely by
individuals. All net capital gain of a corporate taxpayer is subject to tax at
ordinary corporate rates. A corporate taxpayer can deduct capital losses only to
the extent of capital gains, with unused losses being carried back three years
and forward five years.
Information Reporting Requirements and Backup Withholding
RAIT will report to its U.S. shareholders and to the Service the amount
of distributions paid during each calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a shareholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid unless
such holder (i) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact or (ii) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide RAIT with his
correct taxpayer identification number also may be subject to penalties imposed
by the Service. Any amount paid as backup withholding will be creditable against
the shareholder's income tax liability. In addition, RAIT may be required to
withhold a portion of capital gain distributions to any shareholders who fail to
certify their nonforeign status to RAIT. The Treasury Department issued proposed
regulations in April 1996 regarding the backup withholding rules as applied to
Non-U.S. Shareholders. The proposed regulations would alter the current system
of backup withholding compliance and are proposed to be effective for
distributions made after December 31, 1997. See "-Taxation of Non-U.S.
Shareholders."
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Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, in a published ruling the Service
stated that dividend distributions from a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling, amounts distributed by RAIT to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of the Common Shares with debt, a portion of its income
from RAIT will constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of
Code section 501(c) are subject to different UBTI rules, which generally will
require them to characterize distributions from RAIT as UBTI. In addition, in
certain circumstances, a pension trust that owns more than 10% of RAIT's shares
is required to treat a percentage of the dividends from RAIT as UBTI (the "UBTI
Percentage"). The UBTI Percentage is the gross income derived by RAIT from an
unrelated trade or business (determined as if RAIT were a pension trust) divided
by the gross income of RAIT for the year in which the dividends are paid. The
UBTI rule applies to a pension trust holding more than 10% of RAIT's shares only
if (i) the UBTI Percentage is at least 5%, (ii) RAIT qualifies as a REIT by
reason of the modification of the 5/50 Rule that allows the beneficiaries of the
pension trust to be treated as holding shares of RAIT in proportion to their
actuarial interests in the pension trust, and (iii) RAIT is a "pension-held
REIT" (that is, either (A) one pension trust owns more than 25% of the value of
RAIT's shares or (B) a group of pension trusts individually holding more than
10% of the value of RAIT's shares collectively owns more than 50% of the value
of RAIT's shares). Because the Ownership Limitation prohibits any shareholder
from owning (i) more than 8.5% of the number of outstanding Common Shares (other
than RAI, which may own no more than 15% of the number of outstanding Common
Shares and will, at the conclusion of the Offering, own 9.8% of the outstanding
Common Shares, assuming the Underwriters do not exercise their over-allotment
option) or (ii) more than 9.8% of the number of outstanding Preferred Shares of
any series, RAIT should not be a pension-held REIT and, accordingly, no pension
trust should be required to treat a percentage of the dividends from RAIT as
UBTI.
Taxation of Non-U.S. Shareholders
The rules governing United States federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships, and
other foreign shareholders (collectively, "Non-U.S. Shareholders") are complex.
The following discussion provides only a summary of such rules.
PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME
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TAX LAWS WITH REGARD TO AN INVESTMENT IN THE COMMON SHARES, INCLUDING ANY
REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to
gain from sales or exchanges by RAIT of United States real property interests
and are not designated by RAIT as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of RAIT. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Shares is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a United States
trade or business, the Non-U.S. Shareholder generally will be subject to federal
income tax at graduated rates, in the same manner as U.S. Shareholders are taxed
with respect to such distributions (and also may be subject to the 30% branch
profits tax in the case of a Non-U.S. Shareholder that is a non-U.S.
corporation). RAIT expects to withhold United States income tax at the rate of
30% on the gross amount of any such distributions made to a Non-U.S. Shareholder
unless (i) a lower treaty rate applies and any required form evidencing
eligibility for that reduced rate is filed with RAIT or (ii) the Non-U.S.
Shareholder files an IRS Form 4224 with RAIT claiming that the distribution is
effectively connected income. The Treasury Department issued proposed
regulations in April 1996 that would modify the manner in which RAIT complies
with the withholding requirements.
Distributions in excess of current and accumulated earnings and profits
of RAIT will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's Common
Shares, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Shareholder's Common Shares, such
distributions will give rise to tax liability if the Non-U.S. Shareholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Common Shares as described above. Because it generally cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend. However, amounts so withheld are refundable to the extent it is
determined subsequently that such distribution was, in fact, in excess of
current and accumulated earnings and profits of RAIT. In August 1996, the U.S.
Congress passed the Small Business Job Protection Act of 1996, which requires
RAIT to withhold 10% of any distribution in excess of RAIT's current and
accumulated earnings and profits. Consequently, although RAIT intends to
withhold at a rate of 30% on the entire amount of any distribution, to the
extent that RAIT does not do so, any portion of a distribution not subject to
withholding at a rate of 30% will be subject to withholding at a rate of 10%.
For any year in which RAIT qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges by RAIT of United States real
property interests will be taxed to a Non- U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of United States real
property interests are taxed to a Non-U.S. Shareholder as if such gain were
effectively
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connected with a United States business. Non-U.S. Shareholders thus would be
taxed at the normal capital gain rates applicable to U.S. Shareholders (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to the 30% branch profits tax in the hands of a non-U.S.
corporate shareholder not entitled to treaty relief or exemption. RAIT is
required to withhold 35% of any distribution that is designated by RAIT as a
capital gains dividend. The amount withheld is creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his Common
Shares generally will not be taxed under FIRPTA if RAIT is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the shares was held directly
or indirectly by Non-U.S. persons. However, because the Common Shares will be
publicly traded, no assurance can be given that RAIT will be a "domestically
controlled REIT." In addition, a Non-U.S. Shareholder that owns, actually or
constructively, not more than 5% of RAIT's shares throughout a specified
"look-back" period will not recognize gain on the sale of his shares taxable
under FIRPTA, if the shares are traded on an established securities market.
Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if (i) investment in the Common Shares is effectively connected with
the Non-U.S. Shareholder's U.S. trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as United States shareholders
with respect to such gain, or (ii) the Non-U.S. Shareholder is a nonresident
alien individual who was present in the United States for 183 days or more
during the taxable year and certain other conditions apply, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains. If the gain on the sale of the Common Shares were to be subject
to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to the same
treatment as U.S. Shareholders with respect to such gain (subject to applicable
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals, and the possible application of the 30% branch
profits tax in the case of non-U.S. corporations).
State and Local Taxes
RAIT, the General Partner, the Initial Limited Partner, the Operating
Partnership and RAIT's shareholders may be subject to state and local tax in
various states and localities, including those states and localities in which
they transact business, own property, or reside. The state and local tax
treatment of RAIT and its shareholders in such jurisdictions may differ from the
federal income tax treatment described above. Consequently, prospective
shareholders should consult their own tax advisors regarding the effect of state
and local tax laws upon an investment in the Common Shares.
Sale of RAIT's Property
Any gain realized by RAIT on the sale of any property held as inventory
or other property held primarily for sale to customers in the ordinary course of
its trade or business will be treated as income from a prohibited transaction
that is subject to a 100% penalty tax. Such prohibited
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transaction income also may have an adverse effect upon RAIT's ability to
satisfy the income tests for REIT status. See "Federal Income Tax
Considerations--Requirements for Qualification: Income Tests" above. RAIT,
however, does not presently intend to acquire or hold a material amount of
property that represents inventory or other property held primarily for sale to
customers in the ordinary course of its trade or business.
BENEFIT PLAN CONSIDERATIONS
The following summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended, and the prohibited
transaction provisions of section 4975 of the Code, does not purport to deal
with all aspects of ERISA or section 4975 of the Code that may be relevant to
particular shareholders (including plans subject to Title I of ERISA, other
retirement plans and individual retirement accounts ("IRAs") subject to the
prohibited transaction provisions of section 4975 of the Code, and governmental
plans or church plans that are exempt from ERISA and section 4975 of the Code
but that may be subject to state law requirements) in light of their particular
circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON SHARES ON
BEHALF OF A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A
TAX-QUALIFIED RETIREMENT PLAN, OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR
REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE
CODE AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF THE COMMON
SHARES BY SUCH PLAN OR IRA.
Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs
Each fiduciary of a pension, profit-sharing or other employee benefit
plan (a "Plan") subject to Title I of ERISA should consider carefully whether an
investment in the Common Shares is consistent with such fiduciary's
responsibilities under ERISA. In particular, the fiduciary requirements of Part
4 of Title I of ERISA require a Plan's investment to be (i) prudent and in the
best interests of the Plan, its participants and its beneficiaries, (ii)
diversified in order to minimize the risk of large losses, unless it is clearly
prudent not to do so, and (iii) authorized under the terms of the Plan's
governing documents (provided the documents are consistent with ERISA). In
determining whether an investment in the Common Shares is prudent for purposes
of ERISA, the appropriate fiduciary of a Plan should consider all of the facts
and circumstances, including whether the investment is reasonably designed, as a
part of the Plan's portfolio for
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which the fiduciary has investment responsibility, to meet the objectives of the
Plan, taking into consideration the risk of loss and opportunity for gain (or
other return) from the investment, the diversification of portfolio investments
and the cash flow requirements of the Plan.
A fiduciary of an IRA or of an employee benefit plan that is not
subject to Title I of ERISA because it is a governmental or church plan or
because it does not cover common law employees (a "Non-ERISA Plan") should
consider that such an IRA or Non-ERISA Plan may only make investments that are
authorized by the appropriate governing documents and under applicable law.
Fiduciaries of Plans and persons making investment decisions for an IRA
or other Non- ERISA Plan also should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "disqualified person" (within the meaning of section 4975 of the
Code) with respect to a Plan, or an IRA subject to Code section 4975, is subject
to (i) an initial 15% excise tax on the amount involved in any prohibited
transaction involving the assets of the Plan or IRA and (ii) an excise tax equal
to 100% of the amount involved if any prohibited transaction is not corrected.
In general, if the disqualified person who engages in the transaction is the
individual on behalf of whom an IRA is established (or his beneficiary), the IRA
will lose its tax-exempt status and its assets will be deemed to have been
distributed to such individual in a taxable distribution (and no excise tax will
be imposed) on account of the prohibited transaction. In addition, a fiduciary
who permits a Plan to engage in a transaction that the fiduciary knows or should
know is a prohibited transaction may, among other things, be liable to the Plan
for any loss the Plan incurs as a result of the transaction or for any profits
earned by the fiduciary in the transaction.
Status of the Company under ERISA's Plan Asset Rules
Regulations of the DOL defining "plan assets" (the "Plan Asset
Regulations") generally provide that when a Plan, Non-ERISA Plan or IRA subject
to section 406 of ERISA or section 4975 of the Code acquires a security that is
an equity interest in an entity and the security is neither a "publicly-offered
security" nor a security issued by an investment company registered under the
Investment Company Act, the Plan's or Non-ERISA Plan's or IRA's assets include
both the equity interest and an undivided interest in each of the underlying
assets of the issuer of such equity interest, unless one or more exceptions
specified in the Plan Asset Regulations are satisfied.
The Plan Asset Regulations define a publicly-offered security as a
security that is "widely-held," "freely-transferable," and either part of a
class of securities registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or sold pursuant to an effective registration
statement under the Securities Act (provided the securities are registered under
the Exchange Act within 120 days after the end of the fiscal year of the issuer
during which the offering occurred). The Common Shares are being sold in an
offering registered under the Securities Act and will be registered under the
Exchange Act within the required 120 day period.
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The Plan Asset Regulations provide that a security is "widely held" only if it
is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
widely held because the number of independent investors falls below 100
subsequent to the initial public offering as a result of events beyond the
issuer's control. The Company anticipates that upon completion of this Offering,
the Common Shares will be "widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with this offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as ordinarily not affecting that finding include: (i)
any restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or state
tax purposes, or that otherwise would violate any federal or state law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to the issuer, (iii) any administrative procedure that establishes an
effective date, or an event (such as completion of an offering), prior to which
a transfer or assignment will not be effective, and (iv) any limitation or
restriction on transfer or assignment that is not imposed by the issuer or a
person acting on behalf of the issuer. The Company believes that the
restrictions imposed under the Declaration of Trust on the transfer of the
Company's Common Shares will not result in the failure of the Common Shares to
be "freely transferable." The Company also is not aware of any other facts or
circumstances limiting the transferability of the Common Shares that are not
identified in the Plan Asset Regulations as factors that ordinarily do not
adversely affect a finding that securities are freely transferable. However, no
complete assurances can be given that the DOL or the Treasury Department would
not reach a contrary conclusion.
Assuming that the Common Shares will be "widely held" and that no other
facts and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Shares, the Common Shares
should be publicly offered securities and the assets of the Company should not
be deemed to be "plan assets" of any Plan, IRA or Non-ERISA Plan that invests in
the Common Shares. However, no assurances can be given that the Company's assets
will not be deemed to be plan assets.
If the assets of the Company were to be deemed to be "plan assets"
under ERISA, (i) the prudence standards and other provisions of Part 4 of Title
I of ERISA would be applicable to any transactions involving the Company's
assets, (ii) persons who exercise any authority over the Company's assets, or
who provide investment advice to the Company, would (for purposes of the
fiduciary responsibility provisions of ERISA) be fiduciaries of each Plan that
acquires Common Shares, (iii) a fiduciary exercising his investment discretion
over the assets of a Plan to cause it to acquire or hold the Common Shares could
be held liable under Part 4 of Title I of ERISA for transactions entered into by
the Company that do not conform to ERISA standards of prudence and fiduciary
responsibility, and (iv) certain transactions that the Company might enter into
in
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the ordinary course of its business and operations might constitute "prohibited
transactions" under ERISA and the Code.
CERTAIN LEGAL ASPECTS OF
REAL PROPERTY LOANS AND INVESTMENTS
The Company intends primarily to originate or acquire Financings
(including wraparound and other forms of junior lien or subordinated financing)
and, to a lesser extent, Property Interests. There are a number of legal
considerations involved in the origination and acquisition of Financings and
Property Interests or the foreclosure and sale of defaulted Financing. The
following discussion provides general summaries of certain legal aspects of real
estate loans and real property. Because such legal aspects are governed by
applicable state law (which laws vary from state to state), the summaries do not
purport to be complete, to reflect the laws of any particular state, or to
encompass the laws of all states. Accordingly, the summaries are qualified in
their entirety by reference to the applicable laws of the states where the
property is located.
General
Each Financing will be evidenced by a note or bond and typically will
be collateralized by an instrument granting a security interest in real
property, which may be a mortgage, deed of trust, deed to secure debt or similar
instrument, depending upon the prevailing practice and law in the state in which
the underlying property is located. Mortgages, deeds of trust, deeds to secure
debt and similar instruments are herein collectively referred to as "mortgages."
A mortgage creates a lien upon, or grants a title interest in, the real property
covered thereby, and represents the security for the repayment of the
indebtedness customarily evidenced by a promissory note. The priority of the
lien created or interest granted will depend on the terms of the mortgage and,
in some cases, on the terms of separate subordination agreements or
intercreditor agreement with others that hold interests in the real property,
the knowledge of the parties to the mortgage and, generally, the order of
recordation of the mortgage in the appropriate public recording office. However,
the lien of a recorded mortgage will generally be subordinate to later-arising
liens for real estate taxes and assessments and other charges imposed under
governmental police powers. With respect to Financing acquired by the Company,
the Company may not record its mortgage until a default occurs (as a result of
provisions in the instruments held by senior lienors or otherwise), at which
time there may be intervening or prior liens, or injunctions or stays delaying
or precluding such recordation or the exercise of any rights under such
mortgages. See "- Foreclosure and Bankruptcy Laws," below.
Types of Mortgage Instruments
There are two parties to a mortgage: a mortgagor (the borrower and
usually the owner of the subject property) and a mortgagee (the lender). In
contrast, a deed of trust is a three-party instrument, among a trustor (the
equivalent of a borrower), a trustee to whom the real property is conveyed, and
a beneficiary (the lender) for whose benefit the conveyance is made. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust and
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generally with a power of sale, to the trustee to secure repayment of the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties. The grantor (the borrower) conveys title to the real property to
the grantee (the lender), generally with a power of sale, until such time as the
debt is repaid. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a deed to
secure debt are governed by the express provisions of the related instrument,
the law of the state in which the real property is located, certain federal laws
and, in some deed of trust transactions, the directions of the beneficiary.
Leases and Rents
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable license to collect the rents so long as there is
no default. If the borrower defaults, the license terminates and the lender is
entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
The potential payments from a property may be less than the periodic
payments due under the mortgage. For example, the net income that would
otherwise be generated from the property may be less than that amount that would
be needed to service the debt if the leases on the property are at below-market
rents, the market rents have fallen since the original financing, vacancies have
increased, or as a result of excessive or increased maintenance, repair or other
obligations to which a lender succeeds as landlord.
Condemnation and Insurance
The form of the mortgage or deed of trust used by many lenders confers
on the mortgagee or beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust, in such order as the
mortgagee or beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under the senior
mortgage or deed of trust will have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgage or deed of trust. Proceeds in excess of the
amount of senior mortgage indebtedness will, in most cases, be applied to the
indebtedness of a junior mortgage or trust deed to the extent the junior
mortgage or deed of trust so provides (subject, however, to any inter-creditor
agreements). The laws of certain states may limit the ability of mortgagees or
beneficiaries to apply the proceeds of hazard insurance and partial condemnation
awards to the secured indebtedness. In such states, the mortgagor or trustor
must be allowed to use the proceeds of hazard insurance to repair the damage
unless the security of the mortgage or
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beneficiary has been impaired. Similarly, in certain states, the mortgagee or
beneficiary is entitled to the award for a partial condemnation of the real
property security only to the extent that its security is impaired.
Foreclosure
General. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal remedies
under the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property at public auction to satisfy
the indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and non-judicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. Other foreclosure procedures are available in some states, such as
strict foreclosure, but they are either infrequently used or available only in
limited circumstances.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in
a court having jurisdiction over the mortgaged property. Generally, the action
is initiated by the service of legal pleadings upon the property owner and all
parties having a subordinate interest of record in the real property and all
parties in possession of the property, under leases or otherwise, whose
interests are subordinate to the mortgage. A foreclosure action may be subject
to most of the delays and expenses of other lawsuits if defenses are available
and are raised or counterclaims are interposed. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Non-Judicial Foreclosure/Power of Sale. Foreclosure of a deed of trust
is generally accomplished by a non-judicial trustee's sale pursuant to a power
of sale typically granted in the deed of trust. A power of sale may also be
contained in any other type of mortgage instrument if applicable law so permits.
A power of sale under a deed of trust allows a non-judicial public sale to be
conducted generally following a request from the beneficiary/lender to the
trustee to sell the property upon default by the borrower and after notice of
sale is given in accordance with the terms of the mortgage and applicable state
law. The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without regard to the acceleration of the
indebtedness), plus the lender' expenses incurred in enforcing the obligation.
In other states, the borrower or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, state law governs the procedure for
public sale, the parties entitled to notice, the method of giving notice and the
applicable time
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periods. An action to halt a non-judicial foreclosure might be brought if valid
defenses to such foreclosure exist.
Equitable Limitations on Enforceability of Certain Provisions. United
States courts have often imposed general equitable principles to limit the
remedies available to lenders in foreclosure actions. These principles are
generally designed to relieve borrowers from the effects of mortgage defaults
perceived as harsh or unfair. Relying on such principles, a court may alter the
specific terms of a loan to the extent it considers necessary to prevent or
remedy an injustice, undue oppression or overreaching, or may require the lender
to undertake affirmative actions to determine the cause of the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lenders' and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclosure in
the case of a non-monetary default, such as a failure to adequately maintain the
mortgaged property or an impermissible further encumbrance of the mortgaged
property. However, there can be no assurance that these principles will be
applied.
Post-Sale Redemption. In a majority of states, after sale pursuant to a
deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property. In some
states, statutory redemption may occur only upon payment of the foreclosure sale
price. In other states, redemption may be permitted if the former borrower pays
only a portion of the sums due. In some states, the borrower retains possession
of the property during the statutory redemption period. The effect of a
statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
Anti-Deficiency Legislation. Many loans acquired by the Company are
likely to be nonrecourse loans, as to which recourse in the case of default will
be limited to the property and such other assets, if any, that were pledged to
secure the mortgage loan. However, even if a mortgage loan by its terms provides
for recourse to the borrower's other assets, a lender's ability to realize upon
those assets may be limited by state law. For example, in some states a lender
cannot obtain a deficiency judgment against the borrower. In certain other
states, the lender has the option of bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrowing on the debt without first exhausting such
security; however, in some of those states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and thus may be
precluded from foreclosing upon the security. Consequently, lenders in those
states where such an election of remedy provision exists may choose to proceed
first against the security. Finally, other statutory provisions, designed to
protect borrowers from exposure to large deficiency judgments that might
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result from bidding at below-market values at the foreclosure sale, limit any
deficiency judgment to the excess of the outstanding debt over the fair market
value of the property at the time of the sale.
Bankruptcy Laws
Operation of the Bankruptcy Code and related state laws may interfere
with or affect the ability of a lender to realize upon collateral or to enforce
a deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences thereof caused by
such automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced to
the then-current value of the property (with a corresponding partial reduction
of the amount of lender's security interest) pursuant to a confirmed plan or
lien avoidance proceeding, thus leaving the lender a general unsecured creditor
for the difference between such value and the outstanding balance of the loan.
Under certain circumstances, a plan can be confirmed which provides for little
or no payment for the unsecured claim for deficiency. Other modifications may
include a reduction in the amount of each scheduled payment, by means of a
reduction in the rate of interest or alteration of the repayment schedule (with
or without affecting the unpaid principal balance of the loan), and by an
extension (or shortening) of the term to maturity.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of the secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under section 362 of the
Bankruptcy Code, the lender will be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents. In addition, the
Bankruptcy Code has been amended to provide that a lender's perfected
pre-petition security interest in leases, rents and hotel revenues continues in
the post-petition leases, rents and hotel revenues, unless a bankruptcy court
orders to the contrary "based on the equities of the case."
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related mortgage loan to the owner of such mortgage loan. Payments on
long-term debt may be protected from recovery as preferences to the extent the
lender is oversecured or if they are payments in the ordinary course of business
made on debts incurred in the ordinary course of business. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
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A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. In certain circumstances, a debtor in bankruptcy may also
have the power to grant liens senior to the lien of a mortgage, and analogous
state statutes and general principles of equity may also provide a mortgagor
with means to halt a foreclosure proceeding or sale and to force a restructuring
of a mortgage loan on terms a lender would not otherwise accept. Moreover, the
laws of certain states also give priority to certain tax liens over the lien of
a mortgage or deed of trust. Under the Bankruptcy Code, in unusual
circumstances, if the court finds that actions of the mortgagee have been
harmful to the unsecured creditors and are in bad faith or highly unreasonable,
the lien of the related mortgage may be subordinated to the claims of unsecured
creditors.
The Company's acquisition of Property Interests may be affected by many
of the considerations applicable to mortgage loan lending. For example, the
Company's ability to derive income from real property will generally be
dependent on its receipt of rent payments under leases of the related property.
The ability to collect rents may be impaired by the commencement of a bankruptcy
proceeding relating to a lessee under such lease. Under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a lessee results in a stay
in bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a summary
eviction order with respect to a default under the lease that occurred prior to
the filing of the lessee's petition. In addition, the Bankruptcy Code generally
provides that a trustee or debtor-in-possession may, subject to approval of the
court, (i) assume the lease and retain it or assign it to a third party or (ii)
reject the lease. If the lease is assumed, the trustee or debtor-in-possession
(or assignee, if applicable) must cure any default under the lease, compensate
the lessor for its losses and provide the lessor with "adequate assurance" of
future performance. Such remedies may be insufficient, and any assurances
provided to the lessor may, in fact, be inadequate. If the lease is rejected,
the lessor will be treated as an unsecured creditor with respect to its claim
for damages for termination of the lease. The Bankruptcy Code also limits a
lessor's damages for lease rejection to the rent reserved by the lease (without
regard to acceleration) for the greater of one year, or 15%, not to exceed three
years, of the remaining term of the lease. Efforts to eject a debtor/lessee are
usually costly and time-consuming.
Default Interest and Limitations on Prepayments
Notes and mortgages may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made, and
in some circumstances, may prohibit prepayments for a specified period or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
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Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
Environmental Risks
General. The Company may risk environmental liabilities when it takes a
security interest in real property, as well as when it acquires any real
property. Of particular concern are properties that are or have been used for
industrial, manufacturing, military or disposal activity. Such environmental
risks include the risk of the diminution of the value of a contaminated property
or, as discussed below, liability for the costs of compliance with environmental
regulatory requirements or the costs of any remedial actions. These compliance
or remediation costs could exceed the value of the property or the amount of the
lender's loan. In certain circumstances, a lender could determine to abandon a
contaminated mortgaged property as collateral for its loan rather than foreclose
and risk liability for compliance or remediation costs.
CERCLA. The federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of site assessment and remediation. A secured lender may be liable as an
"owner" or "operator" of a contaminated mortgaged property if agents or
employees of the lender have become sufficiently involved in the management of
such mortgaged property or the operations of the borrower. Such liability may
exist even if the lender did not cause or contribute to the contamination, and
whether the lender has actually taken possession of a mortgaged property through
foreclosure, deed in lieu of foreclosure or otherwise. The magnitude of the
CERCLA liability at any given contaminated site is a function of the actions
required to address adequately the risks to human health and the environment
posed by the particular conditions at the site. As a result, such liability is
not constrained by the value of the property or the amount of the original or
unamortized principal balance of any loans secured by the property. Moreover,
under certain circumstances, liability under CERCLA may be joint and several;
any liable party may be obligated to pay the entire remediation cost regardless
of its relative contribution to the contamination.
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The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "1996 Lender Liability Act") provides a safe harbor for a secured
lender from CERCLA liability even though the lender forecloses and sells the
real estate securing the loan, provided the secured lender sells "at the
earliest practicable, commercially reasonable time, at commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements." Although the 1996 Lender Liability Act appears to provide
significant protection to secured lenders, it has not yet been construed by the
courts and there are circumstances in which actions taken could expose a secured
lender to CERCLA liability. Further, the transferee from the secured lender is
not entitled to the protections enjoyed by a secured lender. Accordingly, the
marketability of any contaminated real property cannot be assured.
Certain Other Federal and State Laws. Many states have environmental
clean-up statutes similar to CERCLA, and not all those statutes provide for a
secured creditor exemption. In addition, underground storage tanks ("USTs")
commonly are found at a wide variety of commercial and industrial properties.
Federal and state laws impose liability on the owners and operators for any
remediation that may be required as a result of releases from USTs. These laws
also impose certain compliance obligations on the UST owners and operators, such
as regular monitoring for leaks and upgrading of older USTs. The Company may
become a UST owner or operator and subject to compliance obligations and
potential remediation liabilities, either as a result of becoming involved in
the management of a site at which a UST is located or, more commonly, by taking
title to such a property. Federal and state laws also obligate property owners
and operators to maintain and, under some circumstances, to remove
asbestos-containing building materials and lead-based paint. As a result, the
presence of these materials can increase the cost of operating a property and
thus diminish its value. In a few states, transfers of some types of properties
are conditioned upon remediation of contamination prior to transfer. In these
cases, a lender that becomes the owner of a property through foreclosure, deed
in lieu of foreclosure or otherwise, may be required to remedy the contamination
before selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action (for example, actions based on nuisance or on toxic tort
resulting in death, personal injury or damage to property) related to hazardous
environmental conditions on a property.
Superlien Laws. Under many states' laws, contamination of a property
may give rise to a lien on the property for remediation costs. In several
states, such a lien has priority over all existing liens, including those of
existing mortgages. In these states, the lien of a mortgage may lose its
priority to such a "superlien."
Additional Considerations. The cost of remediating environmental
contamination at a property can be substantial. To reduce the likelihood of
exposure to such losses, the Company will neither acquire title to a property,
whether directly or through foreclosure, nor take over its operation unless,
based on an environmental site assessment prepared by a qualified environmental
consultant, the Company has determined that the acquisition is appropriate. The
Company intends to consider all of its options, including the organization of a
special purpose
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subsidiary, if it determines it appropriate to acquire any environmentally
contaminated real property.
Environmental Site Assessments. Environmental site assessments can be a
valuable tool in anticipating, managing and minimizing risks from environmental
conditions. They are commonly performed in many commercial real estate
transactions. The Company will require that a recent "Phase I" environmental
site assessment report be obtained or available for properties underlying any
Financing or Property Interest. The purpose of Phase I environmental assessments
is to identify potential environmental contamination that is made apparent from
historical reviews of the properties, reviews of certain public records,
preliminary investigations of the sites and surrounding properties, and
screening for the presence of hazardous substances, toxic substances and
underground storage tanks. Environmental site assessments vary considerably in
their content and quality. Even when adhering to good professional practices,
environmental consultants sometimes do not detect significant environmental
problems. Accordingly, these reports may not reveal all environmental
liabilities or there may be material environmental liabilities of which the
Company is unaware. Nevertheless, in assessing and addressing environmental
risks in connection with commercial real estate (including multifamily
properties) it is generally helpful to conduct an environmental site assessment
of a property because it enables anticipation of environmental problems and, if
agreements are structured appropriately, can allow a party to decline to go
forward with a transaction. Depending on what the Phase I assessment discloses,
a Phase II environmental site assessment may be performed.
Where a property has been the subject of a recent Phase I assessment
report which is addressed to the borrower, owner or another person, the Company
may accept such assessment report in lieu of requiring that another assessment
be performed. The Company will normally require that the assessment report be
updated and addressed to the Company. The Company may waive either requirement
if management believes, based upon its review of the assessment report and the
property, that environmental risk is minimal.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 ("Title V") provides that state usury limitations shall not
apply to certain types of residential (including multifamily) first mortgage
loans originated by certain lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a law
or constitutional provision that expressly rejects application of the federal
law. In addition, even where Title V is not so rejected, any state is authorized
by the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
Americans With Disabilities Act
Under Title III of the ADA, in order to protect individuals with
disabilities, public accommodations (such as hotels, restaurants, shopping
centers, hospitals, schools and social
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service center establishments) must remove architectural and communication
barriers to disabled individuals that are structural in nature from existing
places of public accommodation to the extent "readily achievable." In addition,
under the ADA, alterations to a place of public accommodation or a commercial
facility are to be made so that, to the maximum extent feasible, such altered
portions are readily accessible to and usable by disabled individuals. The
"readily achievable" standard takes into account, among other factors, the
financial resources of the affected site, owners, landlord, or other applicable
person. In addition to imposing a possible financial burden on the borrower in
its capacity as owner or landlord, the ADA may also impose such requirements on
a foreclosing lender who succeeds to the interest of the borrower, owner or
landlord. Furthermore, since the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
lender who is financially more capable than the borrower of complying with the
requirements of the ADA may be subject to more stringent requirements that those
to which the borrower is subject.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below and each of the Underwriters, for whom Friedman, Billings, Ramsey & Co.,
Inc. is acting as Representative, has severally agreed to purchase, the number
of Common Shares offered hereby set forth below opposite its name.
Underwriter Number of Shares
----------- ----------------
Friedman, Billings & Ramsey & Co., Inc..........
_______________.................................
Total......................................
===============
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase all the Common Shares offered hereby if
any are purchased.
The Underwriters propose initially to offer the Common Shares directly
to the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such offering price less a concession not
to exceed $_______ per Common Share. The Underwriters may allow and such dealers
may reallow a concession not to exceed $______ per Common Share to certain other
dealers. After the Common Shares are released for sale to the public, the
offering price and other selling terms may be changed by the Underwriters.
The Company has granted to the Underwriters an option exercisable
during a 30-day period after the date hereof to purchase, at the initial
offering price less underwriting discounts and commissions, up to an additional
________ Common Shares for the sole purpose of covering over-allotments, if any.
To the extent that the Underwriters exercise such option, each Underwriter will
be committed, subject to certain conditions, to purchase that number of
additional Common Shares which is proportionate to such Underwriter's initial
commitment.
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The Company has agreed to reimburse the Underwriters for up to $100,000
of their out-of-pocket expenses, including fees and expenses of counsel to the
Underwriters. The Company has further agreed to grant to the Representative, for
nominal consideration, warrants to purchase ____________ Common Shares at the
initial public offering price. The warrants will be exercisable for a period of
five years commencing with the completion of the Offering. The Common Shares
underlying the warrants have been included in the registration statement of
which this Prospectus is a part.
The Company has granted to the Representative preferential rights for
two years from the completion of the Offering to act as the exclusive
underwriter for, or advisor to, the Company in specified transactions or
offerings. The Company has also agreed that, in the event the Representative's
engagement as lead Underwriter for the Offering is terminated prior to
completion of the Offering, and the Company subsequently effects a public or
private sale of equity, debt or capital markets securities, the Company will pay
the Representative a fee of 3.5% of the gross proceeds received by the Company
from such sale.
The Underwriters and dealers may engage in passive market making
transactions in the Common Shares in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase Common Shares at a price that exceeds the highest independent
bid. In addition, the net daily purchases made by any passive market maker
generally may not exceed 30% of its average daily trading volume in the Common
Shares during a specified two-month prior period, or 200 shares, whichever is
greater. A passive market maker must identify passive market making bids as such
on the Nasdaq electronic inter-dealer reporting system. Passive market making
may stabilize or maintain the market price of the Common Shares above
independent market levels. Underwriters and dealers are not required to engage
in passive market making and may end passive market making activities at any
time.
In connection with this Offering, certain Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Shares. Specifically, the Underwriters may overallot this Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase Common Shares in the open market to cover syndicate short positions
or to stabilize the price of the Common Shares. Finally, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed Common Shares in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Shares above
independent market levels. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
The Company has agreed to indemnify the several Underwriters against
certain civil liabilities under the Securities Act, or to contribute to payments
the Underwriters may be required to make in respect thereof.
Prior to this Offering, there has been no public market for the Common
Shares. The initial public offering price has been determined by negotiation
between the Company and the
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representative of the Underwriters. Among the factors considered in making such
determination were the history of, and the prospects for, the industry in which
the Company will compete, an assessment of the Initial Investments and the
Company's prospects for future earnings, the general conditions of the economy
and the securities markets and the prices of offerings by similar issuers. There
can, however, be no assurance that the price at which the Common Shares will
sell in the public market after this Offering will not be lower than the price
at which they are sold by the Underwriters.
The Company has been advised by the Representative that it and certain
of the other Underwriters intend to make a market in the Common Shares. However,
the Underwriters are not obligated to do so and such market making may be
interrupted or discontinued at any time without notice at the sole discretion of
each of the Underwriters. Application has been made by the Company to list the
Common Shares in the Nasdaq Stock Market, but one of the requirements for
listing and continued listing is the presence of two market makers for the
Common Shares. The presence of a second market maker cannot be assured.
Accordingly, no assurance can be given as to the development or liquidity of any
market for the Common Shares.
The Representative has informed the Company that the Underwriters do
not intend to confirm sales of the Common Shares offered hereby to any accounts
over which they exercise discretionary authority.
Entities associated with the Representative are the beneficial owners
of shares of RAI's common stock, representing % of all common shares issued
and outstanding. Entities affiliated with the Representative are the
beneficial owners of $ in principal amount of RAI's 12% Senior Notes,
representing % of the outstanding number of such notes. The Representative
currently makes a market in the securities of RAI.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Ledgewood
Law Firm, P.C., Philadelphia, Pennsylvania and for the Underwriters by Hunton &
Williams, Richmond, Virginia. Certain matters regarding formation of the Company
and Maryland law will be passed upon for the Company by Arnold & Porter,
Washington, D.C. For certain relationships between Ledgewood Law Firm, P.C. and
the Company, see "The Company - Certain Relationships; Conflicts of Interest."
EXPERTS
The financial statement of the Company as of August 25, 1997 included
in this Prospectus or in the Registration Statement of which this Prospectus
forms a part, have been audited by Grant Thornton LLP, independent certified
public accountants, whose report thereon appears herein and elsewhere in this
Registration Statement. Such financial statement is included in reliance upon
the report of Grant Thornton LLP, given upon the authority of such firm as
experts in accounting and auditing.
The appraised values of properties underlying the Initial Investments
have been included herein in reliance upon the reports of Johnson, McClellan,
Sullins & Page, Joseph Dennis Pasquarella & Co., M. Richard Cohen and Louis A.
Iatrola Realty Appraisal Group, Ltd. as experts in appraising real properties.
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ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (of
which this Prospectus forms a part) on Form S-11 under the Securities Act with
respect to the Common Shares. This Prospectus contains summaries of the material
terms of the documents referred to herein and therein, but does not contain all
of the information set forth in the Registration Statement pursuant to the rules
and regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits filed by the Company can be inspected without charge and
copied at prescribed rates at the public reference facilities maintained by the
Commission at the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511; and New York Regional Office, Seven World Trade
Center, Suite 1300, New York, New York 10048. In addition, copies of such
documents may be obtained at the Commission's Internet address at
http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any
contract or other document that is filed as an exhibit to the Registration
Statement are not necessarily complete, and each such statement is qualified in
its entirety by reference to the full text of such contract or document.
The Company will be required to file reports and other information with
the Commission pursuant to the Securities Exchange Act of 1934. In addition to
applicable legal requirements, if any, holders of Common Shares will receive
annual reports containing audited financial statements with a report thereon by
the Company's independent certified public accountants, and quarterly reports
containing unaudited financial information for each of the first three quarters
of each fiscal year.
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GLOSSARY
As used in this Prospectus, the capitalized and other terms listed
below have the meanings indicated.
"ADA" shall mean the Americans with Disabilities Act of 1990, as
amended.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as
amended.
"Beneficiary" shall mean a charitable organization selected by the
Company to which shares in excess of the Ownership Limitation may be donated
under the circumstances set forth in "Description of Shares of Beneficial
Interest - Restrictions on Ownership and Transfer."
"Board of Trustees" shall means the Board of Trustees of RAIT.
"Brandywine" shall mean Brandywine Construction & Management, Inc.
"Bylaws" shall mean the Bylaws of RAIT.
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"Common Shares" shall mean the common shares of beneficial interest,
par value $0.01 per share, of RAIT.
"Company" shall mean Resource Asset Investment Trust, a Maryland real
estate investment trust, together with its subsidiaries, unless the context
indicates otherwise.
"Company Expenses" shall mean all administrative costs and expenses of
the Company and the General Partner.
"Control Share Acquisitions" shall mean transactions causing the voting
strength of any person acquiring beneficial ownership of shares to meet or
exceed certain threshold percentages (20%, 33 1/3% or 50%) of the total votes
entitled to be cast for the election of trustees.
"Counsel" shall mean Ledgewood Law Firm, P.C., counsel to the Company.
"Declaration of Trust" shall mean the Declaration of Trust of RAIT.
"DOL" shall mean the Department of Labor.
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"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exempt Organizations" shall mean tax-exempt entities, including, but
not limited to, charitable organizations, qualified employee pension and profit
sharing trusts and individual retirement accounts.
"Financing" shall mean any one or more of the mortgage or other debt
obligations the Company will originate or acquire for its investment portfolio.
"5/50 Rule" shall mean the requirement under the Code that not more
than 50% in value of the outstanding shares of a REIT be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year after the REIT's
first taxable year.
"FIRPTA" shall mean the Foreign Investment in Real Property Tax Act of
1980.
"General Partner" shall mean RAIT General, Inc., as the sole general
partner of the Operating Partnership.
"Independent Trustee" shall mean a trustee who, within the last two
years, has not (i) been an Affiliate of RAI, JeffBanks, Brandywine or their
Affiliates, (ii) been an officer of the Company, or (iii) had any material
business or professional relationship with the Company, RAI, Brandywine,
JeffBanks or their affiliates.
"Initial Investments" shall mean the Financings acquired or originated
by the Company as set forth in "Investments Objectives and Policies - Initial
Investments."
"Initial Limited Partner" shall mean RAIT Limited, Inc., as limited
partner of the Operating Partnership.
"Interested Shareholder" shall mean any holder of more than 10% of any
class of outstanding voting shares of the Company.
"Investment Company Act" shall mean the Investment Company Act of 1940.
"IRA" shall mean an individual retirement account.
"JeffBanks" shall mean JeffBanks, Inc.
"Limited Partners" shall mean the Initial Limited Partner and any
additional persons admitted as limited partners of the Operating Partnership.
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"MGCL" shall mean the Maryland General Corporation Law.
"1996 Lender Liability Act" shall mean the Asset Conversion, Lender
Liability and Deposit Insurance Act of 1996.
"Non-ERISA Plan" shall mean a plan that does not cover common law
employees.
"Non-U.S. Shareholder" shall mean alien individuals, foreign
corporations, foreign partnerships and other foreign shareholders that are not
resident in the United States.
"Offering" shall mean the offering of Common Shares made pursuant to
this Prospectus.
"Offering Price" shall mean the offering price of $_____ per Common
Share offered pursuant to this Prospectus.
"OID" shall mean original issue discount.
"Operating Partnership" shall mean RAIT Partnership, L.P.
"Operating Partnership Agreement" shall mean the agreement of limited
partnership of the Operating Partnership, as amended from time to time.
"Option Plan" shall mean the qualified share option plan that the
Company intends to adopt to provide options to officers and trustees of the
Company.
"Ownership Limitation" shall mean the restriction on ownership (or
deemed ownership by virtue of the attribution provisions of the Code) of (a)
more than 8.5% of the outstanding Common Shares by any shareholder other than
RAI, (b) more than 15% of the outstanding Common Shares by RAI, or (c) more than
9.8% of the outstanding Preferred Shares of any series by any shareholder.
"Plan" shall mean a pension, profit-sharing or other employee benefit
plan.
"Plan Asset Regulations" shall mean DOL regulations that define "plan
assets."
"Preferred Shares" shall mean the preferred shares of beneficial
interest, par value $0.01 per share, of the Company.
"Prohibited Transferee" shall mean a person to whom a transfer of
Common Shares has been made which is in excess of the Ownership Limitation.
"Property Interest" shall mean any direct or indirect interest in a
property acquired by the Company, including an interest in a partnership, joint
venture or limited liability company owning real property as all or
substantially all of its assets.
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"Qualified Interests" shall mean mortgages and other liens on and
interests in real estate, within the meaning of the Investment Company Act.
"RAI" shall mean Resource America, Inc., the sponsor of the Company.
"RAIT" shall mean Resource Asset Investment Trust.
"Redemption Rights" shall mean the rights that it is anticipated the
Limited Partners (other than the Initial Limited Partner) will have pursuant to
the Operating Partnership Agreement to redeem all or a portion of their
interests in the Operating Partnership for cash or, at the option of the General
Partner, Common Shares on a one-for-one basis.
"REIT" shall mean a real estate investment trust, as defined in section
856 of the Code.
"Representative" shall mean Friedman, Billings, Ramsey & Co., Inc., as
representative of the Underwriters.
"RICO" shall mean the Racketeer Influenced and Corrupt Organizations
Act.
"Rule 144" shall mean the rule promulgated under the Securities Act
that permits holders of restricted securities as well as affiliates of an issuer
of securities, pursuant to certain conditions and subject to certain
restrictions, to sell their securities publicly without registration under the
Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Service" shall mean the Internal Revenue Service.
"Title V" shall mean Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980.
"Treasury Regulations" shall mean the income tax regulations
promulgated under the Code.
"Trustee" shall mean a trustee of RAIT.
"UBTI" shall mean unrelated business taxable income.
"UBTI Percentage" shall mean the gross income derived by the Company in
any year from an unrelated trade or business divided by the gross income of the
Company for that year.
"Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc. and
each of the underwriters for whom Friedman, Billings, Ramsey & Co., Inc. is
acting as representative.
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"Underwriting Agreement" shall mean the agreement pursuant to which the
Underwriters will underwrite the Common Stock.
"Units shall mean units of limited partnership interest in the
Operating Partnership.
"UST" shall mean an underground storage tank.
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BALANCE SHEET
AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
RESOURCE ASSET INVESTMENT TRUST
August 25, 1997
F-1
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Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Trustees
Resource Asset Investment Trust
We have audited the accompanying consolidated balance sheet of Resource
Asset Investment Trust as of August 25, 1997. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents
fairly, in all material respects, the consolidated financial position of
Resource Asset Investment Trust as of August 25, 1997 in conformity with
generally accepted accounting principles.
Philadelphia, Pennsylvania
August 25, 1997
F-2
<PAGE>
Resource Asset Investment Trust
CONSOLIDATED BALANCE SHEET
August 25, 1997
ASSETS
Cash $ 1,000
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Shareholder's equity
Preferred shares - par value $0.01; authorized,
25,000,000 shares $ -
Common shares - par value $0.01; authorized,
200,000,000 shares; issued and outstanding, 100 shares 1
Additional paid-in-capital 999
----------
$ 1,000
==========
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
Resource Asset Investment Trust
NOTES TO CONSOLIDATED BALANCE SHEET
August 25, 1997
NOTE A - FORMATION AND STRUCTURE OF THE COMPANY
Resource Asset Investment Trust (RAIT or the Company), together with its
subsidiaries--RAIT Partnership, L.P. (the Operating Partnership); RAIT
General, Inc. (the General Partner), the General Partner of the Operating
Partnership; and RAIT Limited, Inc. (the Initial Limited Partner), the
Initial Limited Partner of the Operating Partnership--were each formed in
August 1997. The Company, the General Partner and the Initial Limited
Partner were incorporated in Maryland, and the Operating Partnership was
organized as a Delaware limited partnership.
The General Partner and the Initial Limited Partner will capitalize the
Operating Partnership. The General Partner initially owns a 1% general
partnership interest, and the Initial Limited Partner initially owns a 99%
limited partnership interest in the Operating Partnership.
RAIT was initially capitalized through the sale of 100 common shares of
beneficial interest (Common Shares) for $1,000.
RAIT's principal business activity will be to provide mortgage or other debt
financing (Financing) in situations that do not conform to the underwriting
standards of institutional lenders or sources that provide financing through
securitization. The Company intends to purchase or originate Financing
relating to multifamily residential, office and other commercial properties.
The Company will emphasize wraparound loans and, to a lesser extent, other
forms of junior lien and subordinated financing with principal amounts
generally between $1 million and $8 million. The Company also anticipates
the acquisition of real properties, or interests therein. The Operating
Partnership will undertake the business of the Company, including the
origination and acquisition of Financing and the acquisition of property
interests.
The Company's sole activity through August 25, 1997 consisted of the
organization and start-up of the Company. Accordingly, no consolidated
statement of operations is presented.
NOTE B - FEDERAL INCOME TAXES
The Company intends to qualify and will elect to be taxed as a Real Estate
Investment Trust (REIT) under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended, commencing with its taxable year ending
December 31, 1997. If the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income tax on its taxable
income that is distributed to its shareholders. A REIT is subject to a
number of organizational and operational requirements, including a
requirement that it currently distribute at least 95% of its annual taxable
income.
F-4
<PAGE>
Resource Asset Investment Trust
NOTES TO CONSOLIDATED BALANCE SHEET - CONTINUED
August 25, 1997
NOTE C - TRANSACTIONS WITH AFFILIATES
Resource America, Inc. (RAI), which is the sponsor of the Company, will own
9.8% of the outstanding Common Shares upon consummation of an offering of
Common Shares proposed to be made by the Company (assuming that the
underwriters for such offering do not exercise their over-allotment option).
See Note E. RAI, until such time as its ownership of outstanding Common
Shares is less than 5%, has the right to nominate one member of the Board of
Trustees. The Chairman and Chief Executive Officer of the Company is the
spouse of the Chairman, Chief Executive Officer and President of RAI. A
trustee of the Company is their son. A material portion of the Initial
Investments will be purchased by the Company from RAI, and the Company
anticipates that, subject to specified limitations, it will purchase
additional investments from RAI. The Company may also from time to time (but
is not obligated to) retain RAI to perform due diligence investigations on
properties underlying proposed investments (except investments acquired from
RAI). Brandywine Construction and Management, Inc. (Brandywine), an
affiliate of RAI, may provide real property management or management
supervisory services to properties underlying the Company's financing or
included in the Company's property interests. In addition, the Chairman and
Chief Executive Officer of the Company is the Chairman and Chief Executive
Officer of JeffBanks, Inc., with which the Company may have banking
relations and from which the Company may initially obtain loan
administration services. Accordingly, the Company's relationship with RAI
and its affiliates, and with JeffBanks, Inc., will be subject to various
potential conflicts of interest.
The Company has instituted certain procedures to minimize the potential
effects of such conflicts, including (i) requiring that, upon the close of
the Offering, a majority of the Company's trustees be Independent Trustees
(as defined in the Company's Declaration of Trust), (ii) requiring that the
acquisition price of any investments acquired from RAI (or in which an
officer or trustee of the Company has an interest) be determined based upon
independent appraisal of the underlying property, (iii) limiting the
investments which may be acquired from RAI to a maximum of 30% of the
Company's investments (excluding the Initial Investments) based upon the
Company's investment cost (the amount of the investment plus legal, filing,
and other related fees and expenses, (iv) requiring that any fees for
services performed by RAI, Brandywine, JeffBanks, Inc. or their affiliates
be no greater than prevailing fees in the area for similar services provided
by unrelated third parties, (v) requiring that any service arrangements with
an affiliated entity provide that services will be rendered only as and to
the extent requested by the Company from time to time and that, in any
event, the arrangements be cancelable by the Company on no more that 30
days' notice, (vi) requiring that any investment acquisition or services
arrangement, and every transaction with RAI, Brandywine, JeffBanks and their
affiliates, receive the prior approval of a majority of the Independent
Trustees (who, in giving such approval, may rely upon information provided
by RAI, Brandywine, JeffBanks, Inc. or their affiliates) and (vii) with
respect to real estate management or management supervisory services
performed by Brandywine, requiring that the aggregate of the fee received by
Brandywine and the manager being supervised may not exceed the normal and
customary fee for similar property management services with respect to
similar
F-5
<PAGE>
Resource Asset Investment Trust
NOTES TO CONSOLIDATED BALANCE SHEET - CONTINUED
August 25, 1997
properties in the same area. The Company will not be required to obtain the
approval of the Independent Trustees to retain RAI to perform a due
diligence investigation where the amount of the fee for such services will
not exceed the lesser of 1% of the property's appraised value of $10,000.
NOTE D - OPTION PLAN
The Company intends to adopt a qualified share option plan (the Option
Plan), which provides for options to purchase Common Shares (or, at the
election of the Company, units in the Operating Partnership that may be
redeemed for cash or, at the election of the General Partner, Common Shares
on a one-for-one basis). The maximum aggregate number of Common Shares that
may be issued pursuant to options granted under the Option Plan will be
determined by the Board of Trustees. The purpose of the Option Plan is to
provide a means of performance-based compensation in order to provide
incentive for the Company's key employees.
Before completion of the offering of the Company's Common Shares (the
Closing Date), the Company will grant to certain officers of the Company
options to acquire Common Shares at an exercise price per share equal
to the initial offering price of the Common Shares. The options are not
exercisable immediately; rather, 25% of each option becomes exercisable on
each of the first four anniversaries of the Closing Date. The options
terminate on the tenth anniversary of the Closing Date.
The Company has adopted Financial Accounting Standards (FAS) No. 123,
Accounting for Stock-Based Compensation, on August 20, 1997. FAS No. 123
contains a fair value-based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date based
on the fair value of the award. Compensation is then recognized over the
service period, which is usually the vesting period. Alternatively, the
standard permits entities to continue accounting for employee stock options
and similar equity instruments under Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees. Entities that
continue to account for stock options using APB Opinion No. 25 are required
to make pro forma disclosures of net income and net income per share, as if
the fair value-based method of accounting defined in FAS No. 123 had been
applied. The Company's stock option plans will be accounted for under APB
Opinion No. 25.
F-6
<PAGE>
NOTE E - PUBLIC OFFERING OF COMMON SHARES
The Company is in the process of filing a Registration Statement for sale of
its Common Shares. Contingent upon the consummation of the public offering,
the Company will be liable for organization and offering expenses in
connection with the sale of the shares offered. Prior thereto, RAI has paid
such expenses, subject to reimbursement therefor at the Closing Date.
F-7
<PAGE>
No person is authorized to give any information or to make any
representation not contained in this Prospectus and any information or
representation not contained herein must not be relied upon as having been
authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer of any securities other than the securities to which it
relates or an offer to any person in any jurisdiction where such an offer would
be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof.
TABLE OF CONTENTS
Page
----
Prospectus Summary......................................................
Formation and Structure.................................................
Risk Factors............................................................
Use of Proceeds.........................................................
Investment Objectives and Policies......................................
The Company.............................................................
Distribution Policy.....................................................
Capitalization..........................................................
Management's Discussion and Analysis
of Financial Condition................................................
Description of Shares of Beneficial Interest............................
Certain Provisions of Maryland Law
and of the Company's Declaration of
Trust and Bylaws .....................................................
Common Shares Available for Future Sale.................................
Operating Partnership Agreement.........................................
Federal Income Tax Considerations.......................................
Benefit Plan Considerations.............................................
Certain Legal Aspects of Real Property
Loans and Investments.................................................
Underwriting............................................................
Legal Matters...........................................................
Experts.................................................................
Additional Information..................................................
Until _________, 1997, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
___________ Shares
[LOGO]
RESOURCE ASSET INVESTMENT
TRUST
Common Shares
--------
PROSPECTUS
--------
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
____________, 1997
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS.
Item 31. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Common Shares being registered.
Amount to
be Paid
---------
SEC registration fee........................... $
NASD filing fee................................
Nasdaq Stock Market listing fee................
Printing and engraving expenses............ *
Legal fees and expenses............... *
Accounting fees and expenses.......... *
Blue Sky fees and expenses............ *
Transfer agent and custodian fees..... *
Miscellaneous......................... *
---------
Total..................................... $
=========
- ------------------------
*Estimated
Item 32. Sales to Special Parties
Upon completion of this Offering, RAI will purchase __________ of the
Company's Common Shares at a price of $______ per share (the public offering
price, less underwriting discounts and commissions).
As a result of such purchase, RAI will hold 9.8% of the Company's
Common Shares outstanding (_____% if the Underwriters exercise their
over-allotment option). These securities will be issued in reliance on the
exemption from registration contained in Section 4(2) of the Securities Act.
Item 33. Recent Sales of Unregistered Securities
See Item 32, above.
Item 34. Indemnification of Directors and Officers
Maryland law permits a Maryland REIT to include in its trust agreement
a provision limiting the liability of its trustees and officers to the trust and
its shareholders for money
II-1
<PAGE>
damages except for liability resulting from (a) actual receipt of an improper
benefit or profit in money, property or services or (b) active and deliberate
dishonesty established by a final judgment as being material to the cause of
action. The Declaration of Trust of the Company contains such a provision which
eliminates such liability to the maximum extent permitted by Maryland law.
The Declaration of Trust of the Company authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(1) any present or former trustee or officer or (2) any individual who, while a
trustee of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise from and against any claim or liability to which such person
may become subject or which such person may incur by reason of his status as a
present or former trustee or officer of the Company. The Declaration of Trust of
the Company obligates it, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (1) any present or former trustee or officer who
is made a party to the proceeding by reason of his service in that capacity or
(2) any individual who, while a trustee of the Company and at the request of the
individual who, while a trustee of the Company and at the request of the
Company, serves or has served as an officer, director, trustee, partner or
otherwise in another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise and who is made a party to the proceeding by
reason of his service in that capacity.
Maryland law requires a REIT (unless its trust agreement provides
otherwise, which the Company's Declaration of Trust does not) to indemnify a
trustee or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity. Maryland law permits a REIT to indemnify its present and
former trustees and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (1) the act or omission
of the trustee or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (2) the trustee or officer actually received an
improper personal benefit in money, property or services or (3) in the case of
any criminal proceeding, the trustee or officer had reasonable cause to believe
that the act or omission was unlawful. However, a Maryland REIT may not
indemnify for an adverse judgment in a suit by or in the right of the trust or
for a judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. In addition, Maryland law requires the Company, as a condition to
advancing expenses, to obtain (1) a written affirmation by the trustee or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification by the Company and (2) a written statement by or
on his behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
II-2
<PAGE>
In addition, the Company has entered into an Indemnity Agreement
(Exhibit 10 hereto) with its officers and trustees. The Underwriting Agreement
(Exhibit 1) also provides for indemnification by the Underwriters of the
Company, its trustees and officers and persons who control the Company within
the meaning of Section 15 of the Securities Act with respect to certain
liabilities, including liabilities arising under the Securities Act.
ITEM 35. Treatment of Proceeds from Shares Being Registered
Not applicable.
ITEM 36. Financial Statements and Exhibits
(a) Financial Statements included in the Prospectus are:
Consolidated Balance Sheet as of August 25, 1997
All other schedules have been omitted because they are either not
applicable, not required or the information required has been disclosed in the
financial statements and related notes or otherwise in the Prospectus.
(b) Exhibits
<TABLE>
<CAPTION>
<S> <C>
1* Form of Underwriting Agreement
3.1(a) Declaration of Trust of the Company
3.1(b) Form of Amended and Restated Declaration of Trust
3.2 Bylaws of the Company
3.3 Articles of Incorporation of RAIT General, Inc.
3.4 By-laws of RAIT General, Inc.
3.5 Articles of Incorporation of RAIT Limited, Inc.
3.6 By-laws of RAIT Limited, Inc.
3.7 Certificate of Limited Partnership of RAIT Partnership, L.P.
3.8 Limited Partnership Agreement of RAIT Partnership, L.P.
4* Form of Certificate for Common Shares of the Company
5.1* Opinion of Ledgewood Law Firm, P.C.
5.2* Opinion of Arnold & Porter
8* Opinion of Ledgewood Law Firm, P.C. (as to tax matters)
10.1* Form of Indemnification Agreement
10.2* Form of Agreement between Company and Resource America, Inc.
23.1 Consent of Ledgewood Law Firm, P.C. (contained in Exhibits 5.1 and 8)
23.2 Consent of Arnold & Porter (contained in Exhibit 5.2)
23.3 Consent of Grant Thornton LLP
23.4* Consent of Johnson, McClellan, Sullins & Page
23.5* Consent of Joseph Dennis Pasquarella & Co.
23.6* Consent of M. Richard Cohen
24 Power of Attorney (included on signature page)
</TABLE>
- ----------------------
* To be filed by amendment.
II-3
<PAGE>
ITEM 37. Undertakings
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 34 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policies as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a trustee, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Philadelphia, Commonwealth of Pennsylvania, on
the 2nd day of September, 1997.
RESOURCE ASSET INVESTMENT TRUST
By: /s/ Betsy Z. Cohen
----------------------------------------------------
Betsy Z. Cohen, Chairman and Chief Executive Officer
II-5
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below in so signing also makes,
constitutes and appoints Betsy Z. Cohen and Jay J. Eisner, and each of them
acting alone, his or her true and lawful attorney-in-fact, with full power of
substitution, for him or her in any and all capacities, to execute and cause to
be filed with the Securities and Exchange Commission any and all amendments and
post-effective amendments to this Registration Statement with exhibits thereto
and other documents in connection therewith, and hereby ratifies and confirms
all that said attorney-in-fact or said attorney-in-fact's substitute or
substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Betsy Z. Cohen
- ---------------------- Chairman, Chief Executive September 2, 1997
Betsy Z. Cohen Officer and Trustee
(Principal Executive Officer)
/s/ Jay J. Eisner
- ---------------------- President and Chief Operating September 2, 1997
Jay J. Eisner Officer
/s/ Ellen J. DiStefano
- ---------------------- Chief Financial Officer September 2, 1997
Ellen J. DiStefano
/s/ Jonathan Z. Cohen
- ---------------------- Trustee September 2, 1997
Jonathan Z. Cohen
/s/ Jerome S. Goodman
- ---------------------- Trustee September 2, 1997
Jerome S. Goodman
/s/ Joel R. Mesznik
- ---------------------- Trustee September 2, 1997
Joel R. Mesznik
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
II-6
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Daniel Promislo
- ---------------------- September 2, 1997
Daniel Promislo Trustee
/s/ Jack L. Wolgin
- ---------------------- September 2, 1997
Jack L. Wolgin Trustee
II-7
<PAGE>
EXHIBIT INDEX
1* Form of Underwriting Agreement
3.1(a) Declaration of Trust of the Company
3.1(b) Form of Amended and Restated Declaration of Trust
3.2 Bylaws of the Company
3.3 Articles of Incorporation of RAIT General, Inc.
3.4 By-laws of RAIT General, Inc.
3.5 Articles of Incorporation of RAIT Limited, Inc.
3.6 By-laws of RAIT Limited, Inc.
3.7 Certificate of Limited Partnership of RAIT Partnership, L.P.
3.8 Limited Partnership Agreement of RAIT Partnership, L.P.
4* Form of Certificate for Common Shares of the Company
5.1* Opinion of Ledgewood Law Firm, P.C.
5.2* Opinion of Arnold & Porter
8* Opinion of Ledgewood Law Firm, P.C. (as to tax matters)
10.1* Form of Indemnification Agreement
10.2* Form of Agreement between Company and Resource America, Inc.
23.1 Consent of Ledgewood Law Firm, P.C. (contained in Exhibits 5.1 and 8)
23.2 Consent of Arnold & Porter (contained in Exhibit 5.2)
23.3 Consent of Grant Thornton LLP
23.4* Consent of Johnson, McClellan, Sullins & Page
23.5* Consent of Joseph Dennis Pasquarella & Co.
23.6* Consent of M. Richard Cohen
24 Power of Attorney (included on signature page)
- ----------------------
* To be filed by amendment.
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
<PAGE>
TABLE OF CONTENTS
ARTICLE 1 - THE TRUST; DEFINITIONS........................................... 1
Section 1.1. Name................................................... 1
Section 1.2. Resident Agent......................................... 1
Section 1.3. Nature of Trust........................................ 1
Section 1.4. Powers................................................. 2
Section 1.5. Definitions............................................ 2
ARTICLE 2 - TRUSTEES......................................................... 3
Section 2.1. Number................................................. 3
Section 2.2. Initial Board; Term.................................... 3
Section 2.3. Resignation, Removal or Death.......................... 4
Section 2.4. Vacancies.............................................. 4
Section 2.5. Legal Title............................................ 4
ARTICLE 3 - POWERS OF TRUSTEES............................................... 4
Section 3.1. General................................................ 4
Section 3.2. Specific Powers and Authority.......................... 5
Section 3.3. Limitations on Powers and Authority.................... 9
ARTICLE 4 - ADVISER.......................................................... 9
Section 4.1. Appointment............................................ 9
Section 4.2. Affiliation and Functions.............................. 10
ARTICLE 5 - INVESTMENT POLICY................................................ 10
ARTICLE 6 - SHARES........................................................... 10
Section 6.1. Authorized Shares...................................... 10
Section 6.2. Common Shares.......................................... 10
Section 6.3. Preferred Shares....................................... 11
Section 6.4. Dividends or Distributions............................. 11
Section 6.5. General Nature of Shares............................... 11
Section 6.6. Restrictions on Ownership and Transfer:
Exchange For Excess Shares............................. 11
Section 6.7. Legend................................................. 18
Section 6.8. Excess Shares.......................................... 19
Section 6.9. Severability; Agent for Trust.......................... 21
ARTICLE 7 - SHAREHOLDERS..................................................... 21
Section 7.1. Meetings of Shareholders............................... 21
Section 7.2. Voting Rights of Shareholders.......................... 21
Section 7.3. Shareholder Action to be Taken by Meeting.............. 22
ARTICLE 8 -
-i-
<PAGE>
LIABILITY OF SHAREHOLDERS, TRUSTEES, OFFICERS, EMPLOYEES AND AGENTS AND
TRANSACTIONS BETWEEN AFFILIATES AND THE TRUST................................ 22
Section 8.1. Limitation of Shareholder Liability.................... 22
Section 8.2. Limitation of Trustee and Officer Liability............ 22
Section 8.3. Express Exculpatory Clauses in Instruments............. 22
Section 8.4. Indemnification........................................ 23
Section 8.5. Transactions Between the Trust and its Trustees,
Officers, Employees and Agents......................... 23
ARTICLE 9 - AMENDMENT; REORGANIZATION; MERGER, ETC........................... 23
Section 9.1. Amendment.............................................. 23
Section 9.2. Merger, Consolidation or Sale of Trust Property........ 23
ARTICLE 10 - DURATION AND TERMINATION OF TRUST............................... 24
Section 10.1. Duration of Trust..................................... 24
Section 10.2. Termination of Trust.................................. 24
ARTICLE 11 - MISCELLANEOUS................................................... 24
Section 11.1. Governing Law......................................... 24
Section 11.2. Reliance by Third Parties............................. 25
Section 11.3. Provisions in Conflict with Law or Regulations........ 25
Section 11.4. Construction.......................................... 25
Section 11.5. Recordation........................................... 25
-ii-
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
DECLARATION OF TRUST
(Amended and Restated as of ________________, 1997 at the Annual
Meeting of Shareholders by affirmative vote of the
holders of a majority of the outstanding shares
of the Trust pursuant to Section 8-202(c)
of Title 8 of the Maryland Corporations
and Associations Code)
This DECLARATION OF TRUST ("Declaration of Trust" or "Declaration") is
amended and restated as of the date set forth above by the undersigned Trustees.
WHEREAS, the Trustees desire to create a real estate investment trust
under Title 8 of the Corporations and Associations Article of the Annotated Code
of Maryland, as amended ("Title 8"); and
WHEREAS, the Trustees desire that this trust qualify as a "real estate
investment trust" under the Internal Revenue Code of 1986, as amended (the
"Code"), so long as such qualification, in the opinion of the Trustees, is
advantageous to the Shareholders; and
WHEREAS, the beneficial interest in the Trust shall be divided into
transferable shares of one or more classes evidenced by certificates;
NOW, THEREFORE, the Trustees hereby declare that they will hold all
property which they have or may hereafter acquire as such Trustees, together
with the proceeds thereof, in trust, and manage the Trust Property (as defined
herein) for the benefit of the Shareholders as provided by this Declaration of
Trust.
ARTICLE 1 - THE TRUST; DEFINITIONS
Section 1.1. Name. The name of the trust (the "Trust") is Resource
Asset Investment Trust.
So far as may be practicable, the business of the Trust shall be
conducted and transacted under that name, which name (and the word "Trust"
wherever used in this Declaration of Trust, except where the context otherwise
requires) shall refer to the Trustees collectively but not individually or
personally and shall not refer to the Shareholders or to any officers, employees
or agents of the Trust or of such Trustees.
Under circumstances in which the Trustees determine that the use of the
name "Resource Asset Investment Trust" is not practicable, they may use any
other designation or name for the Trust.
Section 1.2. Resident Agent. The name of the resident agent for service
of process of the Trust in the State of Maryland is The Corporation Trust
Incorporated, whose post office address is c/o The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202. The Trust may have
such offices or places of business within or without the State of Maryland as
the Trustees may from time to time determine.
Section 1.3. Nature of Trust. The Trust is a real estate investment
trust within the meaning of Title 8. The Trust shall not be deemed to be a
general partnership, limited partnership, joint venture, joint stock company or,
except as provided in Section 11.4, a corporation (but nothing herein shall
preclude the Trust from being treated for tax purposes as an association under
the Code).
<PAGE>
Section 1.4. Powers. The Trust shall have all of the powers granted to
real estate investment trusts generally by Title 8 or any successor statute and
shall have any other and further powers as are not inconsistent with and are
appropriate to promote and attain the purposes set forth in this Declaration of
Trust.
Section 1.5. Definitions. As used in this Declaration of Trust, the
following terms shall have the following meanings unless the context otherwise
requires:
"Adviser" means the Person, if any, appointed, employed or contracted
with by the Trust pursuant to Section 4.1.
"Affiliate" or "Affiliated" means, as to any individual, corporation,
partnership, trust or other association (other than the Trust), any Person (i)
that holds beneficially, directly or indirectly, 10% or more of the outstanding
stock or equity interests thereof or (ii) who is an officer, director, partner
or trustee thereof or of any Person which controls, is controlled by, or is
under common control with, such corporation, partnership, trust or other
association or (iii) which controls, is controlled by or under common control
with, such corporation, partnership, trust or other association. "Book Value Per
Share" shall mean an amount equal to the quotient obtained by dividing (i) the
Shareholders' Equity as shown in the annual or quarterly financial statements of
the Trust most recently filed by the Trust with the Securities and Exchange
Commission by (ii) the number of Shares outstanding as of the date of such
financial statements. For purposes of clause (ii) of the preceding sentence,
"outstanding" Shares shall consist of those Common Shares then actually issued
and outstanding and those Common Shares issuable upon the exercise or conversion
of any then outstanding "in-the-money" warrants, options or other convertible
securities.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time. "Person" means an individual, corporation, partnership, estate, trust
(including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a
portion of a trust permanently set aside for or to be used exclusively for the
purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock company
or other entity, or any government or agency or political subdivision thereof,
and also includes a group as that term is used for purposes of Section 13(d)(3)
of the Securities Exchange Act of 1934, as amended.
"Real Property" or "Real Estate" means land, rights in land (including
leasehold interests), and any buildings, structures, improvements, furnishings,
fixtures and equipment located on or used in connection with land and rights or
interests in land.
"REIT Provisions of the Code" means Sections 856 through 860 of the
Code and any successor or other provisions of the Code relating to real estate
investment trusts (including provisions as to the attribution of ownership of
beneficial interests therein) and the regulations promulgated thereunder.
"Securities" means Shares, any stock, shares or other evidences of equity or
beneficial or other interests, voting trust certificates, bonds, debentures,
notes or other evidences of indebtedness, secured or unsecured, convertible,
subordinated or otherwise, or in general any instruments commonly known as
"securities" or any certificates of interest, shares or participations in,
temporary or interim certificates for, receipts for, guarantees of, or warrants,
options or rights to subscribe to, purchase or acquire, any of the foregoing, or
shares or other securities of any successor in interest of the Trust.
"Securities of the Trust" means any Securities issued by the Trust.
"Shareholders" means holders of record of outstanding Shares.
2
<PAGE>
"Shareholders' Equity" means the total shareholders' equity of the
Trust or, if the Trust has a class of Preferred Shares outstanding as of the
applicable date, "Shareholders' Equity" means the total "common" shareholders'
equity of the Trust (computed with appropriate adjustments to reflect any
entitlement of Preferred Shares to participate equally and ratably with the
Common Shares in the assets of the Trust upon a liquidation of the Trust and
computed to include amounts payable upon exercise or conversion of outstanding
"in-the-money" warrants, options or other convertible securities issued by the
Trust).
"Shares" means shares of Preferred Shares or Common Shares (all as
defined in Section 6.1).
"Trustees" or "Board of Trustees" means, collectively, all individuals
who have been duly elected and qualify as trustees of the Trust hereunder.
"Trust Property" means any and all property, real, personal or
otherwise, tangible or intangible, which is transferred or conveyed to the Trust
or the Trustees (including all rents, income, profits and gains therefrom),
which is owned or held by, or for the account of, the Trust.
"Voting Shares" means the outstanding Shares entitled to vote generally
in the election of trustees.
ARTICLE 2 - TRUSTEES
Section 2.1. Number. The number of Trustees shall be four, but such
number may be increased or decreased by the unanimous vote of the Trustees then
in office from time to time; provided, that the total number of Trustees shall
be not fewer than three and not more than 15. No reduction in the number of
Trustees shall cause the removal of any Trustee from office prior to the
expiration of his term.
Section 2.2. Initial Board; Term. The Trustees, as of the date on which
this Declaration of Trust has been amended and restated, as set forth above (the
"Initial Trustees"), shall be
________________________________________________________________________________
________________________________________________________________________________
___________________________________________________________________________, but
in each case only for so long as he shall continue to serve as a Trustee of the
Trust hereunder. The term of the Initial Trustees shall commence on the date
hereof and shall continue until the annual meeting of Shareholders in 1998 and
until their successors shall have been duly elected and shall have qualified.
The names and addresses of the Initial Trustees who shall serve until
the annual meeting of the Shareholders held in 1998 and until their successors
are duly elected and qualified are:
Name Address
Beginning with the annual meeting of Shareholders in 1998 and at each
succeeding annual meeting of Shareholders, the Trustees will be elected to hold
office for a term expiring at the succeeding annual meeting. Each Trustee will
hold office for the term for which he is elected and until his successor is duly
elected and qualified.
3
<PAGE>
Section 2.3. Resignation, Removal or Death. Any Trustee may resign by
written notice to the remaining Trustees, effective upon execution and delivery
to the Trust of such written notice or upon any future date specified in the
notice. A Trustee may be removed from office only at a meeting of the
Shareholders called for that purpose, by the affirmative vote of the holders of
not less than a majority of the Shares entitled to vote in the election of
Trustees; provided, however, that in the case of any Trustees elected solely by
holders of a series of Preferred Shares, such Trustees may be removed by the
affirmative vote of a majority of the Preferred Shares of that series then
outstanding and entitled to vote in the election of Trustees, voting together as
a single class. Upon the resignation or removal of any Trustee, or his otherwise
ceasing to be a Trustee, he shall automatically cease to have any right, title
or interest in and to the Trust Property and shall execute and deliver such
documents as the remaining Trustees require for the conveyance of any Trust
Property held in his name, and shall account to the remaining Trustees as they
require for all property which he holds as Trustee. Upon the incapacity or death
of any Trustee, his legal representative shall perform the acts described in the
foregoing sentence.
Section 2.4. Vacancies. Any vacancy (including a vacancy created by an
increase in the number of Trustees) shall be filled, at any regular or special
meeting of Trustees called for that purpose, by a majority of the Trustees
(although less than a quorum). Any individual so elected as Trustee shall hold
office until the next annual meeting of Shareholders and until his successor has
been duly elected and qualified.
Section 2.5. Legal Title. Legal title to all Trust Property shall be
vested in the Trustees, but they may cause legal title to any Trust Property to
be held by or in the name of any Trustee, or the Trust, or any other Person as
nominee. The right, title and interest of the Trustees in and to the Trust
Property shall automatically vest in successor and additional Trustees upon
their qualification and acceptance of election or appointment as Trustees, and
they shall thereupon have all the rights and obligations of Trustees, whether or
not conveyancing documents have been executed and delivered pursuant to Section
2.3 or otherwise. Written evidence of the qualification and acceptance of
election or appointment of successor and additional Trustees may be filed with
the records of the Trust and in such other offices, agencies or places as the
Trustees may deem necessary or desirable.
ARTICLE 3 - POWERS OF TRUSTEES
Section 3.1. General. Subject to the express limitations herein or in
the bylaws of the Trust (the "Bylaws"), (i) the business and affairs of the
Trust shall be managed under the direction of the Board of Trustees and (ii) the
Trustees shall have full, exclusive and absolute power, control and authority
over the Trust Property and over the business of the Trust as if they, in their
own right, were the sole owners thereof. The Trustees may take any actions that,
in their sole judgment and discretion, are necessary or desirable to conduct the
business of the Trust. This Declaration of Trust shall be construed with a
presumption in favor of the grant of power and authority to the Trustees. Any
construction of this Declaration of Trust or determination made in good faith by
the Trustees concerning their powers and authority hereunder shall be
conclusive. The enumeration and definition of particular powers of the Trustees
included in this Article 3 shall in no way be limited or restricted by reference
to or inference from the terms of this or any other provision of this
Declaration of Trust or construed or deemed by inference or otherwise in any
manner to exclude or limit the powers conferred upon the Trustees under the
general laws of the State of Maryland as now or hereafter in force.
Section 3.2. Specific Powers and Authority. Subject only to the express
limitations herein, and in addition to all other powers and authority conferred
by this Declaration or by law, the Trustees, without any vote, action or consent
by the Shareholders, shall have and may exercise, at any time or times, in the
name of the Trust or on its behalf the following powers and authorities:
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(a) Investments. Subject to Section 8.5, to invest in,
purchase or otherwise acquire and to hold real, personal or
mixed, tangible or intangible, property of any kind wherever
located, or rights or interests therein or in connection
therewith, all without regard to whether such property,
interests or rights are authorized by law for the investment
of funds held by trustees or other fiduciaries, or whether
obligations the Trust acquires have a term greater or lesser
than the term of office of the Trustees or the possible
termination of the Trust, for such consideration as the
Trustees may deem proper (including cash, property of any kind
or Securities of the Trust); provided, however, that the
Trustees shall take such actions as they deem necessary and
desirable to comply with any requirements of Title 8 relating
to the types of assets held by the Trust.
(b) Sale, Disposition and Use of Property. Subject to Section
8.5, to sell, rent, lease, hire, exchange, release, partition,
assign, mortgage, grant security interests in, encumber,
negotiate, dedicate, grant easements in and options with
respect to, convey, transfer (including transfers to entities
wholly or partially owned by the Trust or the Trustees) or
otherwise dispose of any or all of the Trust Property by deeds
(including deeds in lieu of foreclosure with or without
consideration), trust deeds, assignments, bills of sale,
transfers, leases, mortgages, financing statements, security
agreements and other instruments for any of such purposes
executed and delivered for and on behalf of the Trust or the
Trustees by one or more of the Trustees or by a duly
authorized officer, employee, agent or nominee of the Trust,
on such terms as they deem appropriate; to give consents and
make contracts relating to the Trust Property and its use or
other property or matters; to develop, improve, manage, use,
alter and otherwise deal with the Trust Property; and to rent,
lease or hire from others property of any kind; provided,
however, that the Trust may not use or apply land for any
purposes not permitted by applicable law.
(c) Financings. To borrow or in any other manner raise money
for the purposes and on the terms they determine, and to
evidence the same by issuance of Securities of the Trust,
which may have such provisions as the Trustees determine; to
reacquire such Securities of the Trust; to enter into other
contracts or obligations on behalf of the Trust; to guarantee,
indemnify or act as surety with respect to payment or
performance of obligations of any Person; to mortgage, pledge,
assign, grant security interests in or otherwise encumber the
Trust Property to secure any such Securities of the Trust,
contracts or obligations (including guarantees,
indemnifications and suretyships); and to renew, modify,
release, compromise, extend, consolidate or cancel, in whole
or in part, any obligation to or of the Trust or participate
in any reorganization of obligors to the Trust.
(d) Loans. Subject to the provisions of Section 8.5, to lend
money or other Trust Property on such terms, for such purposes
and to such Persons as they may determine.
(e) Issuance of Securities. Subject to the provisions of
Article 6, to create and authorize and direct the issuance (on
either a pro-rata or a non-pro-rata basis) by the Trust, in
shares, units or amounts of one or more types, series or
classes, of Securities of the Trust, which may have such
voting rights, dividend or interest rates, preferences,
subordinations, conversion or redemption prices or rights,
maturity dates, distribution, exchange, or liquidation rights
or other rights as the Trustees may determine, without vote of
or other action by the Shareholders, to such Persons for such
consideration, at such time or times and in such manner and on
such terms as the Trustees determine; to list any of the
Securities of the Trust
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on any securities exchange; and to purchase or otherwise
acquire, hold, cancel, reissue, sell and transfer any
Securities of the Trust.
(f) Expenses and Taxes. To pay any charges, expenses or
liabilities necessary or desirable, in the sole discretion of
the Trustees, for carrying out the purposes of this
Declaration of Trust and conducting the business of the Trust,
including compensation or fees to Trustees, officers,
employees and agents of the Trust, and to Persons contracting
with the Trust, and any taxes, levies, charges and assessments
of any kind imposed upon or chargeable against the Trust, the
Trust Property, or the Trustees in connection therewith; and
to prepare and file any tax returns, reports or other
documents and take any other appropriate action relating to
the payment of any such charges, expenses or liabilities.
(g) Collection and Enforcement. To collect, sue for and
receive money or other property due to the Trust; to consent
to extensions of the time for payment, or to the renewal, of
any Securities or obligations; to engage or to intervene in,
prosecute, defend, compound, enforce, compromise, release,
abandon or adjust any actions, suits, proceedings, disputes,
claims, demands, security interests, or things relating to the
Trust, the Trust Property, or the Trust's affairs; to exercise
any rights and enter into any agreements; and take any other
action necessary or desirable in connection with the
foregoing.
(h) Deposits. To deposit funds or Securities constituting part
of the Trust Property in banks, trust companies, savings and
loan associations, financial institutions and other
depositories, whether or not such deposits will draw interest,
subject to withdrawal on such terms and in such manner as the
Trustees determine.
(i) Allocation; Accounts. To determine whether moneys, profits
or other assets of the Trust shall be charged or credited to,
or allocated between, income and capital, including whether or
not to amortize any premium or discount and to determine in
what manner any expenses or disbursements are to be borne as
between income and capital (regardless of how such items would
normally or otherwise be charged to or allocated between
income and capital without such determination); to treat any
dividend or other distribution on any investment as, or
apportion it between, income and capital; in their discretion
to provide reserves for depreciation, amortization,
obsolescence or other purposes in respect of any Trust
Property in such amounts and by such methods as they
determine; to determine what constitutes net earnings, profits
or surplus; to determine the method or form in which the
accounts and records of the Trust shall be maintained; and to
allocate to the Shareholders equity account less than all of
the consideration paid for Shares and to allocate the balance
to paid-in capital or capital surplus.
(j) Valuation of Property. To determine the value of all or
any part of the Trust Property and of any services,
Securities, property or other consideration to be furnished to
or acquired by the Trust, and to revalue all or any part of
the Trust Property, all in accordance with such appraisals or
other information as are reasonable, in their sole judgment.
(k) Ownership and Voting Powers. To exercise all of the
rights, powers, options and privileges pertaining to the
ownership of any mortgages, Securities, Real Estate and other
Trust Property to the same extent that an individual owner
might, including without limitation to vote or give any
consent, request, or notice or waive any notice, either in
person or may be
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for any general or special meetings or action, and may include
the exercise of discretionary powers.
(l) Officers, Etc.; Delegation of Powers. To elect, appoint or
employ such officers for the Trust and such committees of the
Board of Trustees with such powers and duties as the Trustees
may determine or the Trust's Bylaws provide; to engage, employ
or contract with and pay compensation to any Person
(including, subject to Section 8.5, any Trustee and any Person
who is an Affiliate of any Trustee) as agent, representative,
Adviser, member of an advisory board, employee or independent
contractor (including advisers, consultants, transfer agents,
registrars, underwriters, accountants, attorneys-at-law, real
estate agents, property and other managers, appraisers,
brokers, architects, engineers, construction managers, general
contractors or otherwise) in one or more capacities, to
perform such services on such terms as the Trustees may
determine; to delegate to one or more Trustees, officers or
other Persons engaged or employed as aforesaid or to
committees of Trustees or to the Adviser, the performance of
acts or other things (including granting of consents), the
making of decisions and the execution of such deeds, contracts
or other instruments, either in the names of the Trust, the
Trustees or as their attorneys or otherwise, as the Trustees
may determine; and to establish such committees as they deem
appropriate.
(m) Associations. Subject to Section 8.5, to cause the Trust
to enter into joint ventures, general or limited partnerships,
limited liability companies, participation or agency
arrangements or any other lawful combinations, relationships,
or associations of any kind.
(n) Reorganizations, Etc. Without limiting the scope of
Section 9.2, to cause to be organized or assist in organizing
any Person under the laws of any jurisdiction to acquire all
or any part of the Trust Property or carry on any business in
which the Trust shall have an interest; to sell, rent, lease,
hire, convey, negotiate, assign, exchange or transfer all or
any part of the Trust Property to or with any Person in
exchange for Securities of such Person or otherwise; and to
lend money to, subscribe for and purchase the Securities of,
and enter into any contracts with, any Person in which the
Trust holds, or is about to acquire, Securities or any other
interests.
(o) Reverse Stock Splits. Upon the approval of not less than
80% of the Trustees, to cause the Shares of the Trust to be
recapitalized or consolidated by effectuating a reverse stock
split of one or more series or classes of Shares based upon a
reverse stock split ratio (the "Ratio") approved by not less
than 80% of the Trustees, such that following the consummation
of such reverse stock split, each Share of the series or
class(es) of Shares in question will automatically, without
vote of or other action by the Shareholders, be deemed to be a
fewer number of Shares computed in accordance with such Ratio;
and, if determined by the Trustees to be appropriate or
desirable, to cause any fractional Shares resulting therefrom
to be canceled in exchange for a cash payment equal to (x)
with respect to Common Shares, the "market value" of such
Share determined in accordance with the provisions of Section
3-601 et seq. of the Maryland General Corporation Law
(computed for the period ending on the business day prior to
the effective date of such reverse stock split), or for Shares
other than Common Shares traded on the American Stock
Exchange, as determined by the Trustees in good faith,
multiplied by (y) the applicable fraction.
(p) Insurance. To purchase and pay for out of Trust Property
insurance policies insuring the Trust and the Trust Property
against any and all risks, and insuring the Shareholders,
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Trustees, officers, employees and agents of the Trust
individually against all claims and liabilities of every
nature arising by reason of holding or having held any such
status, office or position or by reason of any action alleged
to have been taken or omitted (including those alleged to
constitute misconduct, gross negligence, reckless disregard of
duty or bad faith) by any such Person in such capacity,
whether or not the Trust would have the power to indemnify
such Person against such claim or liability.
(q) Executive Compensation, Pension and Other Plans. To adopt
and implement executive compensation, pension, profit sharing,
stock option, stock bonus, stock purchase, stock appreciation
rights, savings, thrift, retirement, incentive or benefit
plans, trusts or provisions, applicable to any or all
Trustees, officers, employees or agents of the Trust, or to
other Persons who have benefitted the Trust, all on such terms
and for such purposes as the Trustees may determine.
(r) Distributions. To declare and pay dividends or other
distributions to Shareholders, subject to the provisions of
Section 6.4.
(s) Indemnification. Without regard to the indemnification
provided for in Section 8.4, to indemnify any Person,
including any Adviser or independent contractor, with whom the
Trust has dealings.
(t) Charitable Contributions. To make donations for the public
welfare or for community, charitable, religious, educational,
scientific, civic or similar purposes, regardless of any
direct benefit to the Trust.
(u) Discontinue Operations; Bankruptcy. To discontinue the
operations of the Trust; to petition or apply for relief under
any provision of federal or state bankruptcy, insolvency or
reorganization laws or similar laws for the relief of debtors;
to permit any Trust Property to be foreclosed upon without
raising any legal or equitable defenses that may be available
to the Trust or the Trustees or otherwise defending or
responding to such foreclosure; to confess judgment against
the Trust; or to take such other action with respect to
indebtedness or other obligations of the Trustees, in such
capacity, the Trust Property or the Trust as the Trustees in
their discretion may determine.
(v) Trustees. To nominate persons for election as Trustees.
(w) Fiscal Year. Subject to the Code, to adopt, and from time
to time change, a fiscal year for the Trust.
(x) Seal. To adopt and use a seal, but the use of a seal shall
not be required for the execution of instruments or
obligations of the Trust.
(y) Bylaws. To adopt, implement and from time to time alter,
amend or repeal Bylaws of the Trust relating to the business
and organization of the Trust which are not inconsistent with
the provisions of this Declaration of Trust.
(z) Accounts and Books. To determine from time to time whether
and to what extent, and at what times and places, and under
what conditions and regulations, the accounts and books of the
Trust, or any of them, shall be open to the inspection of
Shareholders.
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(aa) Voting Trust. To participate in, and accept Securities
issued under or subject to, any voting trust.
(ab) Proxies. To solicit proxies of the Shareholders at the
expense of the Trust.
(ac) Further Powers. To do all other acts and things and
execute and deliver all instruments incident to the foregoing
powers, and to exercise all powers which they deem necessary,
useful or desirable to carry on the business of the Trust or
to carry out the provisions of this Declaration of Trust, even
if such powers are not specifically provided hereby.
Section 3.3. Limitations on Powers and Authority. Notwithstanding any
provision hereof to the contrary, in no event shall the Trustees have the power
or authority to cause the Trust to do any of the following without the prior
approval of the Shareholders:
(a) Commodities Contracts. To invest in commodities or
commodity future contracts other than interest rate futures
intended to hedge the Trust against interest rate risk.
(b) Trading Activities. To engage in trading (as compared with
investment activities) or engage in the underwriting or agency
distribution or sale of securities issued by others.
(c) Certain Holdings. To hold property primarily for sale to
customers in the ordinary course of business; provided,
however, that the Trust may sell properties if necessary,
advisable or desirable or if effected pursuant to an intent to
liquidate the Trust.
ARTICLE 4 - ADVISER
Section 4.1. Appointment. The Trustees are responsible for setting the
general policies of the Trust and for the general supervision of its business
conducted by officers, agents, employees, advisers or independent contractors of
the Trust. However, the Trustees are not required personally to conduct the
business of the Trust, and they may (but need not) appoint, employ or contract
with any Person (including a Person Affiliated with any Trustee) as an Adviser
and may grant or delegate such authority to the Adviser as the Trustees may, in
their sole discretion, deem necessary or desirable. The Trustees may determine
the terms of retention and the compensation of the Adviser and may exercise
broad discretion in allowing the Adviser to administer and regulate the
operations of the Trust, to act as agent for the Trust, to execute documents on
behalf of the Trust and to make executive decisions which conform to general
policies and principles established by the Trustees.
Section 4.2. Affiliation and Functions. The Trustees, by resolution or
in the Bylaws, may provide guidelines, provisions or requirements concerning the
affiliation and functions of the Adviser.
ARTICLE 5 - INVESTMENT POLICY
The fundamental investment policy of the Trust is to make investments
in such a manner as to comply with the REIT Provisions of the Code and with the
requirements of Title 8, with respect to the composition of the Trust's
investments and the derivation of its income. The Trustees will use their best
efforts to carry out this fundamental investment policy and to conduct the
affairs of the Trust in such a manner as to continue to qualify the Trust for
the tax treatment provided in the REIT Provisions of the Code; however, no
Trustee, officer, employee or agent of the Trust shall be liable for any act or
omission resulting in the loss of tax
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benefits under the Code, except to the extent provided in Section 8.2. The
Trustees may change from time to time, by resolution or in the Bylaws of the
Trust, such investment policies as they determine to be in the best interests of
the Trust, including prohibitions or restrictions upon certain types of
investments.
ARTICLE 6 - SHARES
Section 6.1. Authorized Shares. The total number of shares of
beneficial interest which the Trust is authorized to issue is __________, of
which _________ shares shall be preferred shares, par value $.01 per share
("Preferred Shares"), and __________ shares shall be common shares, $0.01 par
value per share ("Common Shares").
Section 6.2. Common Shares.
(a) Dividend Rights. Subject to the preferential dividend
rights of the Preferred Shares, if any, as may be determined by
the Board of Trustees pursuant to Section 6.3, the holders of
Common Shares shall be entitled to receive such dividends as may
be declared by the Board of Trustees.
(b) Rights Upon Liquidation. Subject to the preferential rights
of the Preferred Shares, if any, as may be determined by the
Board of Trustees pursuant to Section 6.3, in the event of any
voluntary or involuntary liquidation, dissolution or winding up
of, or any distribution of the assets of, the Trust, each holder
of Common Shares shall be entitled to receive, ratably with each
other holder of Common Shares, that portion of the assets of the
Trust available for distribution to the holders of Common Shares
that bears the same relation to the total amount of such assets
of the Trust as the number of Common Shares held by such holder
bears to the total number of Common Shares then outstanding.
(c) Voting Rights. The holders of the Common Shares shall be
entitled to vote on all matters (for which a common shareholder
shall be entitled to vote thereon) at all meetings of the
Shareholders of the Trust, and shall be entitled to one vote for
each Common Share entitled to vote at such meeting, voting
together with the holders of the Preferred Shares who are
entitled to vote (except as otherwise may be determined by the
Board of Trustees pursuant to Section 6.3).
Section 6.3. Preferred Shares. With respect to the Preferred Shares,
the Board of Trustees shall have the power from time to time (a) to classify or
reclassify, in one or more series, any unissued Preferred Shares and (b) to
reclassify any unissued shares of any series of Preferred Shares, in the case of
either (a) or (b) by setting or changing the number of shares constituting such
series and the designation, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of such shares and, in such event, the Trust shall file
for record with the State Department of Assessments and Taxation of Maryland
articles supplementary to this Declaration of Trust in substance and form as
prescribed by Title 8.
Section 6.4. Dividends or Distributions. The Trustees may from time to
time declare and cause the Trust to pay to Shareholders such dividends or
distributions in cash, property or other assets of the Trust or in Securities of
the Trust or from any other source as the Trustees in their discretion shall
determine. The Trustees shall endeavor to declare and pay such dividends and
distributions as shall be necessary for the Trust to qualify as a real estate
investment trust under the REIT Provisions of the Code; however, Shareholders
shall have no right to any dividend or distribution unless and until declared by
the Trustees. The exercise of the
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powers and rights of the Trustees pursuant to this section shall be subject to
the provisions of any class or series of Shares at the time outstanding. The
receipt by any Person in whose name any Shares are registered on the records of
the Trust or by his duly authorized agent shall be a sufficient discharge for
all dividends or distributions payable or deliverable in respect of such Shares
and from all liability to see to the application thereof.
Section 6.5. General Nature of Shares. All Shares shall be personal
property entitling the Shareholders only to those rights provided in this
Declaration of Trust or in the resolution creating any class or series of
Shares. The legal ownership of the Trust Property and the right to conduct the
business of the Trust are vested exclusively in the Trustees; the Shareholders
shall have no interest therein other than beneficial interest in the Trust
conferred by their Shares and shall have no right to compel any partition,
division, dividend or distribution of the Trust or any of the Trust Property.
The death of a Shareholder shall not terminate the Trust or give his legal
representative any rights against other Shareholders, the Trustees or the Trust
Property, except the right, exercised in accordance with applicable provisions
of the Bylaws, to receive a new certificate for Shares in exchange for the
certificate held by the deceased Shareholder. Holders of Shares shall not have
any preemptive right to subscribe to any securities of the Trust.
Section 6.6. Restrictions on Ownership and Transfer: Exchange For
Excess Shares.
(a) Definitions. For the purposes of Sections 6.6, 6.7 and
6.8, the following terms shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Shares either
directly or constructively through the application of Section
544 of the Code, as modified by Section 856(h)(1)(B) of the
Code. The terms "Beneficial Owner," "Beneficially Owns" and
"Beneficially Owned" shall have the correlative meanings.
Accordingly, for purposes hereof, Beneficial Ownership shall
be calculated for any Person by dividing two numbers, (a) the
number that is the numerator being the sum of (i) such
Person's ownership of outstanding Shares plus (ii) the maximum
number of Shares issuable upon the exercise or conversion of
outstanding warrants, preferred stock or other securities
exercisable for or convertible into Shares owned by such
Person and (b) the number that is the denominator being the
sum of (i) all outstanding Shares plus (ii) the maximum number
of Shares issuable upon the exercise or conversion of
outstanding warrants, preferred stock or other securities
exercisable for or convertible into Shares owned by such
Person; provided that the Board of Trustees shall retain full
authority to adopt such other approach to determining
Beneficial Ownership as it may deem appropriate.
Notwithstanding the foregoing, for purposes of determining
compliance with this Section 6.6 by any Person to whom the
Trust issues an option or warrant (or any Shareholder of any
such Person), such option or warrant shall not be deemed to
confer upon such Person Beneficial Ownership or Constructive
Ownership of the Shares issuable upon the exercise thereof,
and the Shares issuable upon the exercise thereof shall be
excluded from both the numerator and denominator of the
foregoing calculation.
"Beneficiary" shall mean the beneficiary of the Special Trust
as determined pursuant to Section 6.8(e).
"Common Equity Shares" shall mean outstanding Shares that are
either Common Shares or Excess Common Shares.
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"Constructive Ownership" shall mean ownership of Shares either
directly or constructively through the application of Section
318(a) of the Code, as modified by Section 856(d)(5) of the
Code. The terms "Constructive Owner," "Constructively Owns"
and "Constructively Owned" shall have the correlative
meanings. Accordingly, for purposes hereof, Constructive
Ownership shall be calculated for any Person by dividing two
numbers, (a) the number that is the numerator being the sum of
(i) such Person's ownership of outstanding Shares plus (ii)
the maximum number of Shares issuable upon the exercise or
conversion of outstanding warrants, preferred stock or other
securities exercisable for or convertible into Shares owned by
such Person and (b) the number that is the denominator being
the sum of (i) all outstanding Shares plus (ii) the maximum
number of Shares issuable upon the exercise or conversion of
outstanding warrants, preferred stock or other securities
exercisable for or convertible into Shares owned by such
Person; provided that the Board of Trustees shall retain full
authority to adopt such other approach to determining
Constructive Ownership as it may deem appropriate.
Notwithstanding the foregoing, for purposes of determining
compliance with Sections 6.6(b) and (c) by any Person to whom
the Trust issues an option or warrant (or any Shareholder of
any such Person), such option or warrant shall not be deemed
to confer upon such Person Beneficial Ownership or
Constructive Ownership of the Shares issuable upon the
exercise thereof, and the Shares issuable upon the exercise
thereof shall be excluded from both the numerator and
denominator of the foregoing calculation.
"Event" shall have the meaning assigned to it in Section
6.6(c).
"Excess Common Shares" shall mean Excess Shares that would,
under Section 6.8(e)(i), automatically be exchanged for Common
Shares in the event of a transfer of an interest in the
Special Trust in which such Excess Shares are held.
"Excess Preferred Shares" shall mean Excess Shares that would,
under Section 6.8(e)(i), automatically be exchanged for
Preferred Shares in the event of a transfer of an interest in
the Special Trust in which such Excess Shares are held.
"Excess Shares" shall mean, as applicable, Excess Common
Shares or Excess Preferred Shares.
"Exempt Parties" shall mean (A) ___________________________,
(B) __________________, (C) _______________, (D) any Section
544 Subsidiary of any of the entities or individuals describe
in (A), (B) or (C) above, and (E) any other Person who
acquires shares from any of the foregoing in a transaction not
registered under Section 5 of the Securities Act of 1933, as
amended. This definition shall apply to any Person so long as,
but only so long as, such Person Beneficially Owns capital
stock (or has rights to acquire capital stock) in excess of
the Ownership Limit. The term "Exempt Party" shall mean any of
the foregoing.
"Market Price" shall mean the last reported sales price
reported on the American Stock Exchange of Shares on the
trading day immediately preceding the relevant date, or if the
Shares are not then traded on the American Stock Exchange, the
last reported sales price of Shares on the trading day
immediately preceding the relevant date as reported on any
exchange or quotation system over which the Shares may be
traded, or if the Shares are not then traded over any exchange
or quotation system, then the market price of the Shares on
the relevant date as determined in good faith by the Board of
Trustees of the Trust. The Market
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Price of the Common Shares shall be determined separately from
the Market Price of any outstanding class of Preferred Shares.
"Ownership Limit" shall mean ____% in value of the outstanding
Shares.
"Ownership Limitation Termination Date" shall mean the first
day after the date on which the Board of Trustees determines
that it is no longer in the best interests of the Trust to
attempt to, or continue to, qualify as a REIT.
"Permissible Ownership Threshold" shall mean as to
______________, _______________________ and _________________,
respectively, ____%, ____% and ____%; provided that, once an
Exempt Party transfers Shares such that such Exempt Party
following such transfer Beneficially Owns and Constructively
Owns less in value than the Ownership Limit, then such Exempt
Party's Permissible Ownership Threshold shall equal the
Ownership Limit.
"Person" shall mean an individual, corporation, partnership,
limited liability company, estate, trust (including a trust
qualified under Section 401(a) or 501(c)(17) of the Code), a
portion of a trust permanently set aside for or to be used
exclusively for the purposes described in Section 642(c) of
the Code, association, private foundation within the meaning
of Section 509(a) of the Code, joint stock company or other
entity or any government or agency or political subdivision
thereof and also includes a group as that term is used for
purposes of Section 13(d)(3) of the Securities Exchange Act of
1934, as amended, but does not include an underwriter which
participates in a public offering of Shares for a period of 25
days following the purchase by such underwriter of those
Shares.
"Purported Beneficial Holder" shall mean, with respect to any
event other than a purported Transfer which results in Excess
Shares, the person for whom the Purported Record Holder of the
Shares that were, pursuant to Section 6.6(c), automatically
exchanged for Excess Shares upon the occurrence of such event
held such Shares.
"Purported Beneficial Transferee" shall mean, with respect to
any purported Transfer which results in Excess Shares, the
purported beneficial transferee for whom the Purported Record
Transferee would have acquired Shares, if such Transfer had
been valid under Section 6.6(b).
"Purported Record Holder" shall mean, with respect to any
event other than a purported Transfer which results in Excess
Shares, the record holder of the Shares that were, pursuant to
Section 6.6(c), automatically exchanged for Excess Shares upon
the occurrence of such event.
"Purported Record Transferee" shall mean, with respect to any
purported Transfer which results in Excess Shares, the record
holder of the Shares if such Transfer had been valid under
Section 6.6(b).
"REIT" shall mean a real estate investment trust under Section
856 of the Code.
"Section 544 Subsidiary" of any individual or entity shall
mean any entity, over 50% of the ownership interest in which
is owned, directly or indirectly (applying the principles of
Section 544 of the Code) by the individual or entity in
question.
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"Special Trust" shall mean the trust created pursuant to
Section 6.8(a).
"Transfer" shall mean any issuance, sale, transfer, gift,
assignment, devise or other disposition of Shares or capital
stock of any Person (including (i) the granting of any option
or entering into any agreement for the sale, transfer or other
disposition of Shares, (ii) the sale, transfer, exercise,
assignment or other disposition of any securities or rights
convertible into or exchangeable for Shares or (iii) the
establishment of a put or the granting to a third party of a
call right with respect to Shares), whether voluntary or
involuntary, whether of record or beneficially and whether by
operation of law or otherwise.
"Trustee" shall mean, for purposes of this Article VI only,
the Trust, as trustee for the Special Trust, and any successor
trustee appointed by the Trust.
(b) Restrictions on Ownership and Transfer.
(i) Except as provided in Section 6.6(k), prior to
the Ownership Limitation Termination Date, no Person
(other than an Exempt Party) shall Beneficially Own
or Constructively Own any Shares to the extent such
ownership would exceed the Ownership Limit. In
addition, except as provided in Section 6.6(k), prior
to the Ownership Limitation Termination Date, no
Exempt Party shall Beneficially Own or Constructively
Own any Shares in excess of the Permissible Ownership
Threshold for such Exempt Party.
(ii) Except as provided in Section 6.6(k), prior to
the Ownership Limitation Termination Date, any
Transfer that, if effective, would result in any
Person (other than an Exempt Party) Beneficially
Owning or Constructively Owning Shares in excess of
the Ownership Limit shall be void ab initio as to the
Transfer of such Shares which would be otherwise
Beneficially Owned or Constructively Owned by such
Person in excess of such Ownership Limit; and the
intended transferee shall acquire no rights in or to
such Shares.
(iii) Except as provided in Section 6.6(k), prior to
the Ownership Limitation Termination Date, any
Transfer that, if effective, would result in any
Exempt Party Beneficially Owning or Constructively
Owning Shares in excess of the Permissible Ownership
Threshold for such Exempt Party shall be void ab
initio as to the Transfer of such Shares which would
be otherwise Beneficially Owned or Constructively
Owned by such Exempt Party in excess of the
Permissible Ownership Threshold for such Exempt
Party; and such Exempt Party shall acquire no rights
in or to such Shares.
(iv) Prior to the Ownership Limitation Termination
Date, any Transfer that, if effective, would result
in Shares being beneficially owned by less than 100
Persons (determined without reference to any rules of
attribution) shall be void ab initio as to the
Transfer of such Shares which would be otherwise
beneficially owned by the transferee; and the
intended transferee shall acquire no rights in such
Shares.
(v) Prior to the Ownership Limitation Termination
Date, any Transfer that, if effective, would result
in the Trust being "closely held" within the meaning
of Section 856(h) of the Code shall be void ab initio
as to the Transfer of the Shares
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which would cause the Trust to be "closely held"
within the meaning of Section 856(h) of the Code; and
the intended transferee shall acquire no rights in
such Shares.
(vi) The Board of Trustees shall have the authority
to select the Ownership Limitation Termination Date.
(c) Exchange For Excess Stock.
(i) If, notwithstanding the other provisions
contained in this Section 6.6, at any time prior to
the Ownership Limitation Termination Date, there is a
purported Transfer such that any Person (other than
an Exempt Party) would Beneficially Own or
Constructively Own Shares in excess of the Ownership
Limit, then, except as otherwise provided in Section
6.6(k), such number of Shares in excess of such
Ownership Limit (rounded up to the nearest whole
Share) shall be automatically exchanged for an equal
number of shares of Excess Shares. Such exchange
shall be effective as of the close of business on the
business day prior to the date of the Transfer.
(ii) If, notwithstanding the other provisions
contained in this Section 6.6, at any time prior to
the Ownership Limitation Termination Date, there is a
purported Transfer such that an Exempt Party would
Beneficially Own or Constructively Own Shares in
excess of the applicable Permissible Ownership
Threshold, then, except as otherwise provided in
Section 6.6(k), such number of Shares in excess of
the applicable Permissible Ownership Threshold
(rounded up to the nearest whole Share) shall be
automatically exchanged for an equal number of Excess
Shares. Such exchange shall be effective as of the
close of business on the business day prior to the
date of the Transfer.
(iii) If, notwithstanding the other provisions
contained in this Section 6.6, at any time prior to
the Ownership Limitation Termination Date, there is a
purported Transfer which, if effective, would cause
the Trust to become "closely held" within the meaning
of Section 856(h) of the Code, then the Shares being
Transferred which would cause the Trust to be
"closely held" within the meaning of Section 856(h)
of the Code (rounded up to the nearest whole Share)
shall be automatically exchanged for an equal number
of Excess Shares. Such exchange shall be effective as
of the close of business on the business day prior to
the date of the Transfer.
(iv) If, notwithstanding the other provisions
contained in this Section 6.6, at any time prior to
the Ownership Limitation Termination Date, an event
other than a purported Transfer (an "Event") occurs
which would (i) cause any Person (other than an
Exempt Party) to Beneficially Own or Constructively
Own Shares in excess of the Ownership Limit, or (ii)
cause an Exempt Party to Beneficially Own or
Constructively Own Shares in excess of such Exempt
Party's applicable Permissible Ownership Threshold,
then, except as otherwise provided in Section 6.6(k),
Shares Beneficially Owned or Constructively Owned by
such Person or Exempt Party, as the case may be
(rounded up to the nearest whole Share), shall be
automatically exchanged for an equal number of Excess
Shares to the extent necessary to eliminate such
excess ownership. Such exchange shall be effective as
of the close of business
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on the business day prior to the date of the Event.
In determining which Shares are exchanged, Shares
directly held or Beneficially Owned by any Person who
caused the Event to occur shall be exchanged before
any Shares not so held are exchanged. Where several
such Persons exist, the exchange shall be pro rata.
(d) Remedies For Breach. If the Board of Trustees or its
designee(s) shall at any time determine that a Transfer has
taken place in violation of Section 6.6(b) or that a Person
intends to acquire or has attempted to acquire beneficial
ownership (determined without reference to any rules of
attribution) of any Shares that would result in Shares being
beneficially owned by less than 100 persons as contemplated by
Section 6.6(b)(iv), or in Beneficial Ownership or Constructive
Ownership of any Shares in violation of Section 6.6(b), the
Board of Trustees or its designees shall take such action as
it deems advisable to refuse to give effect to or to prevent
such Transfer (or any Transfer related to such intent),
including, but not limited to, refusing to give effect to such
Transfer on the books of the Trust or instituting proceedings
to enjoin such Transfer; provided, however, that any Transfers
or attempted Transfers in violation of Sections 6.6(b)(ii),
(iii), (iv) or (v) shall automatically result in the exchange
described in Section 6.6(c), irrespective of any action (or
non-action) by the Board of Trustees or its designees.
(e) Notice of Ownership or Attempted Ownership in Violation of
Section 6.6(b). Any Person who acquires or attempts to acquire
Beneficial Ownership or Constructive Ownership of Shares in
violation of Section 6.6(b) shall immediately give written
notice to the Trust of such acquisition or attempted
acquisition and shall provide to the Trust such other
information as the Trust may request in order to determine the
effect, if any, of such acquisition or attempted acquisition
on the Trust's status as a REIT.
(f) Owners Required to Provide Information. Prior to the
Ownership Limitation Termination Date:
(i) every Beneficial Owner or Constructive Owner of
more than ___% in value of the outstanding Shares
shall, within 30 days after January 1 of each year,
give written notice to the Trust stating the name and
address of such Beneficial Owner or Constructive
Owner, the number of Shares Beneficially Owned or
Constructively Owned, and a description of how such
Shares are held. Each such Beneficial Owner or
Constructive Owner shall provide to the Trust such
additional information as the Trust may request in
order to determine the effect, if any, of such
Beneficial Ownership or Constructive Ownership on the
Trust's status as a REIT.
(ii) Each Person who is a Beneficial Owner or
Constructive Owner of Shares and each Person
(including the shareholder of record) who is holding
Shares for a Beneficial Owner or Constructive Owner
shall provide to the Trust such information as the
Trust may request in order to determine the Trust's
status as a REIT or to comply with regulations
promulgated under the REIT provisions of the Code.
(g) Remedies Not Limited. Nothing contained in this Section
6.6 shall limit the authority of the Board of Trustees to take
such other action as it deems necessary or advisable to
protect the Trust and the interests of its Shareholders by
preserving the Trust's REIT status.
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(h) Ambiguity. In the case of an ambiguity in the application
of any of the provisions of this Article VI including any
definition contained in Section 6.6(a) and any ambiguity with
respect to which Shares are to be exchanged for Excess Shares
in a given situation, the Board of Trustees shall have the
authority to determine the application of the provisions of
this Section 6.6 with respect to any situation based on the
facts known to it.
(i) Increase in Ownership Limit. Subject to the limitations
provided in Section 6.6(j), the Board of Trustees may from
time to time increase the Ownership Limit.
(j) Limitations on Modifications.
(i) The Ownership Limit may not be increased if,
after giving effect to such increase, five Beneficial
Owners of Shares would Beneficially Own, in the
aggregate, more than 49.9% of the outstanding Shares.
(ii) Prior to an increase in the Ownership Limit
pursuant to Section 6.6(i), the Board of Trustees may
require such opinions of counsel or the Trust's tax
accountants, affidavits, undertakings or agreements
as it may deem necessary or advisable in order to
determine or ensure the Trust's status as a REIT.
(k) Exceptions. The Board of Trustees, with a ruling from the
Internal Revenue Service or an opinion of counsel or the
Trust's tax accountants to the effect that such exemption will
not result in the Trust being "closely held" within the
meaning of Section 856(h) of the Code, may exempt a Person
from the Ownership Limit or the Permissible Ownership
Threshold, as the case may be, if the Board of Trustees
obtains such representations and undertakings from such Person
as the Board of Trustees may deem appropriate and such Person
agrees that any violation or attempted violation of any of
such representations or undertakings will result in, to the
extent necessary or otherwise deemed appropriate by the Board
of Trustees, the exchange of Shares held by such Person for
Excess Shares in accordance with Section 6.6(c).
(l) American Stock Exchange Transactions. Nothing in this
Section 6.6 shall preclude the settlement of any transaction
entered into through the facilities of the American Stock
Exchange, any successor exchange or quotation system thereto,
or any other exchange or quotation system over which the
Shares may be traded from time to time.
Section 6.7. Legend.
(a) Each certificate for Common Shares hereafter issued shall
bear the following legend:
"The Common Shares represented by this certificate
are subject to restrictions on ownership and transfer
for the purpose of the Trust's maintenance of its
status as a real estate investment trust under the
Internal Revenue Code of 1986, as amended (the
"Code"). No Person may Beneficially Own or
Constructively Own Shares in excess of ____% in value
(or such greater percentage as may be determined by
the Board of Trustees) of the outstanding Shares of
the Trust (unless such Person is an Exempt Party). No
Person who is an Exempt Party may Beneficially Own or
Constructively Own Shares in excess of the
Permissible Ownership Threshold for such Exempt
Party. Any Person who attempts to Beneficially
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Own or Constructively Own Shares in excess of the
above limitations must immediately notify the Trust.
All capitalized terms used in this legend have the
meanings set forth in the Declaration of Trust, a
copy of which, including the restrictions on
ownership and transfer, will be sent without charge
to each Shareholder who so requests. If the
restrictions on ownership and transfer are violated,
the Common Shares represented hereby will be
automatically exchanged for Excess Shares which will
be held in trust by the Trust."
(b) Each certificate for Preferred Shares hereafter issued
shall bear the following legend:
"The Preferred Shares represented by this certificate
are subject to restrictions on ownership and transfer
for the purpose of the Trust's maintenance of its
status as a real estate investment trust under the
Internal Revenue Code of 1986, as amended (the
"Code"). No Person may Beneficially Own or
Constructively Own Shares in excess of ____% in value
(or such greater percentage as may be determined by
the Board of Trustees) of the outstanding Shares of
the Trust (unless such Person is an Exempt Party). No
Person who is an Exempt Party may Beneficially Own or
Constructively Own Shares in excess of the
Permissible Ownership Threshold for such Exempt
Party. Any Person who attempts to Beneficially Own or
Constructively Own Shares in excess of the above
limitations must immediately notify the Trust. All
capitalized terms used in this legend have the
meanings set forth in the Declaration of Trust, a
copy of which, including the restrictions on
ownership and transfer, will be sent without charge
to each Shareholder who so requests. If the
restrictions on ownership and transfer are violated,
the Preferred Shares represented hereby will be
automatically exchanged for Excess Shares which will
be held in trust by the Trust."
Section 6.8. Excess Shares.
(a) Ownership in Trust. Upon any purported Transfer or Event
that results in an exchange of Shares for Excess Shares
pursuant to Section 6.6(c), such Excess Shares shall be deemed
to have been transferred to the Trust, as Trustee of a Special
Trust for the exclusive benefit of the Beneficiary or
Beneficiaries to whom an interest in such Excess Shares may
later be transferred pursuant to Section 6.8(e). Excess Shares
so held in trust shall be issued and outstanding Shares of the
Trust. The Purported Record Transferee or Purported Record
Holder shall have no rights in such Excess Shares except as
and to the extent provided in Section 6.8(e).
(b) Dividend Rights. Excess Shares shall not be entitled to
any dividends or distributions. Any dividend or distribution
paid prior to the discovery by the Trust that the Shares with
respect to which the dividend or distribution was made had
been exchanged for Excess Shares shall be repaid to the Trust
upon demand.
(c) Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any
distribution of the assets of, the Trust, (i) subject to the
preferential rights of the Preferred Shares, if any, as may be
determined by the Board of
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Trustees pursuant to Section 6.3 and the preferential rights
of the Excess Preferred Shares, if any, each holder of Excess
Common Shares shall be entitled to receive, ratably with each
other holder of Common Shares and Excess Common Shares, that
portion of the assets of the Trust available for distribution
to the holders of Common Shares or Excess Common Shares which
bears the same relation to the total amount of such assets of
the Trust as the number of Excess Common Shares held by such
holder bears to the total number of Common Shares and Excess
Common Shares then outstanding and (ii) each holder of Excess
Preferred Shares shall be entitled to receive that portion of
the assets of the Trust which a holder of the Preferred Shares
that were exchanged for such Excess Preferred Shares would
have been entitled to receive had such Preferred Shares
remained outstanding. The Trust, as holder of the Excess
Shares in trust, or if the Trust shall have been dissolved,
any trustee appointed by the Trust prior to its dissolution,
shall distribute ratably to the Beneficiaries of the Special
Trust, when determined, any such assets received in respect of
the Excess Shares in any liquidation, dissolution or winding
up of, or any distribution of the assets of the Trust.
(d) Voting Rights. The holders of Excess Shares shall not be
entitled to vote on any matters (except as required by law).
(e) Restrictions On Transfer; Designation of Beneficiary.
(i) Excess Shares shall not be transferrable. The
Purported Record Transferee or Purported Record
Holder may freely designate a Beneficiary of an
interest in the Special Trust (representing the
number of Excess Shares held by the Special Trust
attributable to a purported Transfer or Event that
resulted in the Excess Shares) if (i) the Excess
Shares held in the Special Trust would not be Excess
Shares in the hands of such Beneficiary and (ii) the
Purported Beneficial Transferee or Purported
Beneficial Holder does not receive a price, as
determined on a Share-by-Share basis, for designating
such Beneficiary that reflects a price for such
Excess Shares that, (I) in the case of a Purported
Beneficial Transferee, exceeds (x) the price such
Purported Beneficial Transferee paid for the Shares
in the purported Transfer that resulted in the
exchanges of Shares for Excess Shares, or (y) if the
Purported Beneficial Transferee did not give value
for such Shares (having received such Shares pursuant
to a gift, devise or other transaction), the Market
Price of such Shares on the date of the purported
Transfer that resulted in the exchange of Shares for
Excess Shares or (II) in the case of a Purported
Beneficial Holder, exceeds the Market Price of the
Shares that were automatically exchanged for such
Excess Shares on the date of such exchange. Upon such
a transfer of an interest in the Special Trust, the
corresponding shares of Excess Shares in the Special
Trust shall be automatically exchanged for an equal
number of Common Shares or Preferred Shares
(depending upon the type of Shares that were
originally exchanged for such Excess Shares) and such
Common Shares or Preferred Shares shall be
transferred of record to the transferee of the
interest in the Special Trust if such Common Shares
or Preferred Shares would not be Excess Shares in the
hands of such transferee. Prior to any transfer of
any interest in the Special Trust, the Purported
Record Transferee or Purported Record Holder, as the
case may be, must give advance notice to the Trust of
the intended transfer and the Trust must have waived
in writing its purchase rights under Section 6.8(f).
(ii) Notwithstanding the foregoing, if a Purported
Beneficial Transferee or Purported Beneficial Holder
receives a price for designating a Beneficiary of an
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interest in the Special Trust that exceeds the
amounts allowable under Section 6.8(e)(i), such
Purported Beneficial Transferee or Purported
Beneficial Holder shall pay, or cause such
Beneficiary to pay, such excess to the Trust.
(f) Purchase Right in Excess Shares. Excess Shares shall be
deemed to have been offered for sale to the Trust, or its
designee, at a price per share equal to, (I) in the case of
Excess Shares resulting from a purported Transfer, the lesser
of (i) the price per share in the transaction that created
such Excess Shares (or, in the case of a gift, devise or other
transaction, the Market Price at the time of such gift, devise
or other transaction) or (ii) the Market Price on the date the
Trust, or its designee, accepts such offer or (II) in the case
of Excess Shares created by an Event, the lesser of (i) the
Market Price of the Shares originally exchanged for the Excess
Shares on the date of such exchange or (ii) the Market Price
of such Shares on the date the Trust, or its designee, accepts
such offer. The Trust shall have the right to accept such
offer for a period of ninety (90) days after the later of (i)
the date of the purported Transfer or Event which resulted in
an exchange of Shares for such Excess Shares and (ii) the date
the Board of Trustees determines that a purported Transfer or
other event resulting in an exchange of Shares for such Excess
Shares has occurred, if the Trust does not receive a notice of
any such Transfer pursuant to Section 6.6(e).
Section 6.9. Severability; Agent for Trust. If any provision of Section
6.6, 6.7 or 6.8 or any application of any such provision is determined to be
invalid by any federal or state court having jurisdiction over the issues, the
validity of the remaining provisions shall not be affected and other
applications of such provision shall be affected only to the extent necessary to
comply with the determination of such court. In any event, to the extent such
court holds the Purported Record Transferee to be the record and beneficial
owner of Shares which, had the provisions of Sections 6.6, 6.7 and 6.8 been
enforced, would have been exchanged for Excess Shares, such Purported Record
Transferee shall be deemed, at the option of the Trust, to have acted as agent
on behalf of the Trust in acquiring such transferred Shares and to hold such
Shares on behalf of the Trust.
ARTICLE 7 - SHAREHOLDERS
Section 7.1. Meetings of Shareholders. There shall be an annual meeting
of the Shareholders, to be held at such time and place as shall be determined by
or in the manner prescribed in the Bylaws at which the Trustees shall be elected
and any other proper business may be conducted. Except as otherwise provided in
this Declaration of Trust, special meetings of Shareholders may be called in the
manner provided in the Bylaws. Special meetings of Shareholders may be called
upon the written request of Shareholders holding an aggregate of not less than
ten percent (10%) of the Common Shares. Special meetings of shareholders may
also be called by holders of Preferred Shares to the extent, if any, determined
by the Board of Trustees in connection with the establishment of a class or
series of Preferred Shares. If there are no Trustees, the officers of the Trust
shall promptly call a special meeting of the Shareholders entitled to vote for
the election of successor Trustees. Any meeting may be adjourned and reconvened
as the Trustees determine or as provided in the Bylaws.
Section 7.2. Voting Rights of Shareholders. Subject to the provisions
of any class or series of Preferred Shares then outstanding and the mandatory
provisions of any applicable laws or regulations, the Shareholders shall be
entitled to vote only on the following matters: (a) election or removal of
Trustees as provided in Sections 7.1 and 2.3 and Section 8-202 of Title 8 and
the Bylaws; (b) amendment of this Declaration of Trust as provided in Section
9.1; (c) a matter specified in Section 3.3; and (d) a merger of the Trust with
or into another entity as and to the extent required by Section 8-501.1 of Title
8. Except with
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respect to the foregoing matters, no action taken by the Shareholders at any
meeting shall in any way bind the Trustees.
Section 7.3. Shareholder Action to be Taken by Meeting. Any action
required or permitted to be taken by the Shareholders of the Trust must be
effected at a duly called annual or special meeting of Shareholders of the Trust
and may not be effected by any consent in writing of such Shareholders.
Notwithstanding anything contained in this Declaration of Trust to the contrary,
the affirmative vote of at least a majority of the then outstanding Shares
entitled to vote in the election of Trustees, voting together as a single class,
shall be required to amend, repeal, or adopt any provision inconsistent with
this Section 7.3 and the affirmative vote of such number or percentage of the
then outstanding Shares as is specified in this Declaration of Trust or, if not
so specified, in the Bylaws shall be required to take any other action required
or permitted to be taken by the Shareholders.
ARTICLE 8 -
LIABILITY OF SHAREHOLDERS, TRUSTEES, OFFICERS, EMPLOYEES AND AGENTS AND
TRANSACTIONS BETWEEN AFFILIATES AND THE TRUST
Section 8.1. Limitation of Shareholder Liability. No Shareholder shall
be liable for any debt, claim, demand, judgment or obligation of any kind of,
against or with respect to the Trust by reason of his being a Shareholder, nor
shall any Shareholder be subject to any personal liability whatsoever, in tort,
contract or otherwise, to any Person in connection with the Trust Property or
the affairs of the Trust. All written contracts to which the Trust is a party
shall include a provision to the effect that the Shareholders shall not be
personally liable thereon.
Section 8.2. Limitation of Trustee and Officer Liability. To the
maximum extent that Maryland law in effect from time to time permits limitation
of the liability of trustees and officers of a real estate investment trust, no
Trustee or officer of the Trust shall be liable to the Trust or to any
Shareholder for money damages. Neither the amendment nor repeal of this Section,
nor the adoption or amendment of any other provision of this Declaration of
Trust inconsistent with this Section, shall apply to or affect in any respect
the applicability of the preceding sentence with respect to any act or failure
to act which occurred prior to such amendment, repeal or adoption. In the
absence of any Maryland statute limiting the liability of trustees and officers
of a Maryland real estate investment trust for money damages in a suit by or on
behalf of the Trust or by any Shareholder, no Trustee or officer of the Trust
shall be liable to the Trust or to any Shareholder for money damages except to
the extent that (i) the Trustee or officer actually received an improper benefit
or profit in money, property, or services, for the amount of the benefit or
profit in money, property, or services actually received; or (ii) a judgment or
other final adjudication adverse to the Trustee or officer is entered in a
proceeding based on a finding in the proceeding that the Trustee's or officer's
action or failure to act was the result of active and deliberate dishonesty and
was material to the cause of action adjudicated in the proceeding.
Section 8.3. Express Exculpatory Clauses in Instruments. Neither the
Shareholders nor the Trustees, officers, employees or agents of the Trust shall
be liable under any written instrument creating an obligation of the Trust, and
all Persons shall look solely to the Trust Property for the payment of any claim
under or for the performance of that instrument. The omission of the foregoing
exculpatory language from any instrument shall not affect the validity or
enforceability of such instrument and shall not render any Shareholder, Trustee,
officer, employee or agent liable thereunder to any third party, nor shall the
Trustees or any officer, employee or agent of the Trust be liable to anyone for
such omission. No amendment of this Declaration of Trust or repeal of any of its
provisions shall limit or eliminate the limitation of liability provided
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to Trustees and officers hereunder with respect to any act or omission occurring
prior to such amendment or repeal.
Section 8.4. Indemnification. The Trust shall indemnify (i) its
Trustees and officers, whether serving the Trust or at its request any other
entity, to the full extent required or permitted by the general laws of the
State of Maryland applicable to ordinary business corporations now or hereafter
in force, including the advance of expenses under the procedures and to the full
extent permitted by such laws, and (ii) the Shareholders and other employees and
agents of the Trust to such extent as shall be authorized by the Trustees or the
Bylaws and as permitted by law. Nothing contained herein shall be construed to
protect any Person against any liability to the extent such protection would
violate Maryland statutory or decisional law applicable to real estate
investment trusts organized under Title 8 or any successor provision. The
foregoing rights of indemnification shall not be exclusive of any other rights
to which those seeking indemnification may be entitled. The Trustees may take
such action as is necessary to carry out these indemnification provisions and
are expressly empowered to adopt, approve and amend from time to time such
bylaws, resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by law. No amendment of this
Declaration of Trust or repeal of any of its provisions shall limit or eliminate
the right of indemnification provided hereunder with respect to acts or
omissions occurring prior to such amendment or repeal.
Section 8.5. Transactions Between the Trust and its Trustees, Officers,
Employees and Agents. Subject to any express restrictions in this Declaration of
Trust or adopted by the Trustees in the Bylaws or by resolution, the Trust
(which, for purposes of this Section 8.5, shall include the Trust and any of its
subsidiaries) may enter into any contract or transaction of any kind (including
without limitation for the purchase or sale of property or for any type of
services, including those in connection with underwriting or the offer or sale
of Securities of the Trust) with any Person, including any Trustee, officer,
employee or agent of the Trust or any Person Affiliated with the Trust or a
Trustee, officer, employee or agent of the Trust, whether or not any of them has
a financial interest in such transaction; provided, however, that the following
contracts and transactions may not be consummated by the Trust unless first
approved by the affirmative vote of a majority of the Trustees who have no
interest in the contract or transaction: any contract or transaction between the
Trust and any Trustee, officer, employee or agent of the Trust or any person
Affiliated with the Trust or a Trustee, officer, employee or agent of the Trust.
ARTICLE 9 - AMENDMENT; REORGANIZATION; MERGER, ETC.
Section 9.1. Amendment.
(a) This Declaration of Trust may be amended by the
affirmative vote of the holders of not less than a majority of
the Shares then outstanding and entitled to vote thereon,
except that Section 11.5 shall not be amended or repealed, nor
shall provisions inconsistent therewith be adopted, except by
the affirmative vote of the holders of not less than 80% of
the Shares then outstanding and entitled to vote.
(b) An amendment to this Declaration of Trust shall become
effective as provided in Section 11.6.
(c) This Declaration of Trust may not be amended except as
provided in this Section 9.1.
Section 9.2. Merger, Consolidation or Sale of Trust Property. Subject
to the provisions of any class or series of Preferred Shares at the time
outstanding and subject to Section 8-501.1 of Title 8, as and to
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the extent applicable, the Trustees shall have the power to (i) merge the Trust
with or into another entity, (ii) consolidate the Trust with one or more other
entities into a new entity or (iii) sell or otherwise dispose of all or
substantially all of the Trust Property.
ARTICLE 10 - DURATION AND TERMINATION OF TRUST
Section 10.1. Duration of Trust. The Trust shall continue perpetually
unless terminated pursuant to Section 10.2 or pursuant to any applicable
provision of Title 8.
Section 10.2. Termination of Trust.
(a) Subject to the provisions of any class or series of
Preferred Shares at the time outstanding and subject to
Section 8-501.1 of Title 8, as and to the extent applicable,
the Trustees shall have the power to terminate the Trust. Upon
the termination of the Trust:
(i) The Trustees shall proceed to wind up the affairs
of the Trust and all of the powers of the Trustees
under this Declaration of Trust shall continue,
including the powers to fulfill or discharge the
Trust's contracts, collect its assets, sell, convey,
assign, exchange, transfer or otherwise dispose of
all or any part of the remaining Trust Property to
one or more Persons at public or private sale for
consideration which may consist in whole or in part
of cash, Securities or other property of any kind,
discharge or pay its liabilities and do all other
acts appropriate to liquidate its business.
(ii) After paying or adequately providing for the
payment of all liabilities, and upon receipt of such
releases, indemnities and agreements as they deem
necessary for their protection, the Trustees may
distribute the remaining Trust Property, in cash or
in kind or partly in each, among the Shareholders
according to their respective rights, so that after
payment in full or the setting apart for payment of
such preferential amounts, if any, to which the
holders of any Shares (other than Common Shares) at
the time outstanding shall be entitled, the remaining
Trust Property available for payment and distribution
to Shareholders shall, subject to any participating
or similar rights of Shares (other than Common
Shares) at the time outstanding, be distributed
ratably among the holders of Common Shares at the
time outstanding.
(b) After termination of the Trust, the liquidation of its
business, and the distribution to the Shareholders as herein
provided, a majority of the Trustees shall execute and file
with the Trust's records a document certifying that the Trust
has been duly terminated, and the Trustees shall be discharged
from all liabilities and duties hereunder, and the rights and
interests of all Shareholders shall cease.
ARTICLE 11 - MISCELLANEOUS
Section 11.1. Governing Law. This Declaration of Trust is executed by
the undersigned Trustees and delivered in the State of Maryland with reference
to the laws thereof, and the rights of all parties and the validity,
construction and effect of every provision hereof shall be subject to and
construed according to the laws of the State of Maryland without regard to
conflicts of laws provisions thereof.
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Section 11.2. Reliance by Third Parties. Any certificate shall be final
and conclusive as to any Persons dealing with the Trust if executed by an
individual who, according to the records of the Trust or of any recording office
in which this Declaration of Trust may be recorded, appears to be the Secretary
or an Assistant Secretary of the Trust or a Trustee, and if certifying to: (i)
the number or identity of Trustees, officers of the Trust or Shareholders; (ii)
the due authorization of the execution of any document; (iii) the action or vote
taken, and the existence of a quorum, at a meeting of Trustees or Shareholders;
(iv) a copy of this Declaration or of the Bylaws as a true and complete copy as
then in force; (v) an amendment to this Declaration; (vi) the termination of the
Trust; or (vii) the existence of any fact or facts which relate to the affairs
of the Trust. No purchaser, lender, transfer agent or other Person shall be
bound to make any inquiry concerning the validity of any transaction purporting
to be made on behalf of the Trust by the Trustees or by any officer, employee or
agent of the Trust.
Section 11.3. Provisions in Conflict with Law or Regulations.
(a) The provisions of this Declaration of Trust are severable,
and if the Trustees shall determine, with the advice of
counsel, that any one or more of such provisions (the
"Conflicting Provisions") are in conflict with the REIT
Provisions of the Code, Title 8 or other applicable federal or
state laws, the Conflicting Provisions shall be deemed never
to have constituted a part of this Declaration of Trust, even
without any amendment of this Declaration pursuant to Section
9.1; provided, however, that such determination by the
Trustees shall not affect or impair any of the remaining
provisions of this Declaration of Trust or render invalid or
improper any action taken or omitted prior to such
determination. No Trustee shall be liable for making or
failing to make such a determination.
(b) If any provision of this Declaration of Trust shall be
held invalid or unenforceable in any jurisdiction, such
holding shall not in any manner affect or render invalid or
unenforceable such provision in any other jurisdiction or any
other provision of this Declaration of Trust in any
jurisdiction.
Section 11.4. Construction. In this Declaration of Trust, unless the
context otherwise requires, words used in the singular or in the plural include
both the plural and singular and words denoting any gender include all genders.
The title and headings of different parts are inserted for convenience and shall
not affect the meaning, construction or effect of this Declaration. In defining
or interpreting the powers and duties of the Trust and its Trustees and
officers, reference may be made, to the extent appropriate and not inconsistent
with the Code or Title 8, to Titles 1 through 3 of the Corporations and
Associations Article of the Annotated Code of Maryland. In furtherance and not
in limitation of the foregoing, in accordance with the provisions of Title 3,
Subtitles 6 and 7, of the Corporations and Associations Article of the Annotated
Code of Maryland, the Trust shall be included within the definition of
"corporation" for purposes of such provisions.
Section 11.5. Recordation. This Declaration of Trust and any amendment
hereto shall be filed for record with the State Department of Assessments and
Taxation of Maryland and may also be filed or recorded in such other places as
the Trustees deem appropriate, but failure to file for record this Declaration
or any amendment hereto in any office other than in the State of Maryland shall
not affect or impair the validity or effectiveness of this Declaration or any
amendment hereto. A restated Declaration shall, upon filing, be conclusive
evidence of all amendments contained therein and may thereafter be referred to
in lieu of the original Declaration and the various amendments thereto.
IN WITNESS WHEREOF, this Amended and Restated Declaration of Trust has
been signed on this ____ day of _________________, 1997 by the undersigned
Trustees, each of whom acknowledges, under
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penalty of perjury, that this document is his free act and deed, and that to the
best of his knowledge, information, and belief, the matters and facts set forth
herein are true in all material respects.
25
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RESOURCE ASSET INVESTMENT TRUST
AMENDED AND RESTATED DECLARATION OF TRUST
Dated as of______________________ , 1997
<PAGE>
TABLE OF CONTENTS
Article Page
------- ----
I Formation.....................................................1
II Name..........................................................1
III Purposes and Powers ..........................................2
IV Resident Agent................................................2
V Board of Trustees ............................................3
VI Shares of Beneficial Interest.................................7
VII Restrictions on Transfer and Shares-in-Trust.................11
VIII Shareholders.................................................30
IX Liability Limitation, Indemnification and
Transactions with the Trust..................................32
X Amendments...................................................34
XI Merger, Consolidation or Sale of Trust Property..............35
XII Duration and Termination of Trust............................36
XIII Miscellaneous................................................37
<PAGE>
Resource Asset Investment Trust, a Maryland real estate
investment trust (the "Trust") under Title 8 of the Corporations and
Associations Article of the Annotated Code of Maryland ("Title 8"), desires to
amend and restate its Declaration of Trust as currently in effect and as
hereinafter amended.
The following provisions are all the provisions of the
Declaration of Trust currently in effect and as hereinafter amended:
ARTICLE I
FORMATION
The Trust is a real estate investment trust (a "REIT") within the
meaning of Title 8. The Trust shall not be deemed to be a general partnership,
limited partnership, joint venture, joint stock company or a corporation,
provided that nothing herein shall preclude the Trust from being treated for tax
purposes as an association under the Internal Revenue Code of 1986, as amended
(the "Code").
ARTICLE II
NAME
The name of the Trust is:
Resource Asset Investment Trust
Under circumstances in which the Board of Trustees of the Trust (the
"Board of Trustees" or "Board") determines that the use of the name of the Trust
is not practicable, the Trust may use any other designation or name for the
Trust.
<PAGE>
ARTICLE III
PURPOSES AND POWERS
Section 1. Purposes. The purposes for which the Trust is formed are to
invest in and to acquire, hold, manage, administer, control and dispose of loans
relating to real property, real property and interests in real property,
including, without limitation or obligation, engaging in business as a REIT
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
activities may be entered into directly by the Trust, through qualified REIT
subsidiaries of the Trust, or through partnerships of which the general partner
is the Trust or a qualified REIT subsidiary of the Trust.
Section 2. Powers. The Trust shall have all of the powers granted to
REITs by Title 8 and all other powers set forth in the Declaration of Trust
which are not inconsistent with law and are appropriate to promote and attain
the purposes set forth in the Declaration of Trust.
ARTICLE IV
RESIDENT AGENT
The name of the resident agent of the Trust in the State of Maryland is
Resagent, Inc., whose post office address is 7 St. Paul Street, Suite 1407,
Baltimore, Maryland 21202. The resident agent is a domestic corporation of and
resides in the State of Maryland. The Trust may have such offices or places of
business within or outside the State of Maryland as the Board of Trustees of the
Trust may from time to time determine.
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ARTICLE V
BOARD OF TRUSTEES
Section 1. Powers
(A) Subject to any express limitations contained in
the Declaration of Trust or in the Bylaws, (i) the business and affairs of the
Trust shall be managed under the direction of the Board of Trustees and (ii) the
Board shall have full, exclusive and absolute power, control and authority over
any and all property of the Trust. The Board may take any action as it, in its
sole judgment and discretion, deems necessary or appropriate to conduct the
business and affairs of the Trust. The Declaration of Trust shall be construed
with a presumption in favor of the grant of power and authority to the Board.
Any construction of the Declaration of Trust or determination made in good faith
by the Board concerning its powers and authority hereunder shall be conclusive.
The enumeration and definition of particular powers of the Trustees included in
the Declaration of Trust or in the Bylaws shall in no way be construed or deemed
by inference or otherwise in any manner to exclude or limit the powers conferred
upon the Board of Trustees under the general laws of the State of Maryland or
any other applicable laws.
(B) Except as otherwise provided in the Bylaws of the
Trust (the "Bylaws"), the Board, without any action by the shareholders of the
Trust, shall have and may exercise, on behalf of the Trust, without limitation,
the power to adopt, amend and repeal Bylaws; to elect officers in the manner
prescribed in the Bylaws; to solicit proxies from holders of shares of
beneficial interest of the Trust; and to do any other acts and deliver any other
documents necessary or appropriate to the foregoing powers.
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(C) It shall be the duty of the Board of Trustees to
ensure that the Trust satisfies the requirements for qualification as a REIT
under the Code, including, but not limited to, the ownership of outstanding
shares of its beneficial interest, the nature of its assets, the sources of its
income, and the amount and timing of its distributions to its shareholders. The
Board of Trustees shall take no action to disqualify the Trust as a REIT or to
otherwise revoke the Trust's election to be taxed as a REIT without the
affirmative vote of a majority of the number of shares of beneficial interest
entitled to vote on such matter at a meeting of the Shareholders.
Section 2. Number; Initial Board; Term.
(A) The number of Trustees shall be established by
the Board of Trustees from time to time by majority vote, but shall not be less
than three nor more than nine, but such upper and lower limits may be increased
or decreased by a vote of at least seventy-five percent (75%) of the Trustees
then in office from time to time; provided that the number of Trustees so
established shall not be less than the number required by Maryland law. No
reduction in the number of Trustees shall cause the removal of any Trustee from
office prior to the expiration of his term.
(B) The Trustee, as of the date on which this
Declaration of Trust has been amended and restated, as set forth above, is Betsy
Z. Cohen, but only for so long as such Trustee shall continue to serve as a
Trustee of the Trust hereunder. The term of each of the following Trustees (the
"Initial Trustees") shall commence on the date hereof and shall continue
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until the annual meeting of Shareholders in 1998 and until their successors
shall have been duly elected and shall have qualified:
Name Address
---- -------
Betsy Z. Cohen
Jonathan Z. Cohen
Jerome S. Goodman
Daniel Promislo
Joel R. Mesznik
Jack L. Wogin
(C) Beginning with the annual meeting of Shareholders
in 1998 and at each succeeding annual meeting of Shareholders, the Trustees will
be elected to hold office for a term expiring at the succeeding annual meeting.
Each Trustee will hold office for the term for which he is elected and until his
successor is duly elected and qualified.
(D) The Trustees may fill any vacancy on the Board of
Trustees, whether resulting from an increase in the number of Trustees or
otherwise, at any regular meeting of the Trustees or any special meeting called
for such purpose by a majority vote of the remaining Trustees, subject to the
provisions of Section 4 below. It shall not be necessary to list in the
Declaration of Trust the names and addresses of any Trustees hereinafter
elected.
Section 3. Resignation, Removal or Death. Any Trustee may resign by
written notice to the Board, effective upon execution and delivery to the Trust
of such written notice or upon any future date specified in the notice. Subject
to the rights of holders of one or more classes
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or series of Preferred Shares to elect one or more Trustees, a Trustee may be
removed at any time, with or without cause, at a meeting of the shareholders, by
the affirmative vote of the holders of not less than two-thirds of the Shares
then outstanding and entitled to vote generally in the election of Trustees.
Section 4. Independent Trustees. Notwithstanding anything herein to the
contrary, at all times (except during a period not to exceed sixty (60) days
following the death, resignation, incapacity or removal from office of a Trustee
prior to expiration of the Trustee's term of office), a majority of the Board of
Trustees shall be comprised of persons who, within the last two years, have not
been (i) Affiliates (as such term is defined in Section 5, below) of Resource
America, Inc., JeffBanks, Inc., Brandywine Construction & Management, Inc. or
their Affiliates, (ii) officers of the Trust or any subsidiary of the Trust, or
(iii) have had any material business or professional relationship with the
Trust, any subsidiary of the Trust, Resource America, Inc., Brandywine
Construction & Management, Inc., JeffBanks, Inc. or their Affiliates (each such
person serving on the Board of Trustees being an "Independent Trustee").
Independent Trustees shall nominate replacements for vacancies among the
Independent Trustees' positions. In the event that, after the closing of the
Initial Public Offering, a majority of the Trustees are not Independent Trustees
by reason of the resignation or removal of one or more Independent Trustees or
otherwise, the remaining Independent Trustees (or, if there are no Independent
Trustees, the remaining members of the Board of Trustees) shall promptly elect
that number of Independent Trustees necessary to cause the Board of Trustees to
include a majority of Independent Trustees.
Section 5. Definition of Affiliate. For purposes of Section 4, above,
"Affiliate" of a person shall mean (i) any person that, directly or indirectly,
controls or is controlled by or is under common control with such person, (ii)
any other person that owns, beneficially, directly or indirectly, five percent
(5%) or more of the outstanding capital shares, shares or equity
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<PAGE>
interests of such person, or (iii) any officer, director, employee, partner or
trustee of such person or of any person controlling, controlled by or under
common control with such person (excluding trustees and persons serving in
similar capacities who are not otherwise an Affiliate of such person). The term
"person" means and includes individuals, corporations, general and limited
partnerships, stock companies or associations, joint ventures, associations,
companies, trusts, banks, trust companies, land trusts, business trusts, or
other entities and governments and agencies and political subdivisions thereof.
For the purpose of this definition, "control" (including the correlative
meanings of the terms "controlled by" and "under common control with"), as used
with respect to any person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
such person, through the ownership of voting securities, partnership interests
or other equity interests.
Section 6. Business Activities by Trustees. Unless otherwise agreed
between the Trust and the Trustees, each individual Trustee, including each
Independent Trustee, may engage in other business activities of the type
conducted by the Trust and is not required to present to the Trust any
investment opportunities presented to them even though the investment
opportunities may be within the scope of the Trust's investment policies.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
Section 1. Authorized Shares. The beneficial interest of the Trust
shall be divided into shares of beneficial interest (the "Shares"). The Trust
has authority to issue Two Hundred Million (200,000,000) common shares of
beneficial interest, $.01 par value per share ("Common Shares"), and Twenty Five
Million (25,000,000) preferred shares of beneficial interest, $.01 par
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<PAGE>
value per share ("Preferred Shares"). The Trustees, without any action by the
shareholders of the Trust, by a majority vote, may amend the Declaration of
Trust from time to time to increase or decrease the aggregate number of Shares
or the number of Shares of any class that the Trust has authority to issue.
Section 2. Common Shares. Subject to the provisions of Article VII,
each Common Share shall entitle the holder thereof to one vote on each matter
upon which holders of Common Shares are entitled to vote. The Board of Trustees
may reclassify any unissued Common Shares from time to time in one or more
classes or series of Shares.
Section 3. Preferred Shares. The Board of Trustees may classify any
unissued Preferred Shares and reclassify any previously classified but unissued
Preferred Shares of any series from time to time, in one or more series of
Shares.
Section 4. Classified or Reclassified Shares. Prior to issuance of
classified or reclassified Shares of any class or series, the Board of Trustees
by resolution shall (a) designate that class or series to distinguish it from
all other classes and series of Shares; (b) specify the number of Shares to be
included in the class or series; (c) set, subject to the provisions of Article
VII and subject to the express terms of any class or series of Shares
outstanding at the time, the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption for each series; and (d)
cause the Trust to file articles supplementary with the State Department of
Assessments and Taxation of Maryland ("SDAT"). Any of the terms of any class or
series of Shares set pursuant to clause (c) of this Section 4 may be made
dependent upon facts or events ascertainable outside the Declaration of Trust
(including determinations by the Board of Trustees
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<PAGE>
or other facts or events within the control of the Trust) and may vary among
holders thereof, provided that the manner in which such facts, events or
variations shall operate upon the terms of such class or series of Shares is
clearly and expressly set forth in articles supplementary filed with the SDAT.
Section 5. Authorization by Board of Share Issuance. The Board of
Trustees may authorize the issuance from time to time of Shares of any class or
series, whether now or hereafter authorized, or securities or rights convertible
into Shares of any class or series, whether now or hereafter authorized, for
such consideration (whether in cash, property, past or future services,
obligation for future payment or otherwise) as the Board of Trustees may deem
advisable (or without consideration in the case of a Share split or Share
dividend), subject to such restrictions or limitations, if any, as may be set
forth in the Declaration of Trust or the Bylaws of the Trust. Notwithstanding
any other provision in the Declaration of Trust, no determination shall be made
by the Board of Trustees nor shall any transaction be entered into by the Trust
which would cause any Shares or other beneficial interest in the Trust not to
constitute "transferable shares" or "transferable certificates of beneficial
interest" under Section 856(a)(2) of the Code or which would cause any
distribution to constitute a preferential dividend as described in Section
562(c) of the Code.
Section 6. Dividends and Distributions. The holders of all Common
Shares will participate equally in dividends payable to holders of Common Shares
when and as authorized and declared by the Board of Trustees and in net assets
available for distribution to holders of Common Shares upon liquidation or
dissolution. The Board of Trustees may from time to time authorize and declare
to shareholders such dividends or distributions, in cash or other assets of
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the Trust or in securities of the Trust or from any other source as the Board of
Trustees in its discretion shall determine. The Board of Trustees shall endeavor
to declare and pay such dividends and distributions as shall be necessary for
the Trust to qualify as a REIT under the Code; however, shareholders shall have
no right to any dividend or distribution unless and until authorized and
declared by the Board. The exercise of the powers and rights of the Board of
Trustees pursuant to this Section shall be subject to the provisions of any
class or series of Shares at the time outstanding.
Section 7. General Nature of Shares. All Shares shall be personal
property entitling the shareholders only to those rights provided in the
Declaration of Trust. The shareholders shall have no interest in the property of
the Trust and shall have no right to compel any partition, division, dividend or
distribution of the Trust or of the property of the Trust. The death of a
shareholder shall not terminate the Trust. The Trust is entitled to treat as
shareholders only those persons in whose names Shares are registered as holders
of Shares on the beneficial interest ledger of the Trust.
Section 8. Fractional Shares. The Trust may, without the consent or
approval of any shareholder, issue fractional Shares, eliminate a fraction of a
Share by rounding up or down to a full Share, arrange for the disposition of a
fraction of a Share by the person entitled to it, or pay cash for the fair value
of a fraction of a Share.
Section 9. Declaration of Trust and Bylaws. All shareholders are
subject to the provisions of the Declaration of Trust and the Bylaws of the
Trust.
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ARTICLE VII
RESTRICTIONS ON TRANSFER AND SHARES-IN-TRUST
Section 1. Restrictions on Transfer.
(A) Definitions. The following terms shall have the following
meanings
(1) "Beneficial Ownership" shall mean ownership of
Equity Shares (or options to acquire Equity Shares) by a Person who would be
treated as an owner of such Equity Shares either directly or indirectly through
the application of Section 544 of the Code, as modified by Section 856(h)(1)(B)
of the Code. The terms "Beneficial Owner," "Beneficially Owns," and
"Beneficially Owned" shall have correlative meanings.
(2) "Beneficiary" shall mean, with respect to any
Share Trust, one or more organizations described in each of Section 170(b)(1)(A)
(other than clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code
that are named by the Share Trust as the beneficiary or beneficiaries of such
Share Trust, in accordance with the provisions of Section 2(A) hereof.
(3) "Board of Trustees" shall mean the Board of
Trustees of the Trust.
(4) "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time.
(5) "Constructive Ownership" shall mean ownership of
Equity Shares (or options to acquire Equity Shares) by a Person who would be
treated as an owner of such Equity Shares either directly or indirectly through
the application of Section 318 of the Code, as modified by Section 856(d)(5) of
the Code. The terms "Constructive Owner," "Constructively Owns," and
"Constructively Owned" shall have correlative meanings.
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<PAGE>
(6) "Equity Shares" shall mean shares that are either
Preferred Shares or Common Shares. The term "Equity Shares" shall include all
Preferred Shares or Common Shares that are held as Shares-in-Trust in accordance
with the provisions of Section 2 hereof.
(7) "Exchange Rights" shall mean the rights granted
under the RAIT Partnership, L.P. Partnership Agreement to the limited partners
to exchange, under certain circumstances, their limited partnership interests
for cash (or, at the option of the Trust, Common Shares).
(8) "Excluded Holder" shall mean Resource America,
Inc.
(9) "Excluded Holder Limit" shall mean, (i) the
lesser of (A) 15% of the number of outstanding Common Shares or (B) the Adjusted
Excluded Holder Percentage (as defined in Section 1(I) of this Article VII). The
Excluded Holder Limit shall be adjusted on any day that the Adjusted Excluded
Holder Percentage changes as provided in Section 1(I) of this Article VII. The
Excluded Holder shall be subject to the Ownership Limit with respect to any
Preferred Shares acquired by the Excluded Holder.
(10) "Initial Public Offering" means the sale of
Common Shares pursuant to the Trust's first effective registration statement for
such Common Shares filed under the Securities Act of 1933, as amended.
(11) "Market Price" on any date shall mean the
average of the Closing Price for the five consecutive Trading Days ending on
such date. The "Closing Price" on any date shall mean the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted
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to trading as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national securities
exchange on which the Equity Shares are listed or admitted to trading or, if the
Equity Shares are not listed or admitted to trading on any national securities
exchange, the last quoted price, or if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System or,
if such system is no longer in use, the principal other automated quotations
system that may then be in use or, if the Equity Shares are not quoted by any
such organization, the average of the closing bid and asked prices as furnished
by a professional market maker making a market in the Equity Shares selected by
the Board of Trustees. "Trading Day" shall mean a day on which the principal
national securities exchange on which the Equity Shares are listed or admitted
to trading is open for the transaction of business or, if the Equity Shares are
not listed or admitted to trading on any national securities exchange, shall
mean any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
(12) "Non-Transfer Event" shall mean an event (other
than a purported Transfer) that would cause (i) any Person (other than the
Excluded Holder with respect to Common Shares) to Beneficially Own or
Constructively Own Equity Shares in excess of the Ownership Limit or (ii) the
Excluded Holder to Beneficially Own or Constructively Own Common Shares in
excess of the Excluded Holder Limit, including, but not limited to, the granting
of any option or entering into any agreement for the sale, transfer or other
disposition
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of Equity Shares or the sale, transfer, assignment or other disposition of any
securities or rights convertible into or exchangeable for Equity Shares.
(13) "Ownership Limit" initially shall mean 8.5% of
the number of outstanding Common Shares and 9.8% of the outstanding number of
any series of Preferred Shares. After any adjustment provided for in Section
1(J) of this Article VII, the Ownership Limit with respect to Common Shares
shall be increased (but not above 9.8%) as set forth in such Section.
(14) "Partnership Unit" shall mean a fractional,
undivided share of the partnership interests of RAIT Partnership, L.P., a
Delaware limited partnership.
(15) "Permitted Transferee" shall mean any Person
designated as a Permitted Transferee in accordance with the provisions of
Section 2(E) hereof.
(16) "Person" shall mean an individual, corporation,
partnership, estate, trust, a portion of a trust permanently set aside for or to
be used exclusively for the purposes described in Section 642(c) of the Code,
association, private foundation within the meaning of Section 509(a) of the
Code, joint stock company or other entity and also includes a "group" as that
term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of
1934, as amended.
(17) "RAIT Partnership Agreement" shall mean the
agreement of limited partnership of RAIT Partnership, L.P., a Delaware limited
partnership, as amended and restated.
(18) "Prohibited Owner" shall mean, with respect to
any purported Transfer or Non-Transfer Event, any Person who, but for the
provisions of Section 1(C) hereof, would own record title to Equity Shares.
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(19) "REIT" shall mean a real estate investment trust
under Section 856 of the Code.
(20) "Restriction Termination Date" shall mean the
first day after the date of the Initial Public Offering on which the Board of
Trustees and the shareholders of the Trust determine, pursuant to Article V,
Section 1(C), that it is no longer in the best interests of the Trust to attempt
to, or continue to, qualify as a REIT.
(21) "Shares-in-Trust" shall mean any Equity Shares
designated Shares-in-Trust pursuant to Section 1(C) hereof.
(22) "Share Trust" shall mean any separate trust
created pursuant to Section 1(C) hereof and administered in accordance with the
terms of Section 2 hereof, for the exclusive benefit of any Beneficiary.
(23) "Share Trustee" shall mean any person or entity
unaffiliated with both the Trust and any Prohibited Owner, such Share Trustee to
be designated by the Trust to act as trustee of any Share Trust, or any
successor trustee thereof.
(24) "Transfer" (as a noun) shall mean any sale,
transfer, gift, assignment, devise or other disposition of Equity Shares,
whether voluntary or involuntary, whether of record, constructively or
beneficially and whether by operation of law or otherwise. "Transfer" (as a
verb) shall have the correlative meaning.
(B) Restriction on Transfers.
(1) Except as provided in Section 1(G) hereof, from
the date of the Initial Public Offering and prior to the Restriction Termination
Date, (i) no Person (other than the Excluded Holder with respect to Common
Shares) shall Beneficially Own or Constructively Own
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outstanding Equity Shares in excess of the Ownership Limit and (ii) the Excluded
Holder shall not Beneficially Own or Constructively Own outstanding Common
Shares in excess of the Excluded Holder Limit.
(2) Except as provided in Section 1(G) hereof and
subject to Section 1(H) hereof, from the date of the Initial Public Offering and
prior to the Restriction Termination Date, any Transfer that, if effective,
would result in (i) any Person (other than the Excluded Holder with respect to
Common Shares) Beneficially Owning or Constructively Owning Equity Shares in
excess of the Ownership Limit or (ii) the Excluded Holder Beneficially Owning or
Constructively Owning Common Shares in excess of the Excluded Holder Limit,
shall be void ab initio as to the Transfer of that number of Equity Shares which
would be otherwise Beneficially Owned or Constructively Owned by such Person in
excess of the Ownership Limit or the Excluded Holder Limit, as applicable, and
the intended transferee shall acquire no rights in such excess Equity Shares.
(3) From the date of the Initial Public Offering and
prior to the Restriction Termination Date, any Transfer that, if effective,
would result in the Equity Shares being beneficially owned by fewer than 100
Persons (determined without reference to any rules of attribution) shall be void
ab initio as to the Transfer of that number of shares which would be otherwise
beneficially owned (determined without reference to any rules of attribution) by
the transferee, and the intended transferee shall acquire no rights in such
excess Equity Shares; provided, however, that this Section 1(B)(3) shall not
apply to the Transfer of Equity Shares from the Trust to the underwriters of the
Initial Public Offering.
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(4) From the date of the Initial Public Offering and
prior to the Restriction Termination Date, any Transfer of Equity Shares that,
if effective, would result in the Trust being "closely held" within the meaning
of Section 856(h) of the Code shall be void ab initio as to the Transfer of that
number of Equity Shares which would cause the Trust to be "closely held" within
the meaning of Section 856(h) of the Code, and the intended transferee shall
acquire no rights in such excess Equity Shares.
(5) Except as provided in Section 1(G) hereof and
subject to Section 1(H) hereof, from the date of the Initial Public Offering and
prior to the Restriction Termination Date, any Transfer of Equity Shares that,
if effective, would cause the Trust to Constructively Own 10% or more of the
ownership interests in a tenant of the Trust's real property, within the meaning
of Section 856(d)(2)(B) of the Code, shall be void ab initio as to the Transfer
of that number of Equity Shares which would cause the Trust to Constructively
Own 10% or more of the ownership interests in a tenant of the Trust's real
property, within the meaning of Section 856(d)(2)(B) of the Code, and the
intended transferee shall acquire no rights in such excess Equity Shares.
(C) Transfer to Share Trust.
(1) If, notwithstanding the other provisions
contained in this Section 1, at any time after the date of the Initial Public
Offering and prior to the Restriction Termination Date, there is a purported
Transfer or Non-Transfer Event such that (i) any Person (other than the Excluded
Holder with respect to Common Shares) would either Beneficially Own or
Constructively Own Equity Shares in excess of the Ownership Limit or (ii) the
Excluded Holder would either Beneficially Own or Constructively Own Common
Shares in excess of the Excluded
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Holder Limit, then, (x) except as otherwise provided in Section 1(G) hereof, the
purported transferee shall acquire no right or interest (or, in the case of a
Non-Transfer Event, the person holding record title to the Equity Shares
Beneficially Owned or Constructively Owned by such Beneficial Owner or
Constructive Owner, shall cease to own any right or interest) in such number of
Equity Shares which would cause such Beneficial Owner or Constructive Owner to
Beneficially Own or Constructively Own Equity Shares in excess of the Ownership
Limit or the Excluded Holder Limit, as applicable, (y) such number of Equity
Shares in excess of the Ownership Limit or the Excluded Holder Limit, as
applicable (rounded up to the nearest whole share), shall be designated
Shares-in-Trust and, in accordance with the provisions of Section 2 hereof,
transferred automatically and by operation of law to the Share Trust to be held
in accordance with that Section 2 and (z) the Prohibited Owner shall submit such
number of Equity Shares to the Trust for registration into the name of the Share
Trust. Such transfer to a Share Trust and the designation of shares as
Shares-in-Trust shall be effective as of the close of business on the business
day prior to the date of the Transfer or Non-Transfer Event, as the case may be.
(2) If, notwithstanding the other provisions
contained in this Section 1, at any time after the date of the Initial Public
Offering and prior to the Restriction Termination Date, there is a purported
Transfer or Non-Transfer Event that, if effective, would (i) result in the
Equity Shares being beneficially owned by fewer than 100 Persons (determined
without reference to any rules of attribution), (ii) result in the Trust being
"closely held" within the meaning of Section 856(h) of the Code, or (iii) cause
the Trust to Constructively Own 10% or more of the ownership interests in a
tenant of the Trust's real property, within the meaning of
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Section 856(d)(2)(B) of the Code, then (x) the purported transferee shall not
acquire any right or interest (or, in the case of a Non-Transfer Event, the
person holding record title of the Equity Shares with respect to which such
Non-Transfer Event occurred, shall cease to own any right or interest) in such
number of Equity Shares, the ownership of which by such purported transferee or
record holder would (A) result in the Equity Shares being beneficially owned by
fewer than 100 Persons (determined without reference to any rules of
attribution), (B) result in the Trust being "closely held" within the meaning of
Section 856(h) of the Code, or (C) cause the Trust to Constructively Own 10% or
more of the ownership interests in a tenant of the Trust's real property, within
the meaning of Section 856(d)(2)(B) of the Code, (y) such number of Equity
Shares (rounded up to the nearest whole share) shall be designated
Shares-in-Trust and, in accordance with the provisions of Section 2 hereof,
transferred automatically and by operation of law to the Share Trust to be held
in accordance with that Section 2, and (z) the Prohibited Owner shall submit
such number of Equity Shares to the Trust for registration into the name of the
Share Trust. Such transfer to a Share Trust and the designation of shares as
Shares-in-Trust shall be effective as of the close of business on the business
day prior to the date of the Transfer or Non-Transfer Event, as the case may be.
If, for any reason, the transfer to the Share Trust is not automatically
effective to prevent the result described in (A), (B) or (C) of this paragraph,
then the Transfer or Non-Transfer Event to the extent of the number of shares
calculated in clause (y) of this paragraph shall be void.
(D) Remedies For Breach. If the Trust, or its designees, shall
at any time determine in good faith that a Transfer has taken place in violation
of Section 1(B) hereof or that a Person intends to acquire or has attempted to
acquire Beneficial Ownership or Constructive
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Ownership of any Equity Shares in violation of Section 1(B) hereof, the Trust
shall take such action as it deems advisable to refuse to give effect to or to
prevent such Transfer or acquisition, including, but not limited to, refusing to
give effect to such Transfer on the books of the Trust or instituting
proceedings to enjoin such Transfer or acquisition.
(E) Notice of Restricted Transfer. Any Person who acquires or
attempts to acquire Equity Shares in violation of Section 1(B) hereof, or any
Person who owned Equity Shares that were transferred to the Share Trust pursuant
to the provisions of Section 1(C) hereof, shall immediately give written notice
to the Trust of such event and shall provide to the Trust such other information
as the Trust may request in order to determine the effect, if any, of such
Transfer or Non-Transfer Event, as the case may be, on the Trust's status as a
REIT.
(F) Owners Required To Provide Information. From the date of
the Initial Public Offering and prior to the Restriction Termination Date:
(1) Every Beneficial Owner or Constructive Owner of
more than 5%, or such lower percentages as required pursuant to regulations
under the Code, of the outstanding Equity Shares of the Trust shall, within 30
days after January 1 of each year, provide to the Trust a written statement or
affidavit stating the name and address of such Beneficial Owner or Constructive
Owner, the number of Equity Shares Beneficially Owned or Constructively Owned,
and a description of how such shares are held. Each such Beneficial Owner or
Constructive Owner shall provide to the Trust such additional information as the
Trust may request in order to determine the effect, if any, of such Beneficial
Ownership or Constructive Ownership on the Trust's status as a REIT and to
ensure compliance with the Ownership Limit and the Excluded Holder Limit.
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(2) Each Person who is a Beneficial Owner or
Constructive Owner of Equity Shares and each Person (including the shareholder
of record) who is holding Equity Shares for a Beneficial Owner or Constructive
Owner shall provide to the Trust a written statement or affidavit stating such
information as the Trust may request in order to determine the Trust's status as
a REIT and to ensure compliance with the Ownership Limit and the Excluded Holder
Limit.
(G) Exception to Ownership Limit. The Ownership Limit shall
not apply to the acquisition of Equity Shares by an underwriter that
participates in a public offering of such shares for a period of 90 days
following the purchase by such underwriter of such shares provided that the
restrictions contained in Section 1(B) hereof will not be violated following the
distribution by such underwriter of such shares. In addition, the Board of
Trustees, upon receipt of a ruling from the Internal Revenue Service or an
opinion of counsel in each case to the effect that the restrictions contained in
Section 1(B)(3) and/or Section 1(B)(4) hereof will not be violated and that REIT
status will not otherwise be lost, may exempt a Person from the Ownership Limit
if such Person is not an individual for purposes of Section 542(a)(2) of the
Code, provided that (i) the Board of Trustees obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain that no
individual's Beneficial Ownership or Constructive Ownership of Equity Shares
will cause the Trust to lose its status as a REIT and (ii) such Person agrees
that any violation or attempted violation of such representations and
undertakings will result in a transfer to the Share Trust of Equity Shares
pursuant to Section 1(C) hereof.
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(H) Redetermination of Excluded Holder Limit. The Excluded
Holder Limit shall be redetermined whenever the Adjusted Excluded Holder
Percentage (as defined below) is changed by the Board of Trustees. The "Adjusted
Excluded Holder Percentage" shall equal the percentage of the number of
outstanding Common Shares Beneficially or Constructively Owned by the Excluded
Holder assuming the following: (i) all of the Partnership Units Beneficially or
Constructively Owned by the Excluded Holder are exchanged for Common Shares;
(ii) no other Partnership Units are exchanged for Common Shares; (iii) all of
the options to acquire Common Shares that are Beneficially or Constructively
Owned by the Excluded Holder are exercised; and (iv) no other options to acquire
Common Shares are exercised. The Adjusted Excluded Holder Percentage may (but is
not required to) be redetermined by the Board of Trustees whenever there is a
change in either the number of Common Shares outstanding or the number of Common
Shares Beneficially or Constructively Owned by the Excluded Holder, in each case
based on the assumptions set out in the immediately preceding sentence. In
redetermining the Adjusted Excluded Holder Percentage, the Board of Trustees may
take into account any options with respect to Common Shares that are expected to
be issued to the Excluded Holder (or to any other Person if the Excluded Holder
will be considered to Beneficially or Constructively Own the Common Shares that
are the subject of the options) in the future.
(I) Redetermination of Ownership Limit. Whenever the Excluded
Holder Limit is redetermined pursuant to Section 1(I) of this Article VII, the
Ownership Limit shall be redetermined to equal the percentage obtained by
dividing (i) 49% minus the new Excluded Holder Limit by (ii) four.
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(J) Limitations on Redetermination of Excluded Holder Limit
and Ownership Limit.
(1) Neither the Ownership Limit nor the Excluded
Holder Limit may be increased (nor may any additional ownership limitation be
created with respect to any shareholder of the Trust) if, after giving effect to
such increase (or creation), the Trust would be (or potentially could be if five
or more individuals Beneficially Owned a percentage of outstanding Common Shares
equal to the applicable limits) "closely held" within the meaning of Section
856(h) of the Code.
(2) In no event shall the Adjusted Excluded Holder
Percentage be less than 9.8%.
(3) In no event shall the Ownership Limit be less
than 8.5% or greater than 9.8%.
(4) Prior to any redetermination of the Adjusted
Excluded Holder Limit, the Board may require such opinions of counsel,
affidavits, undertakings, or agreements as it may deem necessary or advisable in
order to determine or assure the Trust's status as a REIT.
Section 2. Shares-in-Trust.
(A) Share Trust. Any Equity Shares transferred to a Share
Trust and designated Shares-in-Trust pursuant to Section 1(C) hereof shall be
held for the exclusive benefit of the Beneficiary. The Trust shall name a
beneficiary of each Share Trust within five days after discovery of the
existence thereof. Any transfer to a Share Trust, and subsequent designation of
Equity Shares as Shares-in-Trust, pursuant to Section 1(C) hereof shall be
effective as of the
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close of business on the business day prior to the date of the Transfer or
Non-Transfer Event that results in the transfer to the Share Trust.
Shares-in-Trust shall remain issued and outstanding Equity Shares of the Trust
and shall be entitled to the same rights and privileges on identical terms and
conditions as are all other issued and outstanding Equity Shares of the same
class and series. When transferred to a Permitted Transferee in accordance with
the provisions of Section 2(E) hereof, such Shares-in-Trust shall cease to be
designated as Shares-in-Trust.
(B) Dividend Rights. The Share Trust, as record holder of
Shares-in-Trust, shall be entitled to receive all dividends and distributions as
may be declared by the Board of Trustees on such Equity Shares and shall hold
such dividends or distributions in trust for the benefit of the Beneficiary. The
Prohibited Owner with respect to Shares-in-Trust shall repay to the Share Trust
the amount of any dividends or distributions received by it that (i) are
attributable to any Equity Shares designated Shares-in-Trust and (ii) the record
date for which was on or after the date that such shares became Shares-in-Trust.
The Trust shall take all measures that it determines reasonably necessary to
recover the amount of any such dividend or distribution paid to a Prohibited
Owner, including, if necessary, withholding any portion of future dividends or
distributions payable on Equity Shares Beneficially Owned or Constructively
Owned by the Person who, but for the provisions of Section 1(C) hereof, would
Constructively Own or Beneficially Own the Shares-in-Trust; and, as soon as
reasonably practicable following the Trust's receipt or withholding thereof,
shall pay over to the Share Trust for the benefit of the Beneficiary the
dividends so received or withheld, as the case may be.
(C) Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Trust, each
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holder of Shares-in-Trust shall be entitled to receive, ratably with each other
holder of Equity Shares of the same class or series, that portion of the assets
of the Trust which is available for distribution to the holders of such class
and series of Equity Shares. The Share Trust shall distribute to the Prohibited
Owner the amounts received upon such liquidation, dissolution, or winding up, or
distribution; provided, however, that the Prohibited Owner shall not be entitled
to receive amounts pursuant to this Section 2(C) in excess of, (i) in the case
of a purported Transfer in which the Prohibited Owner gave value for Equity
Shares and which Transfer resulted in the transfer of the shares to the Share
Trust, the price per share, if any, such Prohibited Owner paid for the Equity
Shares and, (ii) in the case of a Non-Transfer Event or Transfer in which the
Prohibited Owner did not give value for such shares (e.g., if the shares were
received through a gift or devise) and which Non-Transfer Event or Transfer, as
the case may be, resulted in the transfer of shares to the Share Trust, the
price per share equal to the Market Price on the date of such Non-Transfer Event
or Transfer. Any remaining amount in such Share Trust shall be distributed to
the Beneficiary.
(D) Voting Rights. The Share Trustee shall be entitled to vote
all Shares-in-Trust. Any vote by a Prohibited Owner as a holder of Equity
Shares prior to the discovery by the Trust that the Equity Shares are
Shares-in-Trust shall, subject to applicable law, be rescinded and shall be void
ab initio with respect to such Shares-in-Trust and the Prohibited Owner shall be
deemed to have given, as of the close of business on the business day prior to
the date of the purported Transfer or Non-Transfer Event that results in the
transfer to the Share Trust of Equity Shares under Section 1(C) hereof, an
irrevocable proxy to the Share Trustee to vote the Shares-in-Trust in the manner
in which the Share Trustee, in its sole and absolute discretion,
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desires. If, however, the company has already taken irreversible corporate
action, then the Share Trustee shall not have the authority to rescind and
revote such vote.
(E) Designation of Permitted Transferee. The Share Trustee
shall have the exclusive and absolute right to designate a Permitted Transferee
of any and all Shares-in-Trust. In an orderly fashion so as not to materially
adversely affect the Market Price of the Shares-in-Trust, the Share Trustee
shall designate any Person as Permitted Transferee, provided, however, that (i)
the Permitted Transferee so designated purchases for valuable consideration
(whether in a public or private sale), at a price as set forth in Section 2(G)
hereof, the Shares-in-Trust and (ii) the Permitted Transferee so designated may
acquire such Shares-in-Trust without such acquisition resulting in a transfer to
a Share Trust and the redesignation of such Equity Shares so acquired as
Shares-in-Trust under Section 1(C) hereof. Upon the designation by the Share
Trustee of a Permitted Transferee in accordance with the provisions of this
Section 2(E), the Share Trustee shall (i) cause to be transferred to the
Permitted Transferee that number of Shares-in-Trust acquired by the Permitted
Transferee, (ii) cause to be recorded on the books of the Trust that the
Permitted Transferee is the holder of record of such number of Equity Shares,
(iii) cause the Shares-in-Trust to be canceled and (iv) distribute to the
Beneficiary any and all amounts held with respect to the Shares-in-Trust after
making the payment to the Prohibited Owner pursuant to Section 2(F) hereof.
(F) Compensation to Record Holder of Equity Shares that Become
Shares-in-Trust. Any Prohibited Owner shall be entitled (following discovery of
the Shares-in-Trust and subsequent designation of the Permitted Transferee in
accordance with Section 2(E) hereof or following the acceptance of the offer to
purchase such shares in accordance with Section 2(G)
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hereof) to receive from the Share Trustee following the sale or other
disposition of such Shares- in-Trust the lesser of (i) in the case of (a) a
purported Transfer in which the Prohibited Owner gave value for Equity Shares
and which Transfer resulted in the transfer of the shares to the Share Trust,
the price per share, if any, such Prohibited Owner paid for the Equity Shares,
or (b) a Non-Transfer Event or Transfer in which the Prohibited Owner did not
give value for such shares (e.g., if the shares were received through a gift or
devise) and which Non-Transfer Event or Transfer, as the case may be, resulted
in the transfer of shares to the Share Trust, the price per share equal to the
Market Price on the date of such Non-Transfer Event or Transfer and (ii) the
price per share received by the Share Trustee from the sale or other disposition
of such Shares-in-Trust in accordance with Section 2(E) hereof. Any amounts
received by the Share Trustee in respect of such Shares-in-Trust and in excess
of such amounts to be paid the Prohibited Owner pursuant to this Section 2(F)
shall be distributed to the Beneficiary in accordance with the provisions of
Section 2(E) hereof. Each Beneficiary and Prohibited Owner waive any and all
claims that they may have against the Share Trustee and the Share Trust arising
out of the disposition of Shares-in-Trust, except for claims arising out of the
gross negligence or willful misconduct of, or any failure to make payments in
accordance with this Section 2 by such Share Trustee or the Trust.
(G) Purchase Right in Shares-in-Trust. Shares-in-Trust shall
be deemed to have been offered for sale to the Trust, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case of devise, gift
or Non-Transfer Event, the Market Price at the time of such devise, gift or Non-
Transfer Event) and (ii) the Market Price on the date the Trust, or its
designee, accepts such
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offer. The Trust shall have the right to accept such offer for a period of
ninety days after the later of (i) the date of the Non-Transfer Event or
purported Transfer which resulted in such Shares-in-Trust and (ii) the date the
Trust determines in good faith that a Transfer or Non- Transfer Event resulting
in Shares-in-Trust has occurred, if the Trust does not receive a notice of such
Transfer or Non-Transfer Event pursuant to Section 1(E) hereof.
Section 3. Remedies Not Limited. Subject to Section 1(H) hereof,
nothing contained in this Article VII shall limit the authority of the Trust to
take such other action as it deems necessary or advisable to protect the Trust
and the interests of its shareholders by preservation of the Trust's status as a
REIT and to ensure compliance with the Ownership Limit and the Excluded Holder
Limit.
Section 4. Ambiguity. In the case of an ambiguity in the application of
any of the provisions of Article VII, including any definition contained in
Section 1(A) hereof, the Board of Trustees shall have the power to determine the
application of the provisions of this Article VII with respect to any situation
based on the facts known to it.
Section 5. Legend. Each certificate for Equity Shares shall bear the
following legend:
"The [Common or Preferred] Shares represented by this certificate are
subject to restrictions on transfer for the purpose of the Trust's maintenance
of its status as a real estate investment trust under the Internal Revenue Code
of 1986, as amended (the "Code"). Subject to certain further restrictions and
except as provided in the Declaration of Trust of the Trust, no Person may (i)
Beneficially or Constructively Own Common Shares in excess of 8.5% (or such
other percentage as may be determined by the Board of Trustees) of the number of
outstanding Common Shares, unless such Person is the Excluded Holder (in which
case the
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Excluded Holder Limit shall be applicable); (ii) Beneficially or Constructively
Own Preferred Shares of any series of Preferred Shares in excess of 9.8% of the
number of outstanding Preferred Shares of such series, (iii) Beneficially Own
Equity Shares that would result in the Equity Shares being beneficially owned by
fewer than 100 Persons (determined without reference to any rules of
attribution), (iv) Beneficially Own Equity Shares that would result in the Trust
being "closely held" under Section 856(h) of the Code, or (v) Constructively Own
Equity Shares that would cause the Trust to Constructively Own 10% or more of
the ownership interests in a tenant of the Trust's real property, within the
meaning of Section 856(d)(2)(B) of the Code. Any Person who attempts to
Beneficially or Constructively Own shares of Equity Shares in excess of the
above limitations must immediately notify the Trust in writing. If any
restrictions above are violated, the Equity Shares represented hereby will be
transferred automatically to a Share Trust and shall be designated
Shares-in-Trust to a trustee of a trust for the benefit of one or more
charitable beneficiaries. In addition, upon the occurrence of certain events,
attempted transfers in violation of the restrictions described above may be void
ab initio. All capitalized terms in this legend have the meanings defined in the
Trust's Amended and Restated Declaration of Trust, as the same may be further
amended from time to time, a copy of which, including the restrictions on
transfer, will be sent without charge to each shareholder who so requests. Such
requests must be made to the secretary of the trust at its principal office or
to the transfer agent."
Section 6. Severability. If any provision of this Article VII or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications
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of such provision shall be affected only to the extent necessary to comply with
the determination of such court.
ARTICLE VIII
SHAREHOLDERS
Section 1. Meetings. There shall be an annual meeting of the
shareholders, commencing in 1998, to be held on proper notice at such time
(after the delivery of the annual report) and convenient location as shall be
determined by or in the manner prescribed in the Bylaws, for the election of the
Trustees, if required, and for the transaction of any other business within the
powers of the Trust. Except as otherwise provided in this Declaration of Trust,
special meetings of shareholders may be called in the manner provided in the
Bylaws. If there are no Trustees, the officers of the Trust shall promptly call
a special meeting of the shareholders entitled to vote for the election of
successor Trustees. Any meeting may be adjourned and reconvened as the Trustees
determine or as provided in the Bylaws. With respect to any meeting of
shareholders (or a special meeting in lieu of an annual meeting), the nomination
of persons for election to the Board of Trustees and the proposal of business to
be considered by shareholders may be made only (a) by the Board of Trustees or
(b) by a shareholder who is entitled to vote at the meeting and has complied
with advance-notice procedures set forth in the Bylaws. With respect to a
special meeting of shareholders, only the business specified in the Company's
notice of meeting may be brought before the meeting.
Section 2. Voting Rights. Subject to the provisions of any class or
series of Shares then outstanding, the shareholders shall be entitled to vote
only on the following matters: (a) termination of REIT status as provided in
Article V, Section (1)(C), (b) election of Trustees as
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provided in Article V, Section 2(A) and the removal of Trustees as provided in
Article V, Section 3; (c) amendment of the Declaration of Trust as provided in
Article X; (d) termination of the Trust as provided in Article XII, Section 2;
(e) merger or consolidation of the Trust, or the sale or disposition of
substantially all of the Trust Property, as provided in Article XI; and (f) such
other matters with respect to which a vote of the shareholders is required by
applicable law or the Board of Trustees has adopted a resolution declaring that
a proposed action is advisable and directing that the matter be submitted to the
shareholders for approval or ratification. Except with respect to the foregoing
matters, no action taken by the shareholders at any meeting shall in any way
bind the Board of Trustees.
Section 3. Preemptive and Appraisal Rights. Except as may be provided
by the Board of Trustees in setting the terms of classified or reclassified
Shares pursuant to Article VI, Section 4, no holder of Shares shall, as such
holder, (a) have any preemptive or preferential right to purchase or subscribe
for any additional Shares of the Trust or any other security of the Trust which
it may issue or sell or (b), except as expressly required by Title 8, have any
right to require the Trust to pay him the fair value of his Shares in an
appraisal or similar proceeding.
Section 4. Extraordinary Actions. Except as specifically provided in
Article V, Sections 1(C), 2(A) and 3 and Article X, Sections 2 and 3, and
Article XII, Section 2 of this Declaration of Trust, notwithstanding any
provision of law permitting or requiring any action to be taken or authorized by
the affirmative vote of the holders of a greater number of votes, any such
action shall be effective and valid if taken or authorized by the affirmative
vote of holders of Shares entitled to cast a majority of all the votes entitled
to be cast on the matter.
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Section 5. Board Approval. The submission of any action to the
shareholders for their consideration shall first be approved by the Board of
Trustees.
Section 6. Action By Shareholders Without a Meeting. The Bylaws of the
Trust may provide that any action required or permitted to be taken by the
shareholders may be taken without a meeting by the written consent of the
shareholders entitled to cast a sufficient number of votes to approve the matter
as required by statute, the Declaration of Trust or the Bylaws of the Trust, as
the case may be.
ARTICLE IX
LIABILITY LIMITATION, INDEMNIFICATION
AND TRANSACTIONS WITH THE TRUST
Section 1. Limitation of Shareholder Liability. No shareholder shall be
liable for any debt, claim, demand, judgment or obligation of any kind of,
against or with respect to the Trust by reason of his being a shareholder, nor
shall any shareholder be subject to any personal liability whatsoever, in tort,
contract or otherwise, to any person in connection with the property or the
affairs of the Trust by reason of his being a shareholder.
Section 2. Limitation of Trustee and Officer Liability. To the maximum
extent that Maryland law in effect from time to time permits limitation of the
liability of trustees and officers of a REIT, no Trustee or officer of the Trust
shall be liable to the Trust or to any shareholder for money damages. Neither
the amendment nor repeal of this Section, nor the adoption or amendment of any
other provision of the Declaration of Trust or Bylaws of the Trust inconsistent
with this section, shall apply to or affect in any respect the applicability of
the preceding sentence with respect to any act or failure to act which occurred
prior to such
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amendment, repeal or adoption. In the absence of any Maryland statute limiting
the liability of trustees and officers of a Maryland REIT for money damages in a
suit by or on behalf of the Trust or by any shareholder, no Trustee or officer
of the Trust shall be liable to the Trust or to any shareholder for money
damages except to the extent that (a) the Trustee or officer actually received
an improper benefit or profit in money, property, or services, for the amount of
the benefit or profit in money, property, or services actually received; or (b)
a judgment or other final adjudication adverse to the Trustee or officer is
entered in a proceeding based on a finding in the proceeding that the Trustee's
or officer's action or failure to act was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding.
Section 3. Express Exculpatory Clauses in Instruments. Neither the
Shareholders nor the Trustees, officers, employees or agents of the Trust shall
be liable under any written instrument creating an obligation of the Trust, and
all Persons shall look solely to the Trust Property for the payment of any claim
under or for the performance of that instrument. The omission of the foregoing
exculpatory language from any instrument shall not affect the validity or
enforceability of such instrument and shall not render any Shareholder, Trustee,
officer, employee or agent liable thereunder to any third party, nor shall the
Trustees or any officer, employee or agent of the Trust be liable to anyone for
such omission.
Section 4. Indemnification. The Trust shall have the power, to the
maximum extent permitted by Maryland law in effect from time to time, to
obligate itself to indemnify, and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to, (a) any individual who is a
present or former shareholder, Trustee or officer of the Trust or (b) any
individual who, while a Trustee of the Trust and at the request of the Trust,
serves or has served
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as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his status as a
present or former shareholder, Trustee or officer of the Trust. The Trust shall
have the power, with the approval of its Board of Trustees, to provide such
indemnification and advancement of expenses to a person who served as a
predecessor of the Trust in any of the capacities described in (a) or (b) above,
and to any employee or agent of the Trust or a predecessor of the Trust.
Section 5. Transactions Between the Trust and its Trustees, Officers,
Employees and Agents. Subject to any express restrictions in the Declaration of
Trust or adopted by the Trustees in the Bylaws or by resolution, the Trust may
enter into any contract or transaction of any kind with any person, including
any Trustee, officer, employee or agent of the Trust or any person affiliated
with a Trustee, officer, employee or agent of the Trust, whether or not any of
them has a financial interest in such transaction.
ARTICLE X
AMENDMENTS
Section 1. General. The Trust reserves the right from time to time to
make any amendment to the Declaration of Trust, now or hereafter authorized by
law, including any amendment altering the terms or contract rights, as expressly
set forth in the Declaration of Trust, of any Shares. All rights and powers
conferred by this Declaration of Trust on shareholders, Trustees and officers
are granted subject to this reservation. An amendment to the Declaration of
Trust (a) shall be signed and acknowledged by at least two-thirds of the
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Trustees, (b) shall be filed for record with SDAT as provided in Article XIII,
Section 5 and (c) shall become effective as of the later of the time the SDAT
accepts the amendment for record or the time established in the amendment, not
to exceed 30 days after the amendment is accepted for record. All references to
the Declaration of Trust shall include all amendments thereto.
Section 2. By Trustees. The Trustees by a two-thirds vote may amend the
Declaration of Trust from time to time, in the manner provided by Title 8,
without any action by the shareholders, to qualify as a REIT under the Code or
under Title 8.
Section 3. By Shareholders. Other than amendments pursuant to Section 2
of this Article X, any amendment to the Declaration of Trust shall be valid only
if approved by the affirmative vote of at least a majority of all the votes
entitled to be cast on the matter, except that any amendment to Article V,
Article VII, Article X, Sections 2 and 3, and Article XII, Section 2 of this
Declaration of Trust shall be valid only if approved by the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter.
ARTICLE XI
MERGER, CONSOLIDATION OR SALE OF TRUST PROPERTY
Subject to the provisions of any class or series of Shares at the time
outstanding, the Trust may (a) merge the Trust into another entity, (b)
consolidate the Trust with one or more other entities into a new entity or (c)
sell, lease, exchange or otherwise transfer all or substantially all of the
Trust Property. Any such action must be approved b the Board of Trustees and,
after notice to all shareholders entitled to vote on the matter, by the
affirmative vote of a majority of all the votes entitled to be cast on the
matter. As used herein, a sale, lease, exchange or other transfer of
substantially all of the assets of the Trust shall mean a sale,
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lease, exchange or other transfer of 90% or more of the total assets of the
Company (based upon the most recent appraised values) within a twelve-month
period.
ARTICLE XII
DURATION AND TERMINATION OF TRUST
Section 1. Duration. The Trust shall continue perpetually unless
terminated pursuant to Section 2 of this Article XII or pursuant to any
applicable provision of Title 8.
Section 2. Termination.
(A) Subject to the provision of any class or series of Shares
at the time outstanding, the Trust may be terminated at any meeting of
shareholders, by the affirmative vote of two thirds of all the votes entitled to
be cast on the matter. Upon the termination of the Trust:
(1) The Trust shall carry on no business except for
the purpose of winding up its affairs.
(2) The Trustees shall proceed to wind up the affairs
of the Trust and all of the powers of the Trustees under the Declaration of
Trust shall continue, including the powers to fulfill or discharge the Trust's
contracts, collect its assets, sell, convey, assign, exchange, transfer or
otherwise dispose of all or any part of the remaining property of the Trust to
one or more persons at public or private sale for consideration which may
consist in whole or in part of cash, securities or other property of any kind,
discharge or pay its liabilities and do all other acts appropriate to liquidate
its business.
(3) After paying or adequately providing for the
payment of all liabilities, and upon receipt of such releases, indemnities and
agreements as they deem necessary
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for their protection, the Trust may distribute the remaining property of the
Trust among the shareholders so that after payment in full or the setting apart
for payment of such preferential amounts, if any, to which the holders of any
Shares at the time outstanding shall be entitled, the remaining property of the
Trust shall, subject to any participating or similar rights of Shares at the
time outstanding, be distributed ratably among the holders of Common Shares at
the time outstanding.
(B) After termination of the Trust, the liquidation of its
business and the distribution to the shareholders as herein provided, a majority
of the Trustees shall execute and file with the Trust's records a document
certifying that the Trust has been duly terminated, and the Trustees shall be
discharged from all liabilities and duties hereunder, and the rights and
interests of all shareholders shall cease
ARTICLE XIII
MISCELLANEOUS
Section 1. Governing Law. The Declaration of Trust is executed by the
undersigned Trustee and delivered in the State of Maryland with reference to the
laws thereof, and the rights of all parties and the validity, construction and
effect of every provision hereof shall be subject to and construed according to
the laws of the State of Maryland without regard to conflicts of laws provisions
thereof.
Section 2. Reliance by Third Parties. Any certificate shall be final
and conclusive as to any person dealing with the Trust if executed by the
Secretary or an Assistant Secretary of the Trust or a Trustee, and if certifying
to: (a) the number or identity of Trustees, officers of the Trust or
shareholders; (b) the due authorization of the execution of any document; (c)
the
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action or vote taken, and the existence of a quorum, at a meeting of the Board
of Trustees or shareholders; (d) a copy of the Declaration of Trust or of the
Bylaws as a true and complete copy as then in force; (e) an amendment to the
Declaration of Trust; (f) the termination of the Trust; or (g) the existence of
any fact relating to the affairs of the Trust. No purchaser, lender, transfer
agent or other person shall be bound to make any inquiry concerning the validity
of any transaction purporting to be made by the Trust on its behalf or by any
officer, employee or agent of the Trust.
Section 3. Severability.
(A) The provisions of the Declaration of Trust are severable,
and if the Board of Trustees shall determine, with the advice of counsel, that
any one or more of such provisions (the "Conflicting Provisions") are in
conflict with the Code, Title 8 or other applicable federal or state laws, the
Conflicting Provisions, to the extent of the conflict, shall be deemed never to
have constituted a part of the Declaration of Trust, even without any amendment
of the Declaration of Trust pursuant to Article X and without affecting or
impairing any of the remaining provisions of the Declaration of Trust or
rendering invalid or improper any action taken or omitted prior to such
determination. No Trustee shall be liable for making or failing to make such a
determination. In the event of any such determination by the Board of Trustees,
the Board shall amend the Declaration of Trust in the manner provided in Article
X, Section 2.
(B) If any provision of the Declaration of Trust shall be held
invalid or unenforceable in any jurisdiction, such holding shall apply only to
the extent of any such invalidity or unenforceability and shall not in any
manner affect, impair or render invalid or
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unenforceable such provision in any other jurisdiction or any other provision of
the Declaration of Trust in any jurisdiction.
Section 4. Construction. In the Declaration of Trust, unless the
context otherwise requires, words used in the singular or in the plural include
both the plural and singular and words denoting any gender include all genders.
The title and headings of different parts are inserted for convenience and shall
not affect the meaning, construction or effect of the Declaration of Trust. In
defining or interpreting the powers and duties of the Trust and its Trustees and
officers, reference may be made by the Trustees or officers, to the extent
appropriate and not inconsistent with the Code or Title 8, to Titles 1 through 3
of the Corporations and Associations Article of the Annotated Code of Maryland.
In furtherance and not in limitation of the foregoing, in accordance with the
provisions of Title 3, Subtitles 6 and 7, of the Corporations and Associations
Article of the Annotated Code of Maryland, the Trust shall be included within
the definition of "corporation" for purposes of such provisions.
Section 5. Recordation. The Declaration of Trust and any amendment
hereto shall be filed for record with the SDAT and may also be filed or recorded
in such other places as the Trustees deem appropriate, but failure to file for
record the Declaration of Trust or any amendment hereto in any office other than
in the State of Maryland shall not affect or impair the validity or
effectiveness of the Declaration of Trust or any amendment hereto. A restated
Declaration of Trust shall, upon filing, be conclusive evidence of all
amendments contained therein and may thereafter be referred to in lieu of the
original Declaration of Trust and the various amendments thereto.
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IN WITNESS WHEREOF, this Amended and Restated Declaration of Trust has
been signed on this_____ day of________________ 1997 by the undersigned
President of the Trust and witnessed by the undersigned Secretary of the Trust,
each of whom acknowledges that this document is his free act and deed, and that
to the best of his knowledge, information, and belief, the matters and facts set
forth herein are true in all material respects and that the statement is made
under the penalties for perjury.
RESOURCE ASSET INVESTMENT TRUST
ATTEST:
---------------------------------
, President
IN WITNESS WHEREOF, this Amended and Restated Declaration of Trust has
been signed on this____ day of____________ 1997 by the sole Trustee of the Trust
who acknowledges that this document is his free act and deed, and that to the
best of his knowledge, information, and belief, the matters and facts set forth
herein are true in all material respects and that the statement is made under
the penalties for perjury.
__________________________(SEAL)
, Trustee
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RESOURCE ASSET INVESTMENT TRUST
BYLAWS
ARTICLE I. NAME AND SEAL
ARTICLE II. REGISTERED AND PRINCIPAL OFFICES
ARTICLE III. MEETING OF SHAREHOLDERS
ARTICLE IV. TRUSTEES AND BOARD MEETINGS
ARTICLE V. OFFICERS
ARTICLE VI. INDEMNIFICATION OF TRUSTEES, OFFICERS AND
OTHER PERSONS
ARTICLE VII. FINANCIAL REPORTS TO SHAREHOLDERS
ARTICLE VIII. RELATION OF TRUSTEES AND OFFICERS TO TRUST
ARTICLE IX. RECORDS OF TRUST
ARTICLE X. SHARES OF CAPITAL STOCK
ARTICLE XI. DIVIDENDS AND OTHER DISTRIBUTIONS TO
SHAREHOLDERS
ARTICLE XII. MISCELLANEOUS
ARTICLE XIII. AMENDMENTS
ARTICLE XIV. ADOPTION OF BYLAWS
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
BYLAWS
ARTICLE I. NAME.
Section 101. Name. The name of the trust is RESOURCE ASSET INVESTMENT
TRUST.
Section 102. State of Formation. The trust has been formed under the
laws of the State of Maryland.
ARTICLE II. REGISTERED AND PRINCIPAL OFFICES.
Section 201. Registered Office. The registered office of the trust in
the State of Maryland shall be at 7 St. Paul Street, Suite 1400, Baltimore,
Maryland 21202.
Section 202. Offices. The principal office of the trust and any other
offices of the trust shall be located at such places, within and without the
State of Maryland, as the Board of Trustees may from time to time determine or
as the business of the trust may require.
ARTICLE III. MEETINGS OF SHAREHOLDERS.
Section 301. Place of Meetings. All meetings of the holders
("shareholders") of shares of beneficial interest ("shares") of the trust shall
be held at such place or places, within or without the State of Maryland, as
shall be determined by the Board of Trustees from time to time.
Section 302. Annual Meetings. At least once in each calendar year on a
date and at a time determined by the Board of Trustees, a meeting of the
shareholders shall be held at which time they shall elect Trustees and transact
such other business as may properly be brought before the meeting.
Section 303. Special Meetings. Special meetings of the shareholders may
be called at any time by the Chairman of the Board, Chief Executive Officer,
President or the Board of Trustees and shall be called upon the request in
writing of holders of 50% or more of the outstanding shares entitled to vote.
Special meetings of the shareholders shall be held on a date fixed by the
Secretary of the trust which shall be not more than ninety (90) days after the
date of the call, or after receipt of the request. If the Secretary shall
neglect or refuse to fix the date or to give notice as required by Section 304,
below, the person or persons making the request may do so.
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Section 304. Notice of Meetings. Written notice of every meeting of
shareholders, stating the time and place thereof, shall be given as herein
provided by, or at the direction of, the person authorized to call the meeting,
to each shareholder of record entitled to vote at the meeting, not less than ten
(10) nor more than ninety (90) days prior to the day named for the meeting,
unless a greater period of notice is required by statute in a particular case.
In the case of a special meeting of shareholders, the notice shall also set
forth the purpose of the meeting. When a meeting is adjourned, it shall not be
necessary to give any notice of the adjourned meeting or of the business to be
transacted at any adjourned meeting, other than by announcement at the meeting
at which such adjournment is taken. Except as set forth in Section 404, below,
business to be conducted at any annual, special in lieu of annual or special
meeting of shareholders may be proposed only by the Board of Trustees or by a
shareholder who is entitled to vote at the meeting and who has filed his
proposed item of business with the Secretary of the trust within the time limits
set forth in the Securities Exchange Act of 1934, as amended, or, if the trust
is not subject to the requirements of such Act,forty-five (45) days prior to the
meeting. Only the business specified in the notice of meeting may be brought
before the meeting.
Section 305. Quorum. The shareholders present, in person or by proxy,
at a shareholders' meeting duly called shall constitute a quorum for the
transaction of business except as otherwise provided by law or by resolution of
the Board of Trustees prior to such meeting. If however, such quorum shall not
be present, those present thereat may adjourn the meeting to such time and place
as they may determine.
Section 306. Voting. Each shareholder shall be entitled to one (1)
vote, in person or by proxy, for each full share having voting power standing
registered in his name on the record date for the meeting of shareholders.
Section 307. Vote by Ballot. Upon the demand of any shareholder made
before the voting begins, the vote for Trustees, and the vote upon any other
question or matter before a shareholder meeting, shall be by ballot.
Section 308. Proxy Voting. At each meeting of the shareholders, every
shareholder having the right to vote shall be entitled to vote in person or by
proxy appointed by an instrument in writing subscribed by such shareholder and
delivered to the Secretary at the meeting. No unrevoked proxy shall be valid
after eleven (11) months from the date of its execution, unless a longer time is
expressly provided therein.
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Section 309. Unpaid Shares. No share upon which any installment is due
the trust and unpaid shall be voted at any meeting.
Section 310. Voting List. The officer or agent having charge of the
transfer books shall make, at least five (5) days before each meeting of
shareholders, a complete list of the shareholders entitled to vote at the
meeting, arranged in alphabetical order, setting forth the address of and the
number of shares held by each, which list shall be kept on file at the
registered office of the trust, and shall be subject to inspection by any
shareholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting, and shall be
subject to the inspection of any shareholder during the whole time of the
meeting. The original share ledger or transfer book, or a duplicate thereof
(kept at the office of the transfer agent for the trust) shall be prima facie
evidence as to who are the shareholders entitled to examine such list or share
ledger or transfer book, or to vote in person or by proxy, at any meeting of
shareholders.
Section 311. Action by Less Than Unanimous Consent. Any action which
may be taken at a meeting of the shareholders or of a class of shareholders may
be taken without a meeting, if a consent or consents in writing to such action,
setting forth the action so taken, shall be (1) signed by shareholders entitled
to cast such a percentage of the number of votes which all such shareholders are
entitled to cast thereon as is required by law for the taking of action at a
meeting of the shareholders or of a class of shareholders and (2) filed with the
Secretary of the Trust.
Section 312. Cumulative Voting. Unless the Declaration of Trust (the
"Declaration") of the trust expressly provides for cumulative voting, in all
elections for Trustees, every shareholder entitled to vote shall have the right,
in person or by proxy, to cast one vote per share; there shall be no cumulative
voting.
ARTICLE IV. TRUSTEES AND BOARD MEETINGS.
Section 401. Management by Board of Trustees. The business, property
and affairs of the trust shall be managed by its Board of Trustees. The Board of
Trustees may exercise all such powers of the trust and do all such lawful acts
and things as are not by statute or by the Declaration or by these Bylaws
directed or required to be exercised or done by the shareholders.
Section 402. Number of Trustees. The Board of Trustees shall consist of
not less than three (3) nor more than nine (9) Trustees. Within these limits,
the number of Trustees shall be
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as established by resolution of the Board of Trustees, provided, however, that
no reduction in the number of Trustees shall in any way affect the terms of
Trustees then in office. A majority of the Trustees shall be Independent
Trustees (as such term is defined in the Declaration).
Section 403. Qualifications of Trustees. The Trustees need not be
residents of the State of Maryland or shareholders in the trust.
Section 404. Election of Trustees. The Trustees shall be elected by the
shareholders at the annual meeting of shareholders of the trust. Each Trustee
shall be elected for the term of one year, or until his successor shall be
elected and shall qualify. Only such persons as are duly nominated by (1) the
incumbent trustees or (2) by a shareholder who is entitled to vote at the
meeting and who has filed his nominations with the Secretary of the trust at
least twenty (20) days before the time scheduled for said meeting, shall be
eligible for election.
Section 405. Vacancies. If the office of any Trustee shall become
vacant by reason of death, resignation, disqualification or other cause, such
vacancy or vacancies, including vacancies resulting from an increase in the
number of Trustees, shall be filled by a majority of the remaining members of
the Board, though less than a quorum; provided, however, that any such vacancy
occurring among the Independent Trustees shall be filled as set forth in the
Declaration. Each person so elected by the Board of Trustees to fill a vacancy
shall be a Trustee until his or her successor is elected by the shareholders who
may make such election at the next annual meeting of shareholders, or at any
earlier special meeting of the shareholders duty called for that purpose, and
until such successor shall qualify.
Section 406. Removal of Trustees. The entire Board of Trustees, or any
individual Trustee, may be removed from office without assigning any cause by
the vote of shareholders entitled to cast at least two-thirds of the votes which
all shareholders would be entitled to cast at any annual election of such
Trustees. In case the Board of Trustees or any one or more Trustees be so
removed, new Trustees may be elected at the same meeting. The Board of Trustees
may declare vacant the office of a Trustee if he be declared of unsound mind by
an order of court, or convicted of felony, or for any other proper cause, or if,
within sixty (60) days after notice of his election, he does not accept such
office either in writing or by attending a meeting of the Board of Trustees and
fulfill such other requirements of qualification as these Bylaws may specify.
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Section 407. Resignations. Any Trustee may resign at any time. Such
resignation shall be in writing, but the acceptance thereof shall not be
necessary to make it effective.
Section 408. Compensation of Trustees. The compensation, if any, of
Trustees shall be as determined by the Board of Trustees. In addition to
compensation, if any, for services as a Trustee, a Trustee may serve the trust
in other capacities and receive separate compensation therefor.
Section 409. Place of Board Meetings. Meetings of the Board of Trustees
may be held at any place or places, within or outside the State of Maryland, as
shall be determined by the Board of Trustees from time to time, or as may be
designated in the notice calling the meeting.
Section 410. Regular Meetings. Regular meetings of the Board of
Trustees shall be held in each year at such times as the Board of Trustees may
provide, from time to time, by resolution with appropriate notice to the members
of the Board of Trustees.
Section 411. Special Meetings. Unless the Board of Trustees shall
otherwise direct, special meetings of the Board of Trustees may be called by or
at the request of the Chairman, Chief Executive Officer or President of the
trust on appropriate notice to each Trustee, which notice shall, in any event,
be given at least twenty-four (24) hours before the time for which the meeting
is scheduled. Special meetings shall be called by the Chairman, Chief Executive
Officer, President or Secretary in like manner and on like notice on the written
request of any two (2) Trustees. The person or persons authorized to call
special meetings of the Board of Trustees may fix any place, either within or
outside the State of Maryland, as the place for holding any special meeting of
the Board of Trustees called by them. Any business may be transacted at a
special meeting.
Section 412. Notice of Meetings. Unless otherwise required by law or
these Bylaws, neither the business to be transacted at, nor the purpose of, any
meeting of the Board of Trustees need be specified in the notice or waiver of
notice of such meeting. Notwithstanding anything herein to the contrary, no
action of the Board of Trustees or trust action taken pursuant thereto shall be
deemed unauthorized solely because the provisions of this Article concerning
notice of Trustees' meetings have not been complied with, provided that said
Board action is taken in a meeting at which a quorum of Trustees is present, and
such action is approved or subsequently ratified by a majority of Trustees then
in office.
Section 413. Quorum. A majority of the Trustees in office shall be
necessary to constitute a quorum for the transaction of business, and the acts
of a majority of the Trustees present at a
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meeting at which a quorum is present shall be the acts of the Board of Trustees.
Notwithstanding the foregoing, a majority of the Independent Trustees must
approve any investment acquisition or services arrangement entered into by the
trust, and every transaction between the trust and Resource America, Inc.,
Brandywine Construction & Management, Inc., JeffBanks, Inc. and their affiliates
(as such term is defined in the Declaration), provided that (i) the Trustees may
rely upon information provided by such persons in giving their approval, and
(ii) no such approval is required for due diligence investigations by Resource
America, Inc. of a particular real property investment or loan made or proposed
to be made by the trust, if the fee for such services does not exceed the lesser
of 1% of the appraised value of the real property to be acquired, or of the real
property underlying the loan to be originated or acquired, or $10,000.
Section 414. Informal Action by Board of Trustees Without Meeting. Any
action which may be taken at a meeting of the Board of Trustees may be taken
without a meeting and without notice or a waiver of notice, if a consent in
writing, setting forth the action so taken or the action to be taken by the
trust, shall be signed by all the Trustees and shall be filed with the Secretary
of the trust.
Section 415. Executive Committee. The Board of Trustees may, by
resolution adopted by a majority of the whole Board, delegate two (2) or more of
its number to constitute an Executive Committee, which, to the extent provided
in such resolution, shall have and exercise the authority of the Board of
Trustees, in the management of the business of the trust, subject to the
provisions of the Declaration and these Bylaws regarding the Independent
Trustees and required approvals of the Independent Trustees.
Section 416. Other Committees. Committees other than the Executive
Committee may be established, from time to time, by resolution adopted by a
majority of the whole Board. Each such committee shall consist of at least two
Trustees and shall have such powers as the Board of Trustees shall prescribe by
the resolution forming such Committee.
Section 417. Presence at Meetings. Any one or more Trustees or
shareholders may participate in a meeting of the Board of Trustees or a
committee of the Board of Trustees or of the shareholders by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and any person so
participating shall be deemed present at the meeting for all purposes.
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ARTICLE V. OFFICERS, AGENTS AND EMPLOYEES.
Section 501. Executive Officers. The executive officers of the trust
shall be elected annually by the Board of Trustees and shall be a Chairman, a
Chief Executive Officer, a President, a Chief Financial Officer and a Secretary.
One or more Vice Presidents, and such other officers and assistant officers also
may be elected or appointed as the Board of Trustees may authorize from time to
time. Any two offices, except those of President and Vice President, may be
filled by the same person. In addition to the powers and duties prescribed by
these Bylaws, the officers and assistant officers shall have such authority and
shall perform such duties as from time to time shall be prescribed by the Board
of Trustees. The officers and assistant officers of the trust shall hold office
at the pleasure of the Board of Trustees. The Board of Trustees may add to the
title of any officer or assistant officer a word or words descriptive of his
powers or the general character of his duties. If the office of any officer or
assistant officer becomes vacant for any reason, the vacancy shall be filled by
the Board of Trustees.
Section 502. Agents or Employees. The Board of Trustees may by
resolution designate the officer or officers who shall have authority to appoint
such agents or employees as the needs of the trust may require. In the absence
of such designation, this function may be performed by the Chief Executive
Officer and may be delegated by him to others in whole or in part.
Section 503. Salaries. The salaries of all officers of the trust shall
be fixed by the Board of Trustees or by authority conferred by resolution of the
Board of Trustees. The Board of Trustees also may fix the salaries or other
compensation of assistant officers, agents and employees of the trust, but in
the absence of such action this function shall be performed by the Chief
Executive Officer or by others under his supervision.
Section 504. Removal of Officers, Agents or Employees. Any officer,
assistant officer, agent or employee of the trust may be removed or his
authority revoked by resolution of the Board of Trustees whenever in its
judgment the best interests of the trust will be served thereby, but such
removal or revocation shall be without prejudice to the rights, if any, of the
person so removed to receive compensation or other benefits in accordance with
the terms of existing contracts. Any agent or employee of the trust likewise may
be removed by the Chief Executive Officer, President or, subject to his or their
supervision, by the person having authority with respect to the appointment of
such agent or employee.
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Section 505. Chairman of the Board and President; Powers and Duties.
(a) The Chairman of the Board, if elected or appointed, shall
preside at all meetings of the shareholders and of the Board of Trustees and
shall have such powers and duties as the Board of Trustees may prescribe.
(b) The Chief Executive Officer shall be the chief executive
officer of the trust. He shall have general charge and supervision of the
business of the trust and shall exercise or perform all the powers and duties
usually incident to the office of Chief Executive Officer. In the absence of the
Chairman of the Board of Trustees, the Chief Executive Officer shall preside at
all meetings of the shareholders and of the Board of Trustees. He shall from
time to time make such reports of the affairs of the trust as the Board of
Trustees may require and shall annually present to the annual meeting of the
shareholders a report of the business of the trust for the preceding fiscal
year.
(c) The President shall be the chief operating officer of the
trust. He shall have charge and supervision over the daily operations of the
trust, subject to the direction of the Board of Trustees and the Chief Executive
Officer, and shall exercise or perform all of the powers and duties usually
incident to the office of a chief operating officer. The President shall, in the
absence or disability of the Chief Executive Officer, perform the duties and
exercise the powers of the Chief Executive Officer.
(d) The Chairman of the Board, Chief Executive Officer and
President shall be, ex officio, members of the Executive Committee (if any) and
of every other committee appointed by the Board of Trustees.
Section 506. Vice President; Powers and Duties. The Vice President, if
any, shall, in the absence or disability of the President, perform the duties
and exercise the powers of the President; and if there be more than one Vice
President, their seniority in performing such duties and exercising such powers
shall be determined by the Board of Trustees or, in default of such
determination, by the order in which they were first elected or appointed. Each
Vice President also shall have such powers and perform such duties as may be
assigned to him by the Board of Trustees.
Section 507. Secretary's Powers and Duties. The Secretary shall attend
all sessions of the Board of Trustees and all meetings of the shareholders and
act as clerk thereof, and record all the votes and minutes thereof in books to
be kept for that purpose. The Secretary shall perform like duties for the
Executive Committee of the Board of Trustees (if any) when required. He shall
give, or cause to be given, notice of all
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<PAGE>
meetings of the shareholders and of the Board of Trustees, and shall perform
such other duties as may be prescribed by the Board of Trustees or by the Chief
Executive Officer.
Section 508. Chief Financial Officer; Powers and Duties. The Chief
Financial Officer shall cause full and accurate accounts of receipts and
disbursements to be kept in books belonging to the trust. He shall see to the
deposit of all moneys and other valuable effects in the name and to the credit
of the trust in such depositary or depositaries as may be designated by the
Board of Trustees, subject to disbursement or disposition upon orders signed in
such manner as the Board of Trustees shall prescribe. He shall render to the
Chief Executive Officer and to the Trustees, at the regular meetings of the
Board of Trustees or whenever the President or the Board of Trustees may require
it, an account of all his transactions as Chief Financial Officer and of the
results of operations and financial condition of the trust. Only if required by
the Board, the Chief Financial Officer shall give the trust a bond in such sum,
and with such surety or sureties as may be satisfactory to the Board of Trustees
for the faithful discharge of the duties of his office, and for the restoration
to the trust, in case of his death, resignation, retirement or removal from
office, of all books, records, money, and other property of whatever kind in his
possession or under his control belonging to the trust.
Section 509. Delegation of Officers' Duties. Any officer may delegate
duties to his assistant (if any) appointed by the Board of Trustees; and in case
of the absence of any officer or assistant officer of the trust, or for any
other reason that the Board of Trustees may deem sufficient, the Board of
Trustees may delegate or authorize the delegation of his powers or duties, for
the time being, to any person.
ARTICLE VI. INDEMNIFICATION OF TRUSTEES, OFFICERS AND OTHER PERSONS.
Section 601. Indemnification. The trust may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was a trustee, officer,
employee or agent of the trust, or is or was serving at the request of the trust
as a director, trustee, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against reasonable
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding unless his act or omission was the result of active
and deliberate dishonesty, or if he actually received an improper personal
benefit in money, property or services, or with respect to any criminal action
or proceeding, had reasonable
- 9 -
<PAGE>
cause to believe his act or omission was unlawful. The termination of any
action, suit or proceeding by judgment, order or settlement shall not create a
presumption that the person did not meet the required standards of conduct set
forth in this Section 601. The termination of any action, suit or proceeding by
conviction, or a plea of nolo contendere or its equivalent, or by entry of an
order of probation prior to judgment, shall create a rebuttable presumption that
the person did not meet such standard of conduct. Notwithstanding the foregoing,
it is the express policy of the trust that indemnification of any person under
this Section 601 shall be to the fullest extent allowed by, but subject to the
limitations and conditions set forth in, Section 2-418 of the Maryland General
Corporation Law (or any successor provisions thereto), as made applicable to
real estate investment trusts by Section 8-301(15) of Title 8 of the Code of
Maryland and, accordingly, if such law provides other, further or expanded
indemnification rights, this Section 601 shall be deemed to incorporate the
same.
Section 602. Reliance on Certain Information. In performing
his duties, a trustee shall be entitled to rely on any information, opinion,
report or statement, including any financial statement and other financial data,
in each case prepared or presented by any of the following:
(1) One or more officers or employees of the trust whom the
trustee reasonably believes to be reliable and competent in the matters
presented.
(2) A lawyer, certified public accountant or other person as
to matters which the trustee reasonably believes to be within the person's
professional or expert competence.
(3) A committee of the Board upon which he does not serve, as
to matters within its designated authority, which the trustee reasonably
believes to merit confidence; provided however that a trustee shall not be
considered to be acting in good faith if he has any knowledge concerning the
matter in question that would cause his reliance to be unwarranted.
Section 603. Payments By Trust. The indemnification provided for in
this Article VI shall be paid by the trust only as authorized in the specific
proceeding upon a determination that indemnification of the person is proper
under the circumstances because he has met the applicable standard of conduct
and that expenses are reasonable. Such determination is to be made by the Board
of Trustees by majority vote of a quorum consisting of trustees who were not
parties to such action, suit or proceeding, or in any other manner authorized by
law which the Board of Trustees shall direct.
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<PAGE>
Section 604. Payment of Expenses. Reasonable expenses incurred by a
person who is a party to a proceeding may be paid or reimbursed by the trust in
advance of the final disposition of such proceeding upon receipt of (i) a
written affirmation by the person of the person's good faith belief that the
standard of conduct necessary for indemnification by the trust has been met, and
(ii) an undertaking by or on behalf of such person to repay such amount if it
shall ultimately be determined that the standard of conduct has not been met.
Section 605. Nonexclusivity. The indemnification provided by this
Article shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under Maryland law, the Declaration, any bylaw,
agreement, resolution of shareholders or trustees or otherwise, both as to
action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
trustee, officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 606. Insurance. The trust shall have power to purchase and
maintain insurance on behalf of any person who is or was a trustee, officer,
employee or agent of the trust, or is or was serving at the request of the trust
as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
trust would have the power to indemnify him against such liability under the
specified statutory authority or the provisions of this Article VI.
ARTICLE VII. FINANCIAL REPORTS TO SHAREHOLDERS.
Section 701. Annual and Quarterly Reports. The Trustees shall send or
cause to be sent to the shareholders of the trust (i) an annual financial report
containing audited financial statements certified by independent public
accountants, and (ii) quarterly financial reports containing unaudited financial
information with respect to the three remaining quarters of the trust's fiscal
year.
Section 702. Optional Financial Reports. Nothing in these Bylaws shall
be construed to prohibit the Board of Trustees from sending financial or other
reports to the shareholders from time to time in such form as they may deem
necessary or advisable in their discretion. It is hereby expressly provided that
such reports need not be prepared by an independent public or certified
accountant.
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<PAGE>
ARTICLE VIII. LIABILITY OF TRUSTEES AND RELATION OF OFFICERS TO TRUST.
Section 801. Fiduciary Relationship. Trustees and officers of the trust
shall discharge the duties of their respective positions in good faith, in a
manner they reasonably believe to be in the best interests of the trust and with
the care which ordinarily prudent persons in like positions would use under
similar circumstances.
Section 802. Liability of Trustees to the Trust. The Trustees and
officers of the trust shall not be personally liable for monetary damages as
such for any action except to the extent that (i) it is proved that any such
person actually received an improper benefit or profit in money, property or
services or (ii) a judgment or other final adjudication adverse to the person is
entered in a proceeding based on a finding in the proceeding that the person's
action or failure to act was the result of active and deliberate dishonesty and
was material to the cause of action adjudicated in the proceeding.
ARTICLE IX. RECORDS OF THE TRUST.
Section 901. Proceedings of Shareholders and Trustees. There shall be
kept at the principal office of the trust an original or duplicate record of the
proceedings of the shareholders and of the Trustees, and the original or a copy
of its Bylaws, including all amendments or alterations thereof to date, together
with other necessary and appropriate corporate records.
Section 902. Shareholders' Right to Examine Records of Trust. Every
shareholder shall, upon written demand, have a right to examine, in person or by
agent or attorney, during the usual hours for business, the Bylaws, minutes of
the proceedings of the shareholders and Trustees, annual statements of affairs
and voting trust agreements on file at the trust's principal office, and make
copies or extracts therefrom. A shareholder shall, upon written demand, have a
right to receive a sworn statement from the President or Chief Financial Officer
of the trust showing all shares and securities issued by the trust during a
specified period of not more than 12 months before the date of the request,
including: (i) the number of shares or amounts of each class of shares or other
securities issued during the specified period; (ii) the consideration received
per share or unit; and (iii) the value of any consideration other than money as
set forth in a resolution of the Board of Trustees. In addition, one or more
persons who together are and have been for at least six months holders of record
of at least 5% of the outstanding shares of any class may (i) in person or by
agent, on written request, inspect and copy during usual business hours the
trust's books of account and its share ledger; (ii) present to
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any officer or resident agent of the trust a written request for a statement of
its affairs; and (iii) in the case the trust does not maintain the original or a
duplicate stock ledger at its principal office, present to any officer or
resident agent of the trust a written request for a list of its shareholders.
Within 20 days after a request for information is made by the person or persons
referred to in the preceding sentence, the trust shall prepare and have
available on file at its principal office (a) in the case of a request for a
statement of affairs, a statement verified under oath by the President, Chief
Financial Officer or a vice-president which sets forth in reasonable detail the
trust's assets and liabilities as of a reasonably current date; and (b) in the
case of a request for a list of shareholders, a list verified under oath by one
of its officers or its transfer agent or registrar which sets forth the name and
address of each shareholder and the number of shares of each class which the
shareholder holds.
ARTICLE X. SHARES OF BENEFICIAL INTEREST.
Section 1001. Share Certificates. Every shareholder in the trust shall
be entitled to receive a certificate representing the shares owned by him. Said
share certificates shall be numbered and registered in the books of the trust,
as they are issued.
Section 1002. Contents of Share Certificates. Said share certificates
shall state: (1) the name of the trust; (2) the name of the registered holder of
the shares represented thereby; (3) the number and class of shares and the
designation of the series, if any, which the certificate represents; and (4) the
par value of each share represented, or a statement that the shares are without
par value. If the trust is authorized to issue more than one (l) class of
shares, then upon the face or back of the certificate there shall be set forth
(or a statement shall appear that the trust will furnish to any shareholder,
upon request and without charge), a full summary statement of the designations,
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends and distributions, qualifications and terms and
conditions of redemption of the shares of each class authorized to be issued
and, if the trust is authorized to issue any preferred or special class in
series, the variations in the relative rights and preferences between the shares
of each such series so far as the same have been fixed and determined, and the
authority of the Board of Trustees to fix and determine the relative rights and
preferences of subsequent series.
Section 1003. Signatures on Share Certificates. Each such certificate
shall be signed by the Chief Executive Officer, President or Vice President, and
by the Secretary (or an Assistant Secretary), or by such other officers as may
be designated by the Board of Trustees. If a certificate is signed
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<PAGE>
(1) by a transfer agent or an assistant transfer agent or (2) by a transfer
clerk acting on behalf of the trust and a transfer agent or registrar, the
signature of any such authorized officer may be facsimile. In case any officer
who has signed, or whose facsimile signature has been used on, any certificate
or certificates shall cease to be such officer of the trust, before such
certificate is issued, it may be issued by the trust with the same effect as if
the officer had not ceased to be such at the date of its issuance.
Section 1004. Lost or Destroyed Certificates. Upon request of the Board
of Trustees, any person claiming a share certificate to be lost or destroyed
shall make an affidavit or affirmation of that fact and, in the manner and to
the extent required by the Board of Trustees, shall give the trust a bond of
indemnity with sufficient surety to protect the trust or any person injured by
the issue of a new certificate from any liability or expense which it or they
may incur by reason of the fact that the original certificate remains
outstanding, whereupon a new certificate may be issued of the same tenor and for
the same number of shares as the one alleged to be lost or destroyed, but always
subject to the approval of the Board of Trustees.
Section 1005. Transfer of Shares. All transfers of shares of the trust
shall be made upon the books of the trust upon surrender to the trust or the
transfer agent of the trust of a certificate or certificates for shares, duly
endorsed by the person named in the certificate or by attorney, lawfully
constituted in writing, or accompanied by proper evidence of succession,
assignment or authority to transfer. Thereupon, it shall be the duty of the
trust to cause the issuance of a new certificate to the person entitled thereto,
the cancellation of the old certificates and the recordation of the transaction
upon its books.
Section 1006. Agreements Restricting Transfer of Shares. The Board of
Trustees may authorize the trust to become party to agreements with shareholders
and others relating to transfer, repurchase, and issuance, of shares of the
trust; provided, however, that such agreement must be filed with the trust and
all share certificates affected thereby shall have clearly imprinted thereon a
legend containing such agreement or referring thereto.
Section 1007. Registered Shareholders. The trust may treat the person
registered on its books as the holder of any shares as the absolute owner
thereof, and as the one entitled to vote such shares and receive dividends
thereon.
Section 1008. Determination of Shareholders of Record. The Board of
Trustees may fix a time not more than ninety (90) days prior to the date of any
meeting of shareholders, or the date fixed for the payment of any dividend or
distribution, or the
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date for the allotment of rights, or the date when any change or conversion or
exchange of shares will be made or go into effect, as a record date for the
determination of the shareholders entitled to notice of, or to vote at, any such
meeting, or entitled to receive payment of any such dividend or distribution, or
to receive any such allotment of rights, or to exercise the rights in respect to
any such change, conversion, or exchange of shares. In such case only such
shareholders as shall be shareholders of record on the date so fixed shall be
entitled to notice of, or to vote at, such meeting, or to receive payment of
such dividends, or to receive such allotment or rights, or to exercise such
rights, as the case may be, notwithstanding any transfer of any shares on the
books of the trust after any record date fixed as aforesaid. Unless a record
date is fixed for the determination of shareholders entitled to receive notice
of, or vote at, a shareholders' meeting, transferees of shares which are
transferred on the books of the trust within ten (10) days next preceding the
date of such meeting shall not be entitled to notice of or vote at such meeting.
Section 1009. Control Share Acquisition Statute Not Applicable to
Trust. Subtitle 7 of Title 3 of the Code of Maryland, Section 3-701 et seq.,
relating to the voting rights of certain control shares, as defined therein,
shall not be applicable to the trust, the shareholders or any acquiring person,
as defined therein.
ARTICLE XI. DIVIDENDS AND OTHER DISTRIBUTIONS TO SHAREHOLDERS.
Section 1101. Dividends. Subject to applicable Maryland law, and in
accordance with the provisions thereof at the pertinent time, the Board of
Trustees of the trust may from time to time declare, and the trust may pay,
dividends on its outstanding shares in cash or property other than its own
shares, except when the trust is insolvent, or when the payment thereof would
render the trust insolvent, or when the declaration or payment thereof would be
contrary to any restriction contained in the Declaration.
Section 1102. Distribution of Shares of the Trust. The Board of
Trustees of the trust may, from time to time, distribute pro rata to holders of
any class or classes of its issued shares, treasury shares and authorized but
unissued shares. In lieu of issuing fractional shares in any such distributions
the trust may pay in cash the fair value therefor as determined by the Board of
Trustees to shareholders entitled thereto.
Section 1103. Reserves. There may be set aside out of any funds of the
trust available for dividends such sum or sums as the Trustees from time to
time, in their absolute discretion determine as a reserve or reserves to meet
contingencies or for equalizing dividends, or for repairing or maintaining any
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<PAGE>
property of the trust, or for the purchase of additional assets or for such
other purpose as the Board of Trustees shall think conducive to the interests of
the trust. The Board of Trustees may abolish or modify any such reserve.
ARTICLE XII. MISCELLANEOUS.
Section 1201. Fiscal Year. The fiscal year of the trust shall be as
fixed by resolution of the Board of Trustees. If the Board of Trustees shall not
do so, the Chief Executive Officer shall fix the fiscal year.
Section 1202. Signing Checks. All checks or demands for money and notes
of the trust shall be signed by such officer, officers, or other person or
persons as the Board of Trustees may from time to time designate.
Section 1203. Designation of Presiding and Recording Officers. The
Trustees or shareholders, at any meeting of Trustees or shareholders, as the
case may be, shall have the right to designate any person, whether or not an
officer, Trustee or shareholder to preside over, or record the proceedings of,
such meeting.
Section 1204. Written Notice of Meetings. Whenever written notice is
required to be given to any person pursuant to law, the Declaration or these
Bylaws, it may be given to such person, either personally or by sending a copy
thereof through the mail, or by telegram, charges prepaid, to his address
appearing on the books of the trust, or to his business or other address
supplied by him to the trust for the purpose of notice. If the notice is sent by
mail or by telegraph, it shall be deemed to have been given to the person
entitled thereto when deposited in the United States mail or with a telegraph
office for transmission to such person. Such notice shall specify the place, day
and hour of the meeting and, in case of a special meeting of the shareholders,
the general nature of the business to be transacted.
Section 1205. Waiver of Notice. Whenever any written notice is required
to be given pursuant to law, by the Declaration or these Bylaws, a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice. Except in the case of a special meeting of
shareholders, neither the business to be transacted at, nor the purpose of, the
meeting need be specified in the waiver of notice of such meeting. Attendance of
a person, either in person or by proxy, at any meeting, shall constitute a
waiver of notice of such meeting, except where a person attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting was not lawfully called or convened.
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<PAGE>
Section 1206. Text of Proposed Resolution in Written Notice. Whenever
the language of a proposed resolution is included in a written notice to
shareholders, the shareholders' meeting considering the resolution may adopt it,
with such clarifying or other amendments as do not enlarge its original purpose,
without further notice to shareholders not present in person or by proxy.
Section 1207. Interpretation of ByLaws. All words, terms and provisions
of these Bylaws shall be defined by and in accordance with Title 8 of the
Corporations and Associations Article of the Annotated Code of Maryland and
other applicable laws as such laws and these Bylaws are interpreted by the
trust's counsel.
Section 1208. Headings; Pronouns. The headings of the several Articles
and Sections of these Bylaws are for convenience of reference only, and shall
not be relied upon in the interpretation hereof. Pronouns used herein shall be
deemed to include the masculine, feminine and neuter, singular and plural, as
their context may require.
ARTICLE XIII. AMENDMENTS.
Section 1301. Amendment by the Board of Trustees. These Bylaws may be
altered, amended or repealed by the affirmative vote of a majority of the Board
of Trustees at any regular or special meeting of the Board of Trustees duly
convened after appropriate notice to the Trustees of such proposed alteration,
amendment or repeal. The shareholders of the trust do not have the right to
amend these Bylaws.
Section 1303. Recording Amendments and Alterations. The text of all
amendments and alterations to these Bylaws shall be attached to the Bylaws with
a notation of the date of each such amendment or alteration.
ARTICLE XIV. ADOPTION OF BYLAWS RECORD OR AMENDMENT.
Section 1401. These Bylaws have been adopted and filed with the
undersigned to be effective as of the _____ day of ______________, 1997.
__________________________________
, Secretary
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<PAGE>
Section 1402. Amendments to Bylaws.
Section Amended Date Amended
--------------- ------------
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<PAGE>
ARTICLES OF INCORPORATION
OF
RAIT GENERAL, INC.
FIRST: The undersigned, Diane Vecchio, whose post office address is
1521 Locust Street, Suite 800, Philadelphia, PA 19102, being at least eighteen
years of age, does hereby form a corporation under the general laws of the State
of Maryland.
SECOND: The name of this corporation (which is hereinafter called the
Corporation) is: RAIT General, Inc.
THIRD: The purpose for which the Corporation is formed is as follows:
The Corporation shall be formed in any or all lawful business and to have the
general powers as set forth in Section 2-103 of the Maryland General Corporation
Law.
FOURTH: The post office address of the principal office of the
Corporation in Maryland is 7 St. Paul Street, Suite 1400, Baltimore, MD 21202
and the name and post office of the registered agent of the Corporation in
Maryland is Resagent, Inc., 7 St. Paul Street, Suite 1400, Baltimore, MD 21202.
Said agent is a resident corporation in Maryland and actually resides therein.
FIFTH: The total number of shares of stock which the Corporation has
authority to issue is: 1,000.
SIXTH: The number of directors of the Corporation shall be one, which
number may be increased pursuant to the By-laws of the Corporation, but shall
never be less than one; and the name of the director who shall act until the
first annual meeting or until her successor is duly chosen and qualified is:
Betsy Z. Cohen.
SEVENTH: Except to the extent provided for in Section 2-405.2 of the
Maryland General Corporation Law as it may exist on the date hereof or as it may
be hereafter amended, the directors and officers of this Corporation shall not
be liable to the Corporation or its stockholders for any money damages.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation and
acknowledge the same to be my act on this 12th day of August, 1997.
Witness:
/s/ Diane Vecchio
- --------------------------------- ---------------------------------
DIANE VECCHIO, (Seal)
INCORPORATOR
<PAGE>
TO COME
<PAGE>
ARTICLES OF INCORPORATION
OF
RAIT LIMITED, INC.
FIRST: The undersigned, Diane Vecchio, whose post office address is
1521 Locust Street, Suite 800, Philadelphia, PA 19102, being at least eighteen
years of age, does hereby form a corporation under the general laws of the State
of Maryland.
SECOND: The name of this corporation (which is hereinafter called the
Corporation) is: RAIT Limited, Inc.
THIRD: The purpose for which the Corporation is formed is as follows:
The Corporation shall be formed in any or all lawful business and to have the
general powers as set forth in Section 2-103 of the Maryland General Corporation
Law.
FOURTH: The post office address of the principal office of the
Corporation in Maryland is 7 St. Paul Street, Suite 1400, Baltimore, MD 21202
and the name and post office of the registered agent of the Corporation in
Maryland is Resagent, Inc., 7 St. Paul Street, Suite 1400, Baltimore, MD 21202.
Said agent is a resident corporation in Maryland and actually resides therein.
FIFTH: The total number of shares of stock which the Corporation has
authority to issue is: 1,000.
SIXTH: The number of directors of the Corporation shall be one, which
number may be increased pursuant to the By-laws of the Corporation, but shall
never be less than one; and the name of the director who shall act until the
first annual meeting or until her successor is duly chosen and qualified is:
Betsy Z. Cohen.
SEVENTH: Except to the extent provided for in Section 2-405.2 of the
Maryland General Corporation Law as it may exist on the date hereof or as it may
be hereafter amended, the directors and officers of this Corporation shall not
be liable to the Corporation or its stockholders for any money damages.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation and
acknowledge the same to be my act on this 12th day of August, 1997.
Witness:
/s/ Diane Vecchio
- -------------------------------- --------------------------------
DIANE VECCHIO, (Seal)
INCORPORATOR
<PAGE>
TO COME
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 08/15/1997
971273483 - 2785695
STATE of DELAWARE
CERTIFICATE of LIMITED PARTNERSHIP
THE UNDERSIGNED, desiring to form a limited partnership pursuant to the Delaware
Revised Uniform Limited Partnership Act, 6 Delaware Code, Chapter 17, do hereby
certify as follows:
FIRST: The name of the limited partnership is RAIT PARTNERSHIP, L.P.
SECOND: The name and address of the Registered Agent is: Andrew Lubin, 2317
Pennsylvania Avenue, Wilmington, DE
THIRD: The name and mailing address of each general partner is as follows: RAIT
General, Inc., 1521 Locust Street, 6th Floor, Philadelphia, PA 19102
IN WITNESS WHEREOF, the undersigned has executed this Certificate of Limited
Partnership of RAIT Partnership, L.P. as of August 13, 1997.
RAIT GENERAL, INC.
/s/ Jay Eisner
--------------------------------------------
Jay Eisner, President of the General Partner
<PAGE>
RAIT PARTNERSHIP, L.P.
LIMITED PARTNERSHIP AGREEMENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I - CONTINUATION......................................................................................- 1 -
Section 1.1 Continuation............................................................................- 1 -
Section 1.2 Name....................................................................................- 1 -
Section 1.3 Place of Business; Registered Agent.....................................................- 1 -
ARTICLE II - INTERPRETIVE PROVISIONS..........................................................................- 2 -
Section 2.1 Certain Definitions.....................................................................- 2 -
Section 2.2 Rules of Construction....................................................................- 8 -
ARTICLE III - BUSINESS PURPOSE................................................................................- 9 -
Section 3.1 Business................................................................................- 9 -
Section 3.2 Authorized Activities...................................................................- 9 -
ARTICLE IV - CAPITAL CONTRIBUTIONS............................................................................- 9 -
Section 4.1 Capital Contributions ..................................................................- 9 -
Section 4.2 Additional Partnership Interests.......................................................- 10 -
Section 4.3 No Third Party Beneficiaries...........................................................- 10 -
Section 4.4 Return of Capital Account; Interest....................................................- 11 -
Section 4.5 Preemptive Rights......................................................................- 11 -
Section 4.6 REIT Share Purchases...................................................................- 11 -
Section 4.7 Limited Liability......................................................................- 11 -
ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS....................................................................- 11 -
Section 5.1 General................................................................................- 11 -
Section 5.2 Distributions of Net Cash Flow.........................................................- 12 -
Section 5.3 Distributions of Capital Proceeds......................................................- 12 -
Section 5.4 Amounts Withheld.......................................................................- 12 -
ARTICLE VI - PARTNERSHIP MANAGEMENT..........................................................................- 12 -
Section 6.1 Management and Control of Partnership Business.........................................- 12 -
Section 6.2 No Management by Limited Partners; Limitation of Liability.............................- 12 -
Section 6.3 Limitations on Partners................................................................- 13 -
Section 6.4 Business with Affiliates...............................................................- 13 -
Section 6.5 Compensation; Reimbursement of Expenses................................................- 13 -
Section 6.6 Liability for Acts and Omissions.......................................................- 13 -
ARTICLE VII - ADMINISTRATIVE, FINANCIAL AND TAX MATTERS......................................................- 14 -
Section 7.1 Books and Records......................................................................- 14 -
Section 7.2 Annual Audit and Accounting............................................................- 14 -
Section 7.3 Partnership Funds......................................................................- 14 -
Section 7.4 Reports and Notices....................................................................- 14 -
Section 7.5 Tax Matters............................................................................- 15 -
Section 7.6 Withholding............................................................................- 15 -
ARTICLE VIII - TRANSFER OF INTERESTS; ADMISSION OF PARTNERS..................................................- 16 -
Section 8.1 Transfer by General Partner............................................................- 16 -
Section 8.2 Obligations of a Prior General Partner.................................................- 16 -
Section 8.3 Additional or Successor General Partner................................................- 16 -
Section 8.4 Restrictions on Transfer and Withdrawal by Limited Partner.............................- 16 -
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Section 8.5 Substituted Limited Partner............................................................- 17 -
Section 8.6 Timing and Effect of Transfers.........................................................- 18 -
Section 8.7 Additional Limited Partners............................................................- 18 -
Section 8.8 Amendment of Agreement and Certificate.................................................- 18 -
ARTICLE IX - REDEMPTION......................................................................................- 18 -
Section 9.1 Right of Redemption....................................................................- 19 -
Section 9.2 Timing of Redemption...................................................................- 19 -
Section 9.3 Redemption Price.......................................................................- 19 -
Section 9.4 Assumption of Redemption Obligation....................................................- 19 -
Section 9.5 Further Assurances.....................................................................- 19 -
Section 9.6 Effect of Redemption...................................................................- 21 -
ARTICLE X - DISSOLUTION AND LIQUIDATION......................................................................- 20 -
Section 10.1 Term and Dissolution...................................................................- 20 -
Section 10.2 Liquidation of Partnership Assets.....................................................- 20 -
Section 10.3 Effect of Treasury Regulations........................................................- 21 -
Section 10.4 Time for Winding Up...................................................................- 21 -
ARTICLE XI - AMENDMENTS AND MEETINGS.........................................................................- 21 -
Section 11.1 Amendment Procedure...................................................................- 21 -
Section 11.2 Meetings and Voting...................................................................- 22 -
ARTICLE XII - MISCELLANEOUS PROVISIONS.......................................................................- 23 -
Section 12.1 Title to Property.....................................................................- 23 -
Section 12.2 Other Activities of Limited Partners..................................................- 23 -
Section 12.3 Power of Attorney.....................................................................- 23 -
Section 12.4 Further Assurances....................................................................- 24 -
Section 12.5 Titles and Captions...................................................................- 24 -
Section 12.6 Applicable Law........................................................................- 24 -
Section 12.7 Binding Agreement.....................................................................- 24 -
Section 12.8 Waiver of Partition...................................................................- 24 -
Section 12.9 Counterparts and Effectiveness........................................................- 24 -
Section 12.10 Survival of Representations..........................................................- 25 -
Section 12.11 Entire Agreement.....................................................................- 25 -
EXHIBITS
Exhibit 1 - Schedule of Partners
Exhibit 2 - Redemption Notice
Exhibit 3 - Allocation Provisions
</TABLE>
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RAIT LIMITED PARTNERSHIP, L.P.
LIMITED PARTNERSHIP AGREEMENT
THIS LIMITED PARTNERSHIP AGREEMENT (the "Agreement") is made this
day _________ of ___________, 1997, by and among RAIT GENERAL, INC., a Maryland
corporation, as General Partner, and RAIT LIMITED, INC., a Maryland corporation,
as Initial Limited Partner,together with any Persons who or which become
Partners in the Partnership in accordance with the terms hereof.
RECITALS:
A. Pursuant to a Certificate of Limited Partnership (the "Certificate")
filed on August __, 1997 with the Delaware Secretary of State, Resource Asset
Investment Limited Partnership (the "Partnership") was formed for the purpose,
inter alia, of providing mortgage and other financing to borrowers owning real
estate and acquiring, owning, developing, operating and, if and when
appropriate, selling, certain real estate and interests, both direct and
indirect, in real estate; and
B. The parties have reached certain understandings with respect to
their relative sharing of the benefits and burdens to be derived from the
business operations of the Partnership, and desire to enter into this Agreement
in order to (i) set forth herein such understandings and agreements; and (ii)
set forth their rights, obligations and understandings with respect to the
Partnership and its business.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto, intending to be legally bound hereby, agree as
follows:
ARTICLE I - CONTINUATION
Section 1.1 Continuation. The Partners hereby continue the Partnership
as a limited partnership under the Act. The General Partner shall take all
action required by law to perfect and maintain the Partnership as a limited
partnership under the Act and under the laws of all other jurisdictions in which
the Partnership may elect to conduct business, including but not limited to, the
filing of any required amendment to the Certificate with the Delaware Secretary
of State, and qualification of the Partnership as a foreign limited partnership
in the jurisdictions in which such filing shall be required, as determined by
the General Partner. The General Partner shall also promptly register the
Partnership under applicable assumed or fictitious name statutes or similar
laws.
Section 1.2 Name. The name of the Partnership is RAIT Partnership,
L.P.
Section 1.3 Place of Business; Registered Agent. The principal office
of the Partnership is located at 1521 Locust Street, Philadelphia, PA 19102,
which office may be changed to such other place as the General Partner may from
time to time designate. The registered agent for the Partnership in the State of
Delaware is Andrew Lubin, whose address is 2317 Pennsylvania Avenue, Wilmington,
DE.
Section 1.4 Term. The Partnership shall terminate on December 31, 2050
unless sooner terminated as provided in this Agreement or by operation of law.
<PAGE>
ARTICLE II - INTERPRETIVE PROVISIONS
Section 2.1 Certain Definitions. The following terms have the
definitions hereinafter indicated whenever used in this Agreement with initial
capital letters. In addition, certain terms are defined in Exhibit 3 hereto.
Act: The Delaware Revised Uniform Limited Partnership Act, as
it may be amended from time to time.
Additional Limited Partner: A person admitted to the
Partnership as an Additional Limited Partner in accordance with Section 8.7
hereof and who is shown as such on the books and records of the Partnership.
Affiliate: With respect to any referenced Person, (i) such
Person or a member of his immediate family, (ii) any Person who directly or
indirectly owns, controls or holds the power to vote ten percent (10%) or more
of the outstanding voting securities of the Person in question; (iii) any Person
ten percent (10%) or more of whose outstanding securities are directly or
indirectly owned, controlled by, or held with power to vote by the Person in
question; (iv) any Person directly or indirectly controlling, controlled by, or
under direct common control with the Person in question; (v) if the Person in
question is a corporation, any executive officer or director of such Person or
of any corporation directly or indirectly controlling such Person; and (vi) if
the Person in question is a partnership, any general partner of such partnership
or any limited partner owning or controlling ten percent (10%) or more of either
the capital or profits interest in such partnership. As used herein, "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract, or otherwise.
Agreement: This Limited Partnership Agreement and all Exhibits
attached hereto, as the same may he amended or restated and in effect from time
to time.
Assignee: Any Person to whom one or more Partnership Units
have been Transferred as permitted under this Agreement, but who has not become
a Substituted Limited Partner in accordance with the provisions hereof and who
shall have the rights set forth in Section 8.5(B).
Bankrupt(cy): Either (i) a referenced Person's making an
assignment for the benefit of creditors; (ii) the filing by a referenced Person
of a voluntary petition in bankruptcy; (iii) a referenced Person's being
adjudged insolvent or having entered against him an order for relief in any
bankruptcy or insolvency proceeding; (iv) the filing by a referenced Person of
an answer seeking any reorganization, composition, readjustment, liquidation,
dissolution or similar relief under any law or regulation; (v) the filing by a
referenced Person of an answer or other pleading admitting or failing to contest
the material allegations of a petition filed against him in any proceeding of
reorganization, composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation; or (vi) a referenced Person's
seeking, consenting to or acquiescing in the appointment of a trustee, receiver
or liquidator for all or substantially all of his property (or court appointment
of such trustee, receiver or liquidator).
Capital Account: The account maintained by the Partnership for
each Partner described in Exhibit 3 hereto.
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Capital Contribution: With respect to each Partner, the total
amount of cash or cash equivalents, or the Gross Asset Value of Contributed
Property which such Partner contributes or is deemed to contribute to the
Partnership pursuant to the terms of this Agreement, including the Capital
Contribution made by a predecessor holder(s) of the Interest of such Partner.
Capital Proceeds: The net proceeds received by the Partnership
from, or attributable to, (i) any financing obtained by the Partnership after
payment of the then-outstanding principal balance and accrued but unpaid
interest on liabilities of the Partnership then payable pursuant to the terms
thereof from the proceeds of such financing; (ii) the sale or condemnation
(other than a temporary taking) of all or substantially all of any Property
Interest or the Partnership's interest therein after payment of the
then-outstanding principal balance and accrued but unpaid interest on
liabilities of the Partnership then payable pursuant to the terms thereof; (iii)
the receipt of any proceeds from a policy of title or fire and extended coverage
insurance; and (iv) any reserves previously set aside from Capital Proceeds or
Capital Contributions which are deemed available for distribution by the General
Partner.
Cash Payment: The payment to a Redeeming Party of a cash
amount determined by multiplying (i) the number of Partnership Units tendered
for redemption by such Redeeming Party pursuant to a validly proffered
Redemption Notice by (ii) the Unit Value on the date the Redemption Notice is
received by the General Partner.
Certificate: The Partnership's Certificate of Limited
Partnership filed in the office of the Delaware Secretary of State, as amended
from time to time, as required by the terms of this Agreement and the Act.
Code: The Internal Revenue Code of 1986, as amended from time
to time.
Consent: Either the written consent of a Person or the
affirmative vote of such Person at a meeting duly called and held pursuant to
this Agreement, as the case may be, to do the act or thing for which the consent
is required or solicited, or the act of granting such consent, as the context
may require. Except as expressly provided otherwise in this Agreement, reference
to a requirement for the "Consent" of a Partner shall require the commercially
reasonable judgment of such Partner in light of the facts and circumstances,
rather than the unfettered discretionary decision of such Partner.
Contributed Property: Each property or other asset (excluding
cash) contributed or deemed contributed to the Partnership (whether as a result
of a Code Section 708 termination or otherwise).
Contribution Agreement(s): The Contribution Agreement by and
among the Partnership, the General Partner and a Property Interest Owner,
pursuant to which, among other things, such Property Interest Owner agrees to
contribute its Property Interest and other assets owned by such Property
Interest Owner to the Partnership in consideration for Partnership Units.
Conversion Multiple: The factor applied for converting
Partnership Units to REIT Shares, which shall initially be 1.0; provided,
however, in the event that the General Partner (i) declares or pays a dividend
on its outstanding REIT Shares in REIT Shares or makes a distribution to all
holders of its outstanding REIT Shares in REIT Shares, (ii) subdivides its
outstanding REIT Shares, or (iii) combines its outstanding REIT Shares into a
smaller number of REIT Shares, the Conversion Multiple shall be adjusted by
multiplying the Conversion Multiple by a fraction, the numerator of which shall
be
Page 3
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the number of REIT Shares issued and outstanding on the record date (assuming
for such purposes that such dividend, distribution, subdivision or combination
has occurred as of such time), and the denominator of which shall be the actual
number of REIT Shares (determined without the above assumption) issued and
outstanding on the Record Date for such dividend, distribution, subdivision or
combination. Any adjustment to the Conversion Multiple shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
Depreciation: As defined in Exhibit 3 to this Agreement.
Fiscal Year: The calendar year or such other twelve (12)-month
period designated by the General Partner.
General Partner: RAIT General, Inc., its respective successors
who or which become Successor General Partner(s) in accordance with the terms of
this Agreement. For the first taxable year following the IPO, the General
Partner intends to qualify as a qualified REIT subsidiary as defined under Code
Section 856.
General Partner Interest: A Partnership Interest held by the
General Partner that is a general partnership interest. A General Partner
Interest may be expressed as a number of Partnership Units.
Gross Asset Value: With respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(A) The initial Gross Asset Value of any asset contributed by
a Partner to the Partnership shall be the relative equity value of such asset,
as agreed to by the contributing Partner and the Partnership and set forth in
the Contribution Agreement.
(B) The Gross Asset Values of all Partnership Assets shall be
adjusted to equal their respective gross fair market values, as determined by
the General Partner, as of the following times: (1) the acquisition of an
additional interest in the Partnership by any new or existing Partner in
exchange for more than a de minimis Capital Contribution; (2) the distribution
by the Partnership to a Partner of more than a de minimis amount of Partnership
Assets as consideration for an interest in the Partnership; and (3) the
liquidation of the Partnership within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to
clauses (1) and (2) above shall be made only if the General Partner reasonably
determines that such adjustments are necessary or appropriate to reflect the
relative economic interests of the Partners in the Partnership.
(C) The Gross Asset Value of any Partnership Asset distributed
to any Partner shall be the gross fair market value of such asset on the date of
distribution; and
(D) The Gross Asset Values of Partnership Assets shall be
increased (or decreased) to reflect any adjustments to the adjusted basis of
such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to
the extent that such adjustments are taken into account in determining Capital
Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and Section (C) of
Exhibit 3 hereto; provided, however, that Gross Asset Values shall not be
adjusted pursuant to this clause (D) to the extent the General Partner
determines that an adjustment pursuant to clause (B) above is necessary or
appropriate in connection with a transaction that would otherwise result in an
adjustment pursuant to this clause (D).
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<PAGE>
If the Gross Asset Value of an asset has been determined or
adjusted pursuant to clauses (A), (B), or (D) above, such Gross Asset Value
shall thereafter be adjusted by the Depreciation taken into account with respect
to such asset for purposes of computing Partnership profits and losses.
Gross Receipts: With respect to any Fiscal Year or other
accounting period designated by the General Partner, the sum of all cash
receipts of the Partnership, including without limitation, all cash receipts
earned from interest and other sums paid with respect to Loans, the rental of
commercial space within the Property Interests and from other business
operations of the Partnership but excluding tenant security deposits until
applied to rent or other charges, but excluding Capital Proceeds and Capital
Contributions.
Involuntary Withdrawal: As to any (i) individual, such
individual's death, incapacity or adjudication of incompetence; (ii)
corporation, its dissolution or revocation of its charter (unless such
revocation is promptly corrected upon notice thereof); (iii) partnership, the
dissolution and commencement of winding up of its affairs; (iv) trust, the
termination of the trust (but not the substitution of trustees); (v) estate, the
distribution by the fiduciary of the estate's complete interest in the
Partnership; and (vi) Partner, the Bankruptcy of such Partner.
IPO: IPO means the first sale of REIT Shares by RAIT pursuant
to RAIT's first effective registration statement for such REIT Shares filed
under the Securities Act of 1933, as amended.
IRS: The Internal Revenue Service, an agency of the United
States government.
Limited Partner(s): The Initial Limited Partner and any Person
subsequently admitted to the Partnership as a Limited Partner.
Management Company: Brandywine Construction & Management,
Inc., a Pennsylvania corporation and an Affiliate of the Initial Limited
Partner, or any successor management and leasing company selected by the General
Partner from time to time.
Loans: Mortgages or other debt financings owned by the
Partnership.
Net Capital Contributions: As to any Partner on any day, the
Partner's Capital Contributions adjusted as follows:
A. Increased by the amount of any Partnership liabilities
which, in connection with distributions pursuant to the terms hereof, are
assumed by such Partner or are secured by any Partnership Asset distributed to
such Partner, and
B. Reduced by the amount of cash and the Gross Asset Value of
any Partnership Asset distributed to such Partner pursuant to Section 5.3(A)(2)
hereof and the amount of any liabilities of such Partner assumed by the
Partnership or which are secured by any property contributed by such Partner to
the Partnership.
In the event any interest in the Partnership is transferred in
accordance with the terms of this Agreement, the transferee shall succeed to the
adjusted Capital Contribution of the transferor to the extent it relates to the
transferred interest in the Partnership.
Page 5
<PAGE>
Net Cash Flow: Gross Receipts and any other funds deemed
available for distribution by the General Partner, including any amounts
previously set aside as reserves or escrows, less Operating and Capital
Expenses.
Notice: A writing containing the information required by this
Agreement to be communicated to a Person and personally delivered to such Person
or sent by recognized air courier capable of giving receipt therefor, freight
prepaid, to such Person at the last known address of such Person as shown on the
books of the Partnership, the date of personal delivery or of the air courier's
receipt, as the case may be, being deemed the date of such Notice; provided,
however, that any written communication containing such information actually
received by a Person shall constitute Notice for all purposes of this Agreement.
Facsimile transmission promptly confirmed by original communication delivered as
herein provided shall be an acceptable means of notice, with the date of receipt
of the facsimile being deemed the date of Notice. Any Partner may change its
address or the address to which copies of Notices should be sent by Notice to
the other Partners.
Operating and Capital Expenses: All expenditures payable by
the Partnership including, without limitation (i) any and all operating
expenses, management expenses, taxes and insurance; (ii) principal and interest
due on Partnership obligations; (iii) capital expenditures; (iv) reimbursement
to Partners for advances, if any, pursuant to this Agreement; and (v) reserves
deemed reasonably necessary by the General Partner.
Partners: The General Partner and the Limited Partners as a
collective group. The term "Partner" shall mean a General Partner or a Limited
Partner. Such terms shall be deemed to include such other Persons who become
Partners pursuant to the terms of this Agreement.
Partnership: The Delaware limited partnership referred to
herein as RAIT Partnership, L.P. as such partnership may from time to time be
constituted.
Partnership Assets: At any particular time, any assets or
property (tangible or intangible, choate or inchoate, fixed or contingent) held
or owned by the Partnership.
Partnership Interest or Interest: As to any Partner, such
Partner's ownership interest in the Partnership, representing a Capital
Contribution by either a Limited Partner or a General Partner and including such
Partner's right to distributions under this Agreement, and any other rights or
benefits which such Partner has in the Partnership, together with any and all
obligations of such Person to comply with the terms and provisions of this
Agreement. A Partnership Interest may be expressed as a number of Partnership
Units.
Partnership Unit: A fractional, undivided share of the
Partnership Interests of all Partners issued pursuant to Section 4.1 hereof. As
of the date of this Agreement, the aggregate number of Partnership Units
outstanding is ___________, with each such Partnership Unit representing
approximately a % Percentage Interest.
Percentage Interest: As to any Partner, the percentage in the
Partnership as initially shown opposite the name of such Partner on Exhibit 1
attached hereto, as determined by dividing the Partnership Units then owned by
such Partner by the total number of Partnership Units then outstanding, as the
same may be automatically adjusted from time to time to reflect the issuance and
redemption of
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<PAGE>
Partnership Units in accordance with this Agreement, without requiring the
amendment of Exhibit 1 to reflect any such issuance or redemption.
Person: An individual, or a trust, estate, partnership,
association, company or corporation, as such terms are defined in Code Section
7701.
Property Interest: Any real estate property owned by any
Property Interest Owner and contributed to the Partnership pursuant to the
Contribution Agreement for such Property Interest.
Property Interest Owner(s): Any Person which owns a Property
Interest that is being contributed to the Partnership.
RAIT: Resource Asset Investment Trust, a Maryland real estate
investment trust that is the owner of all of the capital stock of the General
Partner and the Initial Limited Partner. RAIT intends to qualify for its first
taxable year following the IPO, and thereafter, as a real estate investment
trust as defined under Code Section 856.
Record Date: The date established by the General Partner for
distribution of Net Cash Flow pursuant to Section 5.2 hereof, which record date
shall be the same as the record date established by the General Partner for a
distribution to its shareholders of some or all of its portion of such
distribution.
Redeeming Party: A Limited Partner or Assignee (other than the
General Partner) who tenders Partnership Units for redemption pursuant to a
Redemption Notice.
Redemption Date: The date for redemption of Partnership Units
as set forth in Section 9.2.
Redemption Effective Date: The first date on which a Redeeming
Party may elect to redeem Partnership Units, which date shall be thirty-six (36)
months following the date of this Agreement.
Redemption Notice: A Notice to the General Partner by a
Redeeming Party, substantially in the form attached as Exhibit 2, pursuant to
which the Redeeming Party requests the redemption of Partnership Units in
accordance with Article IX.
Redemption Obligation: The obligation of the Partnership to
redeem the Partnership Units as set forth in Section 9.1(A).
Redemption Restriction: A restriction on the ability of the
Partnership to redeem the Partnership Units as set forth in Section 9.1(A).
REIT Declaration: The Declaration of Trust of RAIT as filed
with the Maryland State Department of Assessments and Taxation on ______, 1997,
as the same may be amended, or amended and restated, and in effect from time to
time.
REIT Share: A share of common stock representing an ownership
interest in RAIT.
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<PAGE>
REIT Share Rights: Rights to acquire additional REIT Shares
issued to all holders of REIT Shares, whether in the form of rights, options,
warrants or convertible or exchangeable securities, to the extent the same have
been issued without additional consideration after the initial acquisition of
such REIT Shares.
Share Payment: The payment to a Redeeming Party of a number of
REIT Shares determined by multiplying (i) the number of Partnership Units
tendered for redemption by such Redeeming Party pursuant to a validly proffered
Redemption Notice by (ii) the Conversion Multiple. In the event the General
Partner grants any REIT Share Rights prior to such conversion, any Share Payment
shall include for the Redeeming Party his ratable share of such REIT Share
Rights.
Subsidiary: With respect to any Person, any corporation or
other entity of which a majority of (i) the voting power of the voting equity
securities, or (ii) the outstanding equity interests is owned, directly or
indirectly, by such Person.
Substituted Limited Partner: That Person or those Persons
admitted to the Partnership as substitute Limited Partner(s) in accordance with
the provisions of this Agreement. A Substituted Limited Partner, upon his
admission as such, shall succeed to the rights, privileges and liabilities of
his predecessor in interest as a Limited Partner.
Successor General Partner: Any Person who is admitted to the
Partnership as substitute General Partner pursuant to this Agreement. A
Successor General Partner, upon its admission as such, shall succeed to the
rights, privileges and liabilities of its predecessor in interest as a General
Partner in accordance with the provisions of the Act.
Tax Matters Partner: The General Partner, or such other
Partner who becomes Tax Matters Partner pursuant to the terms of this Agreement.
Transfer: With respect to any Partnership Unit(s), a
transaction in which a Partner purports to assign his Partnership Interest to
another Person and includes any sale, assignment, gift, pledge, mortgage,
exchange, hypothecation, encumbrance or other disposition by law or otherwise;
provided, however, the redemption of any Partnership Interest pursuant to
Article IX hereof shall not constitute a "transfer" for purposes hereof. Any
purported Transfer not made in accordance with the terms of this Agreement shall
have no legal effect and shall be null and void ab initio.
Unit Value: With respect to any Partnership Unit, the average
of the daily market price for a REIT Share for the ten (10) consecutive trading
days immediately preceding the date of receipt of a Redemption Notice by the
General Partner. If the REIT Shares are traded on a securities exchange or the
NASDAQ National Market System, the market price for each such trading day shall
be the closing price on such day or, if no sales take place on such day, the
average of the closing bid and asked prices on such day. If the REIT Shares are
not traded on a securities exchange or the NASDAQ National Market System, the
market price for each such trading day shall be determined by the General
Partner using any reasonable method of valuation. If a Share Payment would
include any REIT Share Rights, the value of such REIT Share Rights shall be
determined by the General Partner using any reasonable method of valuation,
taking into account the Unit Value determined hereunder and the factors used to
make such determination and the value of such REIT Share Rights shall be
included in the Unit Value.
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Section 2.2 Rules of Construction. The following rules of
construction shall apply to this
Agreement:
(A) All section headings in this Agreement are for the
convenience of reference only and are not intended to qualify the meaning of any
section.
(B) All personal pronouns used in this Agreement, whether used
in the masculine, feminine or neuter gender, shall include all other genders,
the singular shall include the plural, and vice versa, as the context may
require.
(C) Each provision of this Agreement shall be considered
severable from the rest, and if any provision of this Agreement or its
application to any Person or circumstances shall be held invalid and contrary to
any existing or future law or unenforceable to any extent, the remainder of this
Agreement and the application of any other provision to any Person or
circumstances shall not be affected thereby and shall be interpreted and
enforced to the greatest extent permitted by law so as to give effect to the
original intent of the parties hereto.
(D) Unless otherwise specifically and expressly limited in the
context, any reference herein to a decision, determination, act, action,
exercise of a right, power or privilege, or other procedure by the General
Partner shall mean and refer to the decision, determination, act, action,
exercise or other procedure by the General Partner in its sole and absolute
discretion. Notwithstanding the foregoing, such discretion shall reflect the
commercially reasonable judgment of the General Partner in light of the facts
and circumstances, rather than the unfettered discretionary decision of the
General Partner.
ARTICLE III - BUSINESS PURPOSE
Section 3.1 Business. The business of the Partnership shall be (i) to
provide mortgage or other financing to borrowers owning real estate; (ii) to
acquire, own, develop, operate and, if and when appropriate, sell, real estate
and interests, both direct and indirect, in real estate; (iii) to conduct any
business that may be lawfully conducted by a limited partnership pursuant to the
Act, provided, however, that following the IPO such business shall be limited so
as to permit the General Partner to elect and maintain its status as a real
estate investment trust (unless the General Partner elects to no longer qualify
as a real estate investment trust); (iv) to enter into any partnership, joint
venture or other relationship to engage in any of the foregoing or the ownership
of interests in any entity engaged in any of the foregoing; (v) to make loans or
other financial accommodations; (vi) to do any of the foregoing with respect to
any Affiliate or Subsidiary; and (vii) to do anything necessary or incidental to
the foregoing.
Section 3.2 Authorized Activities. In carrying out the purposes of the
Partnership, but subject to all other provisions of this Agreement, the
Partnership is authorized to engage in any kind of lawful activity, and perform
and carry out contracts of any kind, necessary or advisable in connection with
the accomplishment of the purposes and business of the Partnership described
herein and for the protection and benefit of the Partnership; provided that the
General Partner shall use its best efforts to prevent the Partnership from
taking, or refraining from taking, any action which, in the judgment of the
General Partner, in its sole and absolute discretion, (i) could adversely affect
the ability of the General Partner to qualify and continue to qualify as a real
estate investment trust under the Code; (ii) to enable the General Partner or
the Initial Limited Partner to qualify and continue to qualify as qualified REIT
subsidiaries; (iii) could subject RAIT, the General Partner or the Initial
Limited Partner to additional taxes under Code Section 857 or 4981; (iv) ensure
that the Partnership will not be classified as a "publicly
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traded partnership" for purposes of Code Section 7704; or (v) could violate any
law or regulation of any governmental body or agency having jurisdiction over
RAIT, the General Partner, the Initial Limited Partner or their securities.
ARTICLE IV - CAPITAL CONTRIBUTIONS
Section 4.1 Capital Contributions.
(A) Simultaneously with the execution of this Agreement, the
General Partner and the Limited Partner shall contribute the consideration set
forth on Exhibit 1 which shall be derived from corresponding contributions made
to their capital by RAIT. Exhibit 1 sets forth the initial number of Partnership
Units owned by each Partner and the Percentage Interest of each Partner, which
Percentage Interest shall be adjusted from time to time by the General Partner
to reflect the issuance of additional Partnership Units, the redemption of
Partnership Units, additional Capital Contributions and similar events having an
effect on a Partner's Percentage Interest. Except as set forth in Section 4.2
(regarding issuance of additional Partnership Units) or Section 7.6 (regarding
withholding obligations), no Partner shall be required under any circumstances
to contribute to the capital of the Partnership any amount beyond that sum
required pursuant to this Article IV.
(B) Anything in the foregoing Section 4.1(A) or elsewhere in
this Agreement notwithstanding, the Partnership Units held by the General
Partner shall, at all times, be deemed to be general partnership units and shall
constitute the General Partner Interest.
Section 4.2 Additional Partnership Units.
(A) The General Partner shall be authorized to issue
additional limited partnership interests in the form of Partnership Units for
any Partnership purpose, at any time or from time to time, to any Partner or
other Person (other than the General Partner, except in accordance with Section
4.2(B) below).
(B) The Partnership also may from time to time issue to the
General Partner additional Partnership Units or other Partnership Interests in
such classes and having such designations, preferences and relative rights
(including preferences and rights senior to the existing Limited Partners'
Partnership Interests) as shall be determined by the General Partner in
accordance with the Act and governing law. Such units may be issued for less
than fair market value if RAIT has concluded that such issuance is in the best
interest of RAIT and the Partnership. The General Partner and the Initial
Limited Partner must contribute the net proceeds or any future offerings of RAIT
shares as additional capital to the Partnership in exchange for additional
units. Except as provided in Article IX of this Agreement, any such issuance of
Partnership Units or Partnership Interests to the General Partner shall be
conditioned upon (i) the undertaking by RAIT of a related issuance of REIT
Shares (with such shares having designations, rights and preferences such that
the economic rights of the holders of such REIT Shares are substantially similar
to the rights of the additional Partnership Interests issued to the General
Partner) and the General Partner's making a Capital Contribution in an amount
equal to the net proceeds raised in the issuance of such REIT Shares, derived
from a corresponding contribution to its capital by RAIT, or (ii) the issuance
by RAIT of REIT Shares under any stock option or bonus plan and the General
Partner's making a Capital Contribution in an amount equal to the exercise price
of the option exercised by any employee pursuant to such stock option or other
bonus plan, derived from a corresponding contribution to its capital by RAIT.
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(C) Except in accordance with Article IX of this Agreement,
RAIT shall not issue any (i) additional REIT Shares, (ii) rights, options or
warrants containing the right to subscribe for or purchase REIT Shares, or (iii)
securities convertible or exchangeable into REIT Shares (collectively,
"Additional REIT Securities") other than to all holders of REIT Shares, pro
rata, unless (x) the Partnership issues to the General Partner (i) Partnership
Interests, (ii) rights, options or warrants containing the right to subscribe
for or purchase Partnership Interests or (iii) securities convertible or
exchangeable into Partnership Interests such that the General Partner receives
an economic interest in the Partnership substantially similar to the economic
interest in RAIT represented by the Additional REIT Securities; and (y) the
General Partner contributes the net proceeds from the issuance of the Additional
REIT Securities and from the exercise of any rights contained in any Additional
REIT Securities to the Partnership, derived from a corresponding contribution to
its capital by RAIT.
Section 4.3 No Third Party Beneficiaries. The foregoing provisions of
this Article IV are not intended to be for the benefit of any creditor of the
Partnership or other Person to whom any debts, liabilities or obligations are
owed by (or who otherwise has any claim against) the Partnership or any of the
Partners (except for RAIT (but only to the extent of its right to require the
Partnership to comply with Sections 4.1, 4.2 and 4.6), and no such creditor or
other Person shall obtain any right under any such foregoing provision against
the Partnership or any of the Partners by reason of any debt, liability or
obligation (or otherwise).
Section 4.4 Return of Capital Account; Interest. Except as otherwise
specifically provided in this Agreement, (i) no Partner shall have any right to
withdraw or reduce its Capital Contributions or Capital Account, or to demand
and receive property other than cash from the Partnership in return for its
Capital Contributions or Capital Account; (ii) no Partner shall have any
priority over any other Partners as to the return of its Capital Contributions
or Capital Account; (iii) any return of Capital Contributions or Capital
Accounts to the Partners shall be solely from the Partnership Assets, and no
Partner shall be personally liable for any such return; and (iv) no interest
shall be paid by the Partnership on Capital Contributions or on balances in
Partners' Capital Accounts.
Section 4.5 Preemptive Rights. No Person shall have any preemptive or
similar rights with respect to the issuance or sale of additional Partnership
Units.
Section 4.6 REIT Share Purchases. If RAIT or the General Partner
acquires additional REIT Shares pursuant to the REIT Declaration, the
Partnership shall purchase from RAIT or the General Partner, as the case may be,
that number of Partnership Units determined by applying the Conversion Multiple
to the number of REIT Shares purchased by RAIT or the General Partner at the
same price and on the same terms that RAIT or the General Partner purchased such
REIT Shares.
Section 4.7 Limited Liability. Except as expressly provided in this
Agreement, no Limited Partner (in its capacity as a Limited Partner) shall be
personally liable for losses, costs, expenses, liabilities or obligations of the
Partnership in excess of its Capital Contribution required under this Article
IV. The foregoing shall not affect any liability a Limited Partner may incur if
such Limited Partner undertakes additional obligations to the Partnership, the
Partners or to third parties in a capacity other than as a Limited Partner.
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ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS
Section 5.1 General. The profits of the Partnership shall be shared,
and the losses of the Partnership shall be borne, by the Partners as provided in
Exhibit 3 hereto.
Section 5.2 Distributions of Net Cash Flow.
(A) Distributions of Net Cash Flow shall be made to the
Partners of record on the Record Date established by the General Partner for the
distribution, without regard to the length of time the record holder has been
such. Distributions shall be made within 45 days of the end of each calendar
quarter (or, at the election of the General Partner on a more frequent basis) in
such amounts as may be determined by the General Partner in its sole discretion.
(B) Net Cash Flow will be distributed to the Partners, pro
rata in accordance with their respective Percentage Interests, and the General
Partner will use its best efforts to cause the Partnership to make distributions
of Net Cash Flow which are sufficient to enable RAIT to (i) maintain its status
as a real estate investment trust under Code Section 856, (ii) avoid the
imposition of any tax under Code Section 856, and (iii) avoid the imposition of
any excise tax under Code Section 4981.
(C) The General Partner shall take such reasonable efforts, as
determined by it in its sole and absolute discretion, to distribute Net Cash
Flow to the Partners so as to preclude any distribution or portion thereof from
being treated as part of a sale of property to the Partnership by a Partner
under Section 707 of the Code or the Treasury Regulations thereunder; provided
that the General Partner and the Partnership shall not have liability to a
Limited Partner under any circumstances as a result of any distribution to a
Partner being so treated.
Section 5.3 Distributions of Capital Proceeds. Capital Proceeds will be
distributed to the Partners pro rata in accordance with their respective
Percentage Interests.
Section 5.4 Amounts Withheld. All amounts withheld pursuant to the Code
or any provision of state or local tax law and Section 7.6 of this Agreement
with respect to any allocation, payment or distribution to the General Partner,
Limited Partners or Assignees shall be treated as amounts distributed to such
General Partner, Limited Partner or Assignees pursuant to Section 5.3 of this
Agreement.
ARTICLE VI - PARTNERSHIP MANAGEMENT
Section 6.1 Management and Control of Partnership Business.
(A) Except as otherwise expressly provided or limited by the
provisions of this Agreement, the General Partner shall have full, exclusive and
complete discretion to manage the business and affairs of the Partnership, to
make all decisions affecting the business and affairs of the Partnership, and to
take all such action as it deems necessary or appropriate to accomplish the
purposes of the Partnership as set forth herein. If there shall be more than one
(1) General Partner, the vote or determination of the General Partner owning the
largest Percentage Interest shall control. Except as set forth in this
Agreement, the Limited Partners shall not have any authority, right or power to
bind the Partnership, or to manage, or to participate in the management of the
business and affairs of the Partnership in any manner whatsoever. Such
management shall in every respect be the full and complete responsibility of the
General Partner alone as herein provided.
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(B) In carrying out the purposes of the Partnership, the
General Partner shall be authorized to take all actions it deems necessary and
appropriate to carry on the business of the Partnership. Each of the Limited
Partners, by execution hereof, agrees that the General Partner is authorized to
execute, deliver and perform any agreement and/or transaction on behalf of the
Partnership.
(C) The General Partner in its capacity as such shall not
directly or indirectly enter into or conduct any business other than in
connection with the business of the Partnership and the ownership of its
Partnership Interests therein. The General Partner and its Affiliates may
acquire Limited Partner Interests as provided in Section 4.2(B). Any Limited
Partner Interest acquired by the General Partner shall be added to the General
Partner Interest. Upon acquisition of any Limited Partner Interest, any
Affiliate of the General Partner shall have all the rights of a Limited Partner.
Section 6.2 No Management by Limited Partners; Limitation of
Liability.
(A) The Limited Partners, in their capacity as limited
partners, shall not take part in the day-to-day management, operation or control
of the business and affairs of the Partnership or have any right, power or
authority to act for or on behalf of or to bind the Partnership or transact any
business in the name of the Partnership. The Limited Partners shall have no
rights other than those specifically provided herein or granted by law where
consistent with a valid provision hereof, and any of the approvals rendered or
withheld by the Limited Partners pursuant to this Agreement shall be deemed as
consultation or advice to the General Partner in connection with the business of
the Partnership and in accordance with the Act, and shall not be deemed as
participation by the Limited Partners in the business of the Partnership and are
not intended to create any inference that the Limited Partners should be
classified as general partners under the Act.
(B) The Limited Partners shall have no liability under this
Agreement except to the extent expressly provided herein (including with respect
to withholding under Section 7.6) or under the Act.
(C) The General Partner shall not take any action which would
subject a Limited Partner (in its capacity as Limited Partner) to liability as a
general partner.
Section 6.3 Limitations on Partners. No Partner or Affiliate of a
Partner shall have any authority to perform (i) any act in violation of any
applicable law or any regulation under such law; or (ii) any act without Consent
or ratification which is required to be Consented to or ratified pursuant to
this Agreement. No action shall be taken by a Partner if it would cause the
Partnership to be treated as an association taxable as a corporation for federal
income tax purposes.
Section 6.4 Business with Affiliates.
(A) The General Partner, in its discretion, may cause the
Partnership to transact business with RAIT, a Partner or their Affiliates or
Subsidiaries for goods or services reasonably required in the conduct of the
Partnership's business.
(B) In furtherance of Section 6.4(A), the Partnership may lend
or contribute to its Subsidiaries on terms and conditions established by the
General Partner. In the case of any amount borrowed by the general partner from
a financial institution or other lender to be made available to the
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Partnership, the loan by the General Partner to the Partnership will be on
substantially the same terms and conditions as are applicable to the General
Partner's borrowing of such funds.
(C) The Partners acknowledge that the Management Company may
conduct the day-to-day management, operation and leasing of the Property
Interests, or with respect to properties underlying loans owned by the
Partnership, subject to the terms of the property management agreements
("Management Agreements") that may be entered into between the Partnership and
the Management Company with respect to individual Property Interests, or (with
respect to properties underlying Loans) approved by the General Partner on
behalf of the Partnership.
Section 6.5 Compensation; Reimbursement of Expenses. In consideration
for the General Partner's services to the Partnership in its capacity as General
Partner, and for RAIT's agreements hereunder the Partnership shall pay on behalf
of or reimburse to RAIT or the General Partner (i) all expenses of RAIT, the
General Partner or the Initial Limited Partner incurred in connection with the
management of the business and affairs of the Partnership, including all
executive compensation of employees of the Partnership; and (ii) all general,
operating or administrative and other expenses incurred by RAIT and the General
Partner. Except as otherwise set forth in this Agreement, RAIT and the General
Partner shall be fully and entirely reimbursed by the Partnership for any and
all direct and indirect costs and expenses incurred in connection with (a) the
organization and continuation of the Partnership, the General Partner, the
Initial Limited Partner and RAIT, (b) the preparation and filing of any periodic
reports by RAIT, the Partnership, the General Partner or the Initial Limited
Partner, (c) compliance by RAIT, the Partnership, the General Partner and the
Initial Limited Partner with laws, rules and regulations promulgated by any
regulatory body and (d) all other general, operating or administrative costs of
RAIT, the General Partner or the Initial Limited Partner incurred in the
ordinary course of their business on behalf of the Partnership. In addition,
RAIT shall be reimbursed for all expenses incurred by RAIT in connection with
(i) the initial offering and registration of REIT Shares by RAIT, and (ii) any
other issuance of additional Partnership Interests or REIT Shares. With respect
to any such reimbursement, RAIT or the General Partner, as the case may be,
shall present the Partnership with such invoices or allocations as are necessary
to substantiate such costs and expenses.
Section 6.6 Liability for Acts and Omissions.
(A) Neither RAIT, the General Partner, nor its officers,
directors, employees and agents (together, the "Indemnified Parties"), shall be
liable, responsible or accountable in damages or otherwise to the Partnership or
any of the Partners for any act or omission performed or omitted in good faith
on behalf of the Partnership which the Indemnified Party reasonably believed to
be within the scope of the authority granted by this Agreement and in the best
interests of the Partnership, provided such act or omission is in good faith and
with such care as an ordinarily prudent person in a like position would use
under similar circumstances. The Indemnified Parties shall nevertheless be
liable, responsible or accountable for actual fraud, gross negligence or
intentional misconduct.
(B) The Partnership shall indemnify and make advances for
expenses to the Indemnified Parties to the fullest extent permitted under
Section 17-108 of the Act (to the extent of available assets, but without the
requirement that any Partner make additional Capital Contributions for this
purpose) against any loss or damage incurred by the General Partner by reason of
any act or omission performed or omitted by it or any Indemnified Party which is
consistent with the first sentence of Section 6.6(A) above.
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(C) RAIT and the General Partner shall indemnify and hold
harmless the Partnership and the Partners against any damage or loss incurred by
the Partnership or Partners by reason of its fraud, gross negligence or
intentional misconduct with respect to the Partnership or the Property
Interests.
ARTICLE VII - ADMINISTRATIVE, FINANCIAL AND TAX MATTERS
Section 7.1 Books and Records. The General Partner shall maintain at
the principal office of the Partnership full and accurate books of the
Partnership showing all receipts and expenditures, assets and liabilities,
profits and losses, names and current addresses of Partners, and all other
records necessary for recording the Partnership's business and affairs. All
Partners and their duly authorized representatives shall have the right to
inspect and copy any or all of the Partnership's books and records, including
books and records necessary to enable a Partner to defend any tax audit or
related proceeding, during reasonable hours upon three (3) business days Notice
to the General Partner. The Limited Partners shall have, upon written demand and
at such Limited Partner's expense, the right to receive true and complete
information regarding Partnership matters to the extent required under (and
subject to the limitations of) Delaware law.
Section 7.2 Annual Audit and Accounting. The books and records of the
Partnership shall be kept for financial and tax reporting purposes on the
accrual basis of accounting in accordance with generally accepted accounting
principles ("GAAP"). The accounts of the Partnership shall be reviewed or
compiled annually by a nationally recognized accounting firm of independent
public accountants selected by the General Partner (the "Independent
Accountants").
Section 7.3 Partnership Funds. The General Partner shall have
responsibility for the safekeeping and use of all funds and assets of the
Partnership, whether or not in its direct or indirect possession or control. All
funds of the Partnership not otherwise invested shall be deposited in one or
more accounts maintained in such banking institutions as the General Partner
shall determine, and withdrawals shall be made only in the regular course of
Partnership business on such signatures as the General Partner may, from time to
time, determine.
Section 7.4 Reports and Notices. The General Partner shall provide all
Partners with the following reports no later than the dates indicated or as soon
thereafter as circumstances permit:
(A) By March 31 of each year, IRS Form 1065 and Schedule K-1,
or similar forms as may be required by the IRS, stating each Partner's allocable
share of income, gain, loss, deduction or credit for the prior Fiscal Year;
(B) Within ninety (90) days after the end of each of the first
three (3) fiscal quarters, as of the last day of the fiscal quarter, a report
containing unaudited financial statements of the Partnership, or of RAIT if such
statements are prepared solely on a consolidated basis with RAIT, and such other
information as may be legally required or determined to be appropriate by RAIT;
and
(C) Within one hundred twenty (120) days after the end of each
Fiscal Year, as of the close of the Fiscal Year, an annual report containing the
financial statements of the Partnership, or of RAIT if such statements are
prepared solely on a consolidated basis with RAIT, presented in accordance with
GAAP by the Independent Accountants.
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Section 7.5 Tax Matters.
(A) The General Partner shall be designated the Tax Matters
Partner of the Partnership for federal income tax matters pursuant to Code
Section 6223(c)(3). The Tax Matters Partner is authorized and required to
represent the Partnership (at the expense of the Partnership) in connection with
all examinations of the affairs of the Partnership by any federal, state or
local tax authorities, including any resulting administrative and judicial
proceedings, and to expend funds of the Partnership for professional services
and costs associated therewith. The Tax Matters Partner shall deliver to the
Limited Partners within ten (10) business days of the receipt thereof a copy of
any notice or other communication with respect to the Partnership received from
the IRS (or other governmental tax authority), or any court, in each case with
respect to any administrative or judicial proceeding involving the Partnership.
The Partners agree to cooperate with each other in connection with the conduct
of all proceedings pursuant to this Section 7.5(A).
(B) The Tax Matters Partner shall receive no compensation for
its services in such capacity. If the Partnership incurs any costs related to
any tax audit, declaration of any tax deficiency or any administrative
proceeding or litigation involving any Partnership tax matter, such amount shall
be an expense of the Partnership and the Tax Matters Partner shall be entitled
to full reimbursement therefor.
(C) The General Partner shall cause to be prepared all
federal, state and local income tax returns required of the Partnership at the
Partnership's expense.
(D) Except as set forth herein, the General Partner shall
determine whether to make (and, if necessary, revoke) any tax election available
to the Partnership under the Code or any state tax law; provided, however, upon
the request of any Partner, the General Partner shall make the election under
Code Section 754 and the Treasury Regulations promulgated thereunder. The
Partnership shall elect to deduct expenses, if any, incurred by it in organizing
the Partnership in accordance with the provisions of Code Section 709.
Section 7.6 Withholding. Each Partner hereby authorizes the Partnership
to withhold from or pay to any taxing authority on behalf of such Partner any
tax that the General Partner determines the Partnership is required to withhold
or pay with respect to any amount distributable or allocable to such Partner.
Any amount paid to any taxing authority which does not constitute a reduction in
the amount otherwise distributable to such Partner shall be treated as a loan
from the Partnership to such Partner, which loan shall bear interest at the
"prime rate" as published from time to time in The Wall Street Journal plus two
(2) percentage points, and shall be repaid within ten (10) business days after
request for repayment from the General Partner. The obligation to repay any such
loan shall be secured by such Partner's Partnership Interest and each Partner
hereby grants the Partnership a security interest in his Partnership Interest
for the purposes set forth in this Section 7.6, this Section 7.6 intending to
serve as a security agreement for purposes of the Uniform Commercial Code. Each
Partner agrees to take such reasonable actions as the General Partner may
request to perfect the security interest granted hereby. In the event any
Partner fails to repay any deemed loan pursuant to this Section 7.6, the
Partnership shall be entitled to avail itself of any rights and remedies it may
have. Furthermore, upon the expiration of ten (10) business days after demand
for payment, the General Partner shall have the right to make the payment to the
Partnership on behalf of the defaulting Partner and thereupon be subrogated to
the rights of the Partnership with respect to such defaulting Partner.
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ARTICLE VIII - TRANSFER OF INTERESTS; ADMISSION OF PARTNERS
Section 8.1 Transfer by General Partner. The General Partner may not
voluntarily withdraw or Transfer all or any portion of its General Partner
Interest.
Section 8.2 Obligations of a Prior General Partner. Upon an Involuntary
Withdrawal of the General Partner and the subsequent Transfer of the General
Partner Interest, such General Partner shall (i) remain liable for all
obligations and liabilities (other than Partnership liabilities payable solely
from Partnership Assets) incurred by it as General Partner before the effective
date of such event, and (ii) pay all costs associated with the admission of its
Successor General Partner. However, such General Partner who withdraws shall be
free of and held harmless by the Partnership against any obligation or liability
incurred on account of the activities of the Partnership from and after the
effective date of such event, except as provided in this Agreement.
Section 8.3 Additional or Successor General Partner. A successor to all
of a General Partner's Interest who is proposed to be admitted to the
Partnership as a Successor General Partner shall be admitted as the General
Partner, effective upon the Transfer, with the Consent of the General Partner,
or if there is no remaining General Partner, with the Consent of a majority in
interest of the remaining Partners (measured by the relative number of
Partnership Units owned by each). Any such additional or successor general
partner shall carry on the business of the Partnership without dissolution. In
addition, the following conditions must be satisfied:
(A) The Person shall have accepted and agreed to be bound by
all the terms and provisions of this Agreement, by executing a counterpart
thereof and such other documents or instruments as may be required or
appropriate in order to effect the admission of such Person as a General
Partner; and
(B) An amendment to this Agreement evidencing the admission of
such Person as a General Partner shall have been executed by all General
Partners and an amendment to the Certificate shall have been filed for
recordation as required by the Act.
Section 8.4 Restrictions on Transfer and Withdrawal by Limited
Partner.
(A) Subject to the provisions of Section 8.4(D), no Limited
Partner may Transfer all or any portion of his Partnership Interest without
first obtaining the Consent of the General Partner, which Consent may be granted
or withheld in the sole and absolute discretion of the General Partner. Any such
purported transfer undertaken without such Consent shall be considered to be
null and void ab initio and shall not be given effect.
(B) No Limited Partner may withdraw from the Partnership other
than as a result of a permitted Transfer of all of his Partnership Units
pursuant to this Article VIII or pursuant to a redemption of all of his
Partnership Units pursuant to Article IX of this Agreement. Upon the permitted
Transfer or redemption of all of a Limited Partner's Partnership Units, such
Limited Partner shall cease to be a Limited Partner.
(C) Upon the Involuntary Withdrawal of any Limited Partner
(which shall under no circumstance cause the dissolution of the Partnership),
the executor, administrator, trustee, guardian, receiver or conservator of such
Limited Partner's estate shall succeed to those rights of the Limited
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Partner prior to such Involuntary Withdrawal for the purpose of settling the
affairs of the Limited Partner subject to the Involuntarily Withdrawal. Any
Transfer of Partnership Units, including Transfers by operation of law, shall be
effective only upon receiving Consent or the General Partner.
(D) A Limited Partner may Transfer, with the Consent of the
General Partner, all or a portion of his Partnership Units to (a) a parent or
parents, spouse, natural or adopted descendant or descendants, spouse of such a
descendant, or brother or sister; (b) a corporation controlled by a Person or
Persons named in (a) above; or (c) if the Limited Partner is an entity, its
beneficial owners; and the General Partner shall grant its Consent to any
Transfer pursuant to this Section 8.4(D) unless such Transfer, in the reasonable
judgment of the General Partner, would cause (or have the potential to cause)
RAIT to (i) have more than fifty percent (50%) in value of its outstanding stock
owned, directly or indirectly, by or for not more than five (5) Persons; (ii)
have its outstanding stock held by less than 100 persons (determined without
reference to rules of attribution); (iii) be deemed to be "closely held' within
the meaning of Code Section 856(h); or (iv) own, actually or constructively, 10%
or more of the ownership interests in a tenant of RAIT, in which case the
General Partner shall have the absolute right to refuse to permit such Transfer,
and any purported Transfer in violation of this Section 8.4(D) shall be null and
void ab initio.
(E) No Transfer of any Limited Partner's Partnership Units
shall be made if such Transfer would (i) in the opinion of Partnership counsel,
cause the Partnership to be terminated for federal income tax purposes or to be
treated as an association taxable as a corporation (rather than a partnership)
for federal income tax purposes; (ii) be effected through an "established
securities market" or a "secondary market (or the substantial equivalent
thereof)" within the meaning of Code Section 7704; (iii) in the opinion of
Partnership counsel, such Transfer would violate the provisions of applicable
securities laws; or (iv) violate the terms of (or result in a default or
acceleration under) any law, rule, regulation, agreement or commitment binding
on the Partnership.
Section 8.5 Substituted Limited Partner.
(A) No transferee shall become a Limited Partner in place of
his assignor unless and until the following conditions have been satisfied:
(1) The assignor and transferee file a Notice or
other evidence of Transfer and such other information reasonably required by the
General Partner, including without limitation, names, addresses and telephone
numbers of the assignor and transferee;
(2) The transferee executes, adopts and acknowledges
this Agreement, or a counterpart hereto, and such other documents as may be
reasonably requested by the General Partner, including without limitation, all
documents necessary to comply with applicable tax and/or securities rules and
regulations;
(3) The assignor or transferee pays all costs and
fees incurred or charged by the Partnership to effect the Transfer and
substitution; and
(4) The assignor or transferee obtains the written
Consent of the General Partner, which may be given or withheld in its sole and
absolute discretion.
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(B) If a transferee of a Limited Partner does not become a
Limited Partner pursuant to Section 8.5(A), such transferee shall be an Assignee
and shall not have any rights to require any information on account of the
Partnership's business, to inspect the Partnership's books, to participate in
the management or operation of the Partnership, or to vote or otherwise take
part in the affairs of the Partnership (such Partnership Units being deemed to
have been voted in the same proportion as all other Partnership Units held by
Limited Partners have been voted). Such Assignee shall be entitled, however, to
all the rights of an assignee of a limited partnership interest under the Act.
Any Assignee wishing to Transfer the Partnership Units acquired shall be subject
to the restrictions set forth in this Article VIII.
Section 8.6 Timing and Effect of Transfers. Unless the General Partner
agrees otherwise, Transfers under this Article VIII may only be made as of the
first day of a fiscal quarter of the Partnership. Upon any Transfer of a
Partnership Interest in accordance with this Article VIII or redemption of a
Partnership Interest in accordance with Article IX of this Agreement, the
Partnership shall allocate all items of profit and loss between the transferor
Partner and the transferee Partner in accordance with Code Section 706(d). The
transferor Partner shall have the right to receive all distributions as to which
the Record Date precedes the date of Transfer and the transferee Partner shall
have the right to receive all distributions thereafter.
Section 8.7 Additional Limited Partners. Other than in accordance with
the transactions specified in the Contribution Agreement, after the initial
execution of this Agreement and the admission to the Partnership of the initial
Limited Partners, any Person making a Capital Contribution to the Partnership in
accordance herewith shall be admitted as an Additional Limited Partner only (i)
with the Consent of the General Partner, and (ii) upon execution, adoption and
acknowledgment of this Agreement, or a counterpart hereto, and such other
documents as may be reasonably requested by the General Partner, including
without limitation, the power of attorney required under Section 12.3. Upon
satisfaction of the foregoing requirements, such Person shall be admitted as an
Additional Limited Partner effective on the date upon which the name of such
Person is recorded on the books of the Partnership.
Section 8.8 Amendment of Agreement and Certificate. Upon any admission
of a Person as a Partner to the Partnership, the General Partner shall take all
necessary steps to amend this Agreement to reflect such admission and, if
required by the Act, to cause to be filed an amendment to the Certificate.
ARTICLE IX - REDEMPTION
Section 9.1 Right of Redemption.
(A) Subject to any restriction on RAIT, which restriction may
be in the REIT Declaration, the laws governing RAIT or otherwise (a "Redemption
Restriction"), beginning on the Redemption Effective Date, during the four
30-day periods immediately following the filing with the Securities and Exchange
Commission by RAIT of its annual report on Form 10-K or quarterly reports on
Form 10-Q or during such periods as the Partnership may otherwise determine,
each Redeeming Party shall have the right to require the Partnership to redeem
all or a portion of the Partnership Units held by such Redeeming Party by
providing the General Partner with a Redemption Notice. A Limited Partner may
not invoke its rights under this Article IX with respect to fewer than 100
Partnership Units or an integral multiple thereof or, if such Limited Partner
holds fewer than 100 Partnership Units, all of the Partnership Units held by
such Limited Partner. Upon the General Partner's receipt of a Redemption Notice
from a Redeeming Party, the Partnership shall be obligated (subject to the
existence of any
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Redemption Restriction) to redeem the Partnership Units from such Redeeming
Party (the "Redemption Obligation").
(B) Upon receipt of a Redemption Notice from a Redeeming
Party, the General Partner shall either (i) cause the Partnership to redeem the
Partnership Units tendered in the Redemption Notice, (ii) assume the Redemption
obligation, as set forth in Section 9.4, or (iii) provide written Notice to the
Redeeming Party of any Redemption Restriction.
Section 9.2 Timing of Redemption. The Redemption Obligation (or the
obligation to provide Notice of a Redemption Restriction if one exists) shall
mature on the date which is seven (7) business days after the receipt by the
General Partner of a Redemption Notice from the Redeeming Party (the "Redemption
Date").
Section 9.3 Redemption Price. On or before the Redemption Date, the
Partnership (or the General Partner if it elects pursuant to Section 9.4) shall
deliver to the Redeeming Party, in the sole and absolute discretion of the
General Partner either (i) a Share Payment or (ii) a Cash Payment. In order to
enable the Partnership to effect a redemption by making a Share Payment pursuant
to this Section 9.3, the General Partner in its sole and absolute discretion may
direct RAIT to issue additional REIT Shares to the Partnership in exchange for
the issuance to the General Partner of Partnership Units determined by applying
the Conversion Multiple to the number of REIT Shares issued.
Section 9.4 Assumption of Redemption Obligation. Upon receipt of a
Redemption Notice, the General Partner, in its sole and absolute discretion,
shall have the right to assume the Redemption Obligation of the Partnership. In
such case, the General Partner shall be substituted for the Partnership for all
purposes of this Article IX, and, upon acquisition of the Partnership Units
tendered by the Redeeming Party pursuant to the Redemption Notice shall be
treated for all purposes of this Agreement as the owner of such Partnership
Units. In such case, the transaction shall be treated for federal income tax
purposes by the Partnership, the General Partner and the Redeeming Party as a
sale by the Redeeming Party as seller to the General Partner as purchaser.
Section 9.5 Further Assurances. Each party to this Agreement agrees to
execute any documents deemed reasonably necessary by the General Partner to
evidence the issuance of any Share Payment to a Redeeming Party.
Section 9.6 Effect of Redemption. Upon the satisfaction of the
Redemption Obligation by the Partnership or the General Partner, as the case may
be, the Redeeming Party shall have no further right to receive any Partnership
distributions in respect of the Partnership Units so redeemed.
ARTICLE X - DISSOLUTION AND LIQUIDATION
Section 10.1 Term and Dissolution. The Partnership commenced as of the
date of filing of the Certificate, and shall continue until December 31, 2050,
or until dissolution occurs prior to that date for any one of the following
reasons:
(A) An Involuntary Withdrawal of a sole remaining General
Partner unless, within ninety (90) days after such event of withdrawal, a
majority in interest of the remaining Partners
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(measured by the relative number of Partnership Units owned by each) agree in
writing to the continuation of the Partnership and to the appointment of a
Successor General Partner;
(B) Entry of a decree of judicial dissolution of the
Partnership under the Act; or
(C) The sale, exchange or other disposition of all or
substantially all of the Partnership Assets.
Section 10.2 Liquidation of Partnership Assets.
(D) In the event of dissolution pursuant to Section 10.1, the
Partnership shall continue solely for purposes of winding up the affairs of,
achieving a final termination of and satisfaction of the creditors of the
Partnership. The General Partner (or, if there is no General Partner remaining,
any Person elected by a majority in interest of the Limited Partners (the
"Liquidator")) shall be responsible for oversight of the winding up and
dissolution of the Partnership. The Liquidator shall obtain a full accounting of
the assets and liabilities of the Partnership, and such Partnership Assets shall
be liquidated (including, at the discretion of the Liquidator, in exchange, in
whole or in part, for REIT Shares) as promptly as the Liquidator is able to do
so without any undue loss in value, with the proceeds therefrom applied and
distributed in the following order:
(1) First, to the discharge of Partnership debts and
liabilities to creditors other than Partners;
(2) Second, to the discharge of Partnership debts
and liabilities to the Partners; and
(3) The balance, if any, to the Partners in
accordance with their positive Capital Accounts after giving effect to all
contributions, distributions and allocations for all periods.
(E) In accordance with Section 10.2(A), the Liquidator shall
proceed without any unnecessary delay to sell and otherwise liquidate the
Partnership Assets; provided, however, that if the Liquidator shall determine
that an immediate sale of part or all of the Partnership Assets would cause
undue loss to the Partners, the Liquidator may defer the liquidation except (i)
to the extent provided by the Act or (ii) as may be necessary to satisfy the
debts and liabilities of the Partnership to Persons other than the Partners.
(F) If, in the sole and absolute discretion of the Liquidator,
there are Partnership Assets that the Liquidator will not be able to liquidate,
or if the liquidation of such assets would result in undue loss to the Partners,
the Liquidator may distribute such Partnership Assets to the Partners in kind,
in lieu of cash, as tenants-in-common in accordance with the provisions of
Section 10.2(A). The foregoing notwithstanding, such in-kind distributions shall
only be made if in the Liquidator's good faith judgment that is in the best
interest of the Partners.
(G) Upon the complete liquidation and distribution of the
Partnership Assets, the Partners shall cease to be Partners of the Partnership,
and the Liquidator shall execute, acknowledge and cause to be filed all
certificates and notices required by law to terminate the Partnership. Upon the
dissolution of the Partnership pursuant to Section 10.1, the Liquidator shall
cause to be prepared, and shall furnish to each Partner, a statement setting
forth the assets and liabilities of the Partnership.
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Promptly following the complete liquidation and distribution of the Partnership
Assets, the Liquidator shall furnish to each Partner a statement showing the
manner in which the Partnership Assets were liquidated and distributed.
Section 10.3 Effect of Treasury Regulations.
(A) In the event the Partnership is "liquidated" within the
meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g), distributions
shall be made pursuant to this Article X to the General Partner and the Limited
Partners who have positive Capital Accounts in compliance with Treasury
Regulations Section 1.704-1(b)(2)(ii)(b)(2). If any Partner has a deficit
balance in his Capital Account (after giving effect to all contributions,
distributions and allocations), such Partner shall be obligated to contribute
such amount to the capital of the Partnership.
(B) In the event the Partnership is "liquidated" within the
meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g) but there has been
no dissolution of the Partnership under Section 10.1 hereof, then the
Partnership Assets shall not be liquidated, the Partnerships liabilities shall
not be paid or discharged and the Partnership's affairs shall not be wound up.
In the event of such a liquidation there shall be deemed to have been a
distribution of Partnership Assets in kind to the Partners in accordance with
their respective Capital Accounts followed by a recontribution of the
Partnership Assets by the Partners also in accordance with their respective
Capital Accounts.
Section 10.4 Time for Winding Up. Anything in this Article X
notwithstanding, a reasonable time shall be allowed for the orderly winding up
of the business and affairs of the Partnership and the liquidation of the
Partnership Assets in order to minimize any potential for losses as a result of
such process. During the period of winding up, this Agreement shall remain in
full force and effect and shall govern the rights and relationships of the
Partners inter se.
ARTICLE XI - AMENDMENTS AND MEETINGS
Section 11.1 Amendment Procedure.
(A) Amendments to this Agreement may be proposed by the
General Partner. A proposed amendment will be adopted and become effective only
if it receives the Consent of a majority in interest of the Limited Partners
(measured by the relative number of Partnership Units owned by each); provided,
however, no such amendment shall be adopted if it would (i) convert a Limited
Partner's Interest in the Partnership into a General Partner Interest; (ii)
increase the liability of a Limited Partner under this Agreement; (iii) except
as otherwise permitted in this Agreement, alter the Partners' rights to
distributions set forth in Article V; (iv) alter or modify any aspect of the
Partners' rights with respect to redemption of Partnership Units; (v) cause the
early termination of the Partnership (other than pursuant to the terms hereof);
or (vi) amend this Section 11.1(A), in each case without the Consent of each
Partner adversely affected thereby. In connection with any proposed amendment of
this Agreement requiring Consent, the General Partner shall either call a
meeting to solicit the vote of the Partners or seek the written vote of the
Partners to such amendment. In the case of a request for a written vote, the
General Partner shall be authorized to impose such reasonable time limitations
for response, but in no event less than ten (10) days, with the failure to
respond being deemed a vote consistent with the vote of the General Partner.
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(B) Subject to the foregoing, amendments may be made to this
Agreement by the General Partner, without the Consent of any Limited Partner, to
(i) add to the representations, duties or obligations of the General Partner or
surrender any right or power granted to the General Partner herein; (ii) cure
any ambiguity, correct or supplement any provision herein which may be
inconsistent with any other provision herein or make any other provisions with
respect to matters or questions arising hereunder which will not be inconsistent
with any other provision hereof; (iii) reflect the admission, substitution,
termination or withdrawal of Partners in accordance with this Agreement; or (iv)
satisfy any requirements, conditions or guidelines contained in any order,
directive, opinion, ruling or regulation of a federal or state agency or court
or contained in federal or state law. The General Partner shall notify the
Limited Partners whenever it exercises its authority pursuant to this Section
11.1(B).
(C) Within ten (10) days of the making of any proposal to
amend this Agreement, the General Partner shall give all Partners Notice of such
proposal (along with the text of the proposed amendment and a statement of its
purposes).
Section 11.2 Meetings and Voting.
(A) Meetings of Partners may be called by the General Partner.
The General Partner shall give all Partners Notice of the purpose of such
proposed meeting not less than three (3) days nor more than thirty (30) days
prior to the date of the meeting. Meetings shall be held at a reasonable time
and place selected by the General Partner. Whenever the vote or Consent of
Partners is permitted or required hereunder, such vote or Consent shall be
requested by the General Partner and may be given by the Partners in the same
manner as set forth for a vote with respect to an amendment to this Agreement in
Section 11.1(A).
(B) Any action required or permitted to be taken at a meeting
of the Partners may be taken without a meeting if a Consent setting forth the
action to be taken is signed by the Partners owning Percentage Interests
required to vote in favor of such action, which Consent may be evidenced in one
or more instruments. Consents need not be solicited from any other Partner if
the Consent of a sufficient number of Partners has been obtained to take the
action for which such solicitation was required.
(C) Each Limited Partner may authorize any Person(s) to act
for him by proxy on all matters on which a Limited Partner may participate.
Every proxy (i) must be signed by the Limited Partner or his attorney-in-fact;
(ii) shall expire eleven (11) months from the date thereof unless the proxy
provides otherwise; and (iii) shall be revocable at the discretion of the
Limited Partner granting such proxy.
ARTICLE XII - MISCELLANEOUS PROVISIONS
Section 12.1 Title to Property. All property owned by the Partnership,
whether real or personal, tangible or intangible, shall be deemed to be owned by
the Partnership as an entity, and no Partner, individually, shall have any
ownership of such property. The Partnership may hold any of its assets in its
own name or in the name of its nominee, which nominee may be one or more
individuals, corporations, partnerships, trusts or other entities.
Section 12.2 Other Activities of Limited Partners. Except as expressly
provided otherwise in this Agreement or in any other agreement entered into by a
Limited Partner or any Affiliate of a
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Limited Partner and the Partnership, the General Partner or any Subsidiary of
the Partnership or the General Partner, any Affiliate of the General Partner,
any Limited Partner or any Affiliate of any Limited Partner may engage in, or
possess an interest in, other business ventures of every nature and description,
independently or with others, including without limitation, real estate business
ventures, whether or not such other enterprises shall be in competition with any
activities of the Partnership, the General Partner or the Subsidiary, and
neither the Partnership, the General Partner, such Subsidiary nor the other
Partners shall have any right by virtue of this Agreement in and to such
independent ventures or to the income or profits derived therefrom.
Section 12.3 Power of Attorney.
(A) Each Limited Partner hereby irrevocably appoints and
empowers the General Partner (which term shall include the Liquidator, in the
event of a liquidation, for purposes of this Section 12.3) and each of its
authorized officers and attorneys-in-fact with full power of substitution as his
true and lawful agent and attorney-in-fact, with full power and authority in his
name, place and stead to:
(1) Make, execute, acknowledge, publish and file in
the appropriate public offices (a) any duly approved amendments to the
Certificate pursuant to the Act and to the laws of any state in which such
documents are required to be filed; (b) any certificates, instruments or
documents as may be required by, or may be appropriate under, the laws of any
state or other jurisdiction in which the Partnership is doing or intends to do
business; (c) any other instrument which may be required to be filed by the
Partnership under the laws of any state or by any governmental agency, or which
the General Partner deems advisable to file; (d) any documents which may be
required to effect the continuation of the Partnership, the admission,
withdrawal or substitution of any Partner pursuant to Article VIII of this
Agreement, the dissolution and termination of the Partnership pursuant to
Article X of this Agreement, or the surrender of any rights or the assumption of
any additional responsibilities by the General Partner; (e) any document which
may be required to effect an amendment to this Agreement to correct any mistake,
omission or inconsistency, or to cure any ambiguity herein, to the extent such
amendment is permitted by Section 11.1(B) of this Agreement; and (f) all
instruments (including this Agreement and amendments and restatements hereof)
relating to the determination of the rights, preferences and privileges of any
class or series of Partnership Units issued pursuant to Section 4.2(B) of this
Agreement; and
(2) Sign, execute, swear to and acknowledge all
voting ballots, consents, approvals, waivers, certificates and other instruments
appropriate or necessary, in the sole discretion of the General Partner, to
make, evidence, give, confirm or ratify any vote, consent, approval, agreement
or other action which is made or given by the Partners hereunder or is
consistent with the terms of this Agreement and/or appropriate or necessary, in
the sole discretion of the General Partner, to effectuate the terms or intent of
this Agreement.
(B) Nothing herein contained shall be construed as authorizing
the General Partner to amend this Agreement except in accordance with Article XI
of this Agreement or as may be otherwise expressly provided for in this
Agreement.
(C) The foregoing grant of authority (i) is a special power of
attorney, coupled with an interest, and shall survive the Involuntary Withdrawal
of any Partner and shall extend to such Partner's heirs, successors, assigns and
personal representatives; (ii) may be exercised by the General Partner for each
and every Partner acting as attorney-in-fact for each and every Partner; and
(iii) shall survive the
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Transfer by a Limited Partner of all or any portion of its Partnership Interest
and shall be fully binding upon such transferee; except that the power of
attorney shall survive such assignment with respect to the assignor Limited
Partner for the sole purpose or enabling the General Partner to execute,
acknowledge and file any instrument necessary to effect the admission of the
transferee as a Substitute Limited Partner. Each Partner hereby agrees to be
bound by any representations made by the General Partner, acting in good faith
pursuant to such power of attorney. Each Partner shall execute and deliver to
the General Partner, within fifteen (15) days after receipt of the General
Partner's request therefor, such further designations, powers of attorney and
other instruments as the General Partner deems necessary to effectuate this
Agreement and the purposes of the Partnership.
Section 12.4 Further Assurances. The parties agree to execute and
deliver all such documents, provide all such information and take or refrain
from taking any action as may be necessary or desirable to achieve the purposes
of this Agreement and the Partnership.
Section 12.5 Titles and Captions. All article or section titles or
captions in this Agreement are solely for convenience and shall not be deemed to
be part of this Agreement or otherwise define, limit or extend the scope or
intent of any provision hereof.
Section 12.6 Applicable Law. This Agreement, and the application or
interpretation thereof, shall be governed exclusively by its terms and by the
laws of the State of Delaware, without regard to its principles of conflicts of
laws.
Section 12.7 Binding Agreement. This Agreement shall be binding upon
the parties hereto, their heirs, executors, personal representatives, successors
and assigns.
Section 12.8 Waiver of Partition. Each of the parties hereto
irrevocably waives during the term of the Partnership any right that it may have
to maintain any action for partition with respect to any property of the
Partnership.
Section 12.9 Counterparts and Effectiveness. This Agreement may be
executed in several counterparts, which shall be treated as originals for all
purposes, and all so executed shall constitute one agreement, binding on all of
the parties hereto, notwithstanding that all the parties are not signatory to
the original or the same counterpart. Any such counterpart shall be admissible
into evidence as an original hereof against the Person who executed it. The
execution of this Agreement and delivery thereof by facsimile shall be
sufficient for all purposes, and shall be binding upon any party who so
executes.
Section 12.10 Survival of Representations. All representations and
warranties herein shall survive the dissolution and final liquidation of the
Partnership.
Section 12.11 Entire Agreement. This Agreement (and all Exhibits
hereto) contains the entire understanding among the parties hereto and
supersedes all prior written or oral agreements among them respecting the within
subject matter, unless otherwise provided herein. There are no representations,
agreements, arrangements or understandings, oral or written, among the Partners
hereto relating to the subject matter of this Agreement which are not fully
expressed herein and in said Exhibits.
[SIGNATURES CONTAINED ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, this Agreement has been executed as of the day and
year first above written.
General Partner:
RAIT GENERAL, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
Limited Partner:
RAIT LIMITED, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
For purposes of acknowledging and agreeing to be bound by and to benefit from
the provisions of Section 4.2, Section 6.6 of Article IX of this Agreement only,
Resource Asset Investment Trust
By:_____________________________
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<PAGE>
RAIT PARTNERSHIP, L.P.
EXHIBIT 1 TO
LIMITED PARTNERSHIP AGREEMENT
Schedule of Partners
Applicable
Name and Address Number of Units Percentage Interest
General Partner:
RAIT GENERAL, INC. ____________ ____________%
____________________________
____________________________
Limited Partner:
RAIT LIMITED, INC. ____________% ____________%
____________________________
____________________________
<PAGE>
RAIT PARTNERSHIP, L.P.
EXHIBIT 2 TO
LIMITED PARTNERSHIP AGREEMENT
Redemption Notice
The undersigned hereby irrevocably (i) redeems ________ Partnership
Units in RAIT Partnership, L.P., a Delaware limited partnership (the
"Partnership"), in accordance with the terms and conditions of the Limited
Partnership Agreement of the Partnership (the "Partnership Agreement") and the
provisions regarding the redemption of Partnership Units contained in Article IX
thereof; (ii) surrenders such Partnership Units and all right, title and
interest therein and to the Limited Partnership Interest represented thereby;
(iii) directs that the Share Payment or the REIT Shares (as determined by the
General Partner) deliverable upon exercise of the redemption rights provided by
Article IX of the Partnership Agreement be delivered to the address specified
below, and if REIT Shares are to be delivered, such REIT Shares be registered or
placed in the name(s) and at the addresses) specified below; and (iv) agrees to
be bound by the terms and conditions of any registration rights agreement
applicable to such REIT Shares.
Dated:__________________ ___________________________________________
(Signature of Limited Partner)
_________
___________________________________________
(Street Address)
___________________________________________
(City) (State) (Zip Code)
_________
Signature Guaranteed by:
___________________________________________
_________
Issue REIT Shares to:
__________________________________
(name(s))
__________________________________
Taxpayer Identification Number
<PAGE>
RAIT PARTNERSHIP, L.P.
EXHIBIT 3 TO
LIMITED PARTNERSHIP AGREEMENT
Allocation Provisions
1. Definitions. The following terms shall have the meaning ascribed to
them for purposes of this Exhibit 3.
Adjusted Capital Account Deficit: With respect to any Partner,
the deficit balance, if any, in such Partner's Capital Account as of the end of
the relevant Fiscal Year, after giving effect to the following adjustments:
(A) Credit to such Capital Account any amounts which such
Partner is obligated to restore or is deemed to be obligated to restore pursuant
to the penultimate sentences of Regulations Section 1.704-2(g)(1) and
1.704-2(i)(5); and
(B) Debit to such Capital Account the items described in
Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
The foregoing definition of Adjusted Capital Account Deficit
is intended to comply with the provisions of Regulations Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
Capital Account: For each Partner, the separate account
established with regard to such Partner on the books of the Partnership, which
account shall be credited for (i) the amount of such Partner's Capital
Contributions and (ii) the amount of Profits allocated to such Partner under
this Exhibit 3, and which shall be debited for (i) the Gross Asset Value of any
asset distributed to such Partner and (ii) the amount of Losses allocated to
such Partner under this Exhibit 3. The foregoing definition is intended to
comply with Regulations Section 1.704-1(b)(2)(iv). Any transferee of a Partner's
Interest transferred in accordance with this Agreement shall succeed to that
transferor's Capital Account.
Depreciation: For each Fiscal Year or other period, an amount
equal to the depreciation, amortization or other cost recovery deduction
allowable with respect to an asset for such year or other period, except that if
the Gross Asset Value of an asset differs from its adjusted basis for federal
income tax purposes at the beginning of such year or other period, Depreciation
shall be an amount which bears the same ratio to such beginning Gross Asset
Value as the federal income tax depreciation, amortization, or other cost
recovery deduction for such year or other period bears to the beginning adjusted
tax basis; provided, however, that if the federal income tax depreciation,
amortization or other cost recovery deduction for such year or other period is
zero, Depreciation for such year or other period shall be determined with
reference to such beginning Gross Asset Value using any reasonable method
approved by the General Partner.
Nonrecourse Deductions: The meaning set forth in Regulations
Sections 1.704-2(b)(1) and (c). The amount of Nonrecourse Deductions for a
Fiscal Year equals the excess, if any, of the net increase, if any, in the
amount of Partnership Minimum Gain during that Fiscal Year over the aggregate
amount of any distributions during that Fiscal Year of proceeds of a Nonrecourse
Liability that are allocable to an increase in Partnership Minimum Gain,
determined according to the provisions of Regulations Section 1.704-2(c).
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Nonrecourse Liability: The meaning set forth in Regulations
Section 1.752-1(a)(2).
Partner Minimum Gain: An amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Regulations Section 1.704-2(i).
Partner Nonrecourse Debt: The meaning set forth in Regulations
Section 1.704-2(b)(4).
Partner Nonrecourse Deductions: The meaning set forth in
Regulations Section 1.704-2(i). The amount of Partner Nonrecourse Deductions
with respect to a Partner Nonrecourse Debt for a fiscal year equals the excess,
if any, of the net increase, if any, in the amount of Partner Minimum Gain
attributable to such Partner Nonrecourse Debt during that fiscal year over the
aggregate amount of any distributions during that fiscal year to the Partner
that bears the economic risk of loss for such Partner Nonrecourse Debt to the
extent such distributions are from the proceeds of such Partner Nonrecourse Debt
and are allocable to an increase in Partner Minimum Gain attributable to such
Partner Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i)(2).
Partnership Minimum Gain: The meaning set forth in Regulations
Sections 1.704-2(b)(2) and (d).
Profits and Losses: For each Fiscal Year or other period, an
amount equal to the Partnership's taxable income or loss for such year or
period, determined in accordance with Code Section 703(a) (for this purpose, all
items of income, gain, loss, or deduction required to be stated separately
pursuant to Code Section 703(a)(1) shall be included in taxable income or loss),
with the following adjustments:
(A) Any income of the Partnership that is exempt from federal
income tax and not otherwise taken into account in computing Profits or Losses
pursuant to this definition shall be added to such taxable income or loss;
(B) Any expenditures of the Partnership described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken
into account in computing Profits or Losses pursuant to this definition shall be
subtracted from such taxable income or loss;
(C) In the event the Gross Asset Value of any Partnership
Asset is adjusted pursuant to Clause (B) or (C) of the definition of Gross Asset
Value in Section 2.1 of the Agreement, the amount of such adjustment shall be
taken into account as gain or loss from the disposition of such asset for
purposes of computing Profits or Losses;
(D) Gain or loss resulting from any disposition of Partnership
Assets with respect to which gain or loss is recognized for federal income
purposes shall be computed by reference to the Gross Asset Value of the property
disposed of, notwithstanding that the adjusted tax basis of such property
differs from its Gross Asset Value;
(E) In lieu of the depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable income or loss,
there shall be taken into account Depreciation for such Fiscal Year or other
period, computed in accordance with the definition of Depreciation; and
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<PAGE>
(F) Notwithstanding any other provisions of this definition,
any items which are specially allocated pursuant to Section 2(C) hereof shall
not be taken into account in computing Profits or Losses.
Regulations: The Income Tax Regulations promulgated under the
Code, as such regulations may be amended from time to time, including
corresponding provisions of succeeding regulations.
2. Allocation of Profit and Loss. The income, profits, gains, losses,
deductions and credits of the Partnership shall be determined in accordance with
the capital accounting rules and principles established by Code Sections 702 and
704 and the Regulations thereunder and, to the extent not inconsistent
therewith, in accordance with generally accepted tax accounting principles, and
shall be allocated each Fiscal Year as follows and in the following order of
priority:
(A) Profits. After giving effect to the special allocations
set forth in Section 2(C) hereof, Profits in each Fiscal Year shall be allocated
in the following order:
(1) First, one hundred percent (100%) to the General
Partner to the extent of the excess, if any, of (i) the cumulative Losses
allocated the General Partner pursuant to Section 2(B)(2) hereof for all prior
Fiscal Years, over (ii) the cumulative Profits allocated to the General Partner
pursuant to this Section 2(A)(1) for all prior Fiscal Years;
(2) Second, one hundred percent (100%) to the
Partners, in proportion to and to the extent of the excess, if any, of (i) the
cumulative Losses allocated to each Partner pursuant to Section 2(B)(1)(c)
hereof for all prior Fiscal Years, over (ii) the cumulative Profits allocated to
each Partner pursuant to this Section 2(A)(2) for all prior Fiscal Years;
(3) Third, one hundred percent (100%) to the
Partners, in proportion to and to the extent of the excess, if any, of (i) the
cumulative Losses allocated to each Partner pursuant to Section 2(B)(1)(b)
hereof for all prior Fiscal Years, over (ii) the cumulative Profits allocated to
each Partner pursuant to this Section 2(A)(3) for all prior Fiscal Years;
(4) Thereafter, the balance to the Partners, pro
rata in accordance with their respective Percentage Interests.
(B) Losses. After giving effect to the special allocations set
forth in Section 2(C) hereof, Losses in each Fiscal Year shall be allocated in
the following order:
(1) Losses for any Fiscal Year shall be allocated in
the following order of priority:
(a) First, one hundred percent (100%) to the
Partners in proportion to and to the extent of the excess, if any, of (y) the
cumulative Profits allocated to each such Partner pursuant to Section 2(A)(5)
hereof for all prior Fiscal Years, over (z) the cumulative Losses allocated to
such Partner pursuant to this Section 2(B)(1)(a) for all prior Fiscal Years;
(b) Second, one hundred percent (100%) to
the Partners in proportion to and to the extent of their positive Capital
Accounts until all Capital Accounts have been reduced to zero; and
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(c) Thereafter, the balance to the Partners,
pro rata in accordance with their respective Percentage Interests.
(2) The Losses allocated pursuant to Section 2(B)(1)
hereof shall not exceed the maximum amount of Losses that can be so allocated
without causing any Limited Partner to have an Adjusted Capital Account Deficit
at the end of any Fiscal Year. In the event some but not all of the Limited
Partners would have Adjusted Capital Account Deficits as a consequence of an
allocation of Losses pursuant to Section 2(B)(1) hereof but for this Section
2(B)(2), the limitation set forth in this (B)(2) shall be applied on a Limited
Partner by Limited Partner basis so as to allocate the maximum permissible
Losses to each Limited Partner under Regulations Section 1.704-1(b)(2)(ii)(d).
All Losses in excess of the limitations set forth in this Section 2(B)(2) shall
be allocated to the General Partner.
(C) Special Allocations. The following special allocations
shall be made in the following order:
(1) Minimum Gain Chargeback. Notwithstanding any
other provision of the foregoing Sections 2(A) and (B), if there is a net
decrease in Partnership Minimum Gain during any Fiscal Year, then, to the extent
required by Regulations Section 1.704-2(f), each Partner shall be specially
allocated items of Partnership income and gain for such year (and, if necessary,
subsequent years) in an amount equal to such Partner's share of the net decrease
in Partnership Minimum Gain, determined in accordance with Regulations Section
1.704-2(g)(2). The items to be so allocated shall be determined in accordance
with Regulations Sections 1.704-2(f)(6) and 1.704-2(j). This Section 2(C)(1) is
intended to comply with the minimum gain chargeback requirement in Regulations
Section 1.704-2(f) and shall be interpreted consistently therewith.
(2) Partner Minimum Gain Chargeback. Notwithstanding
any other provision of Sections 2(A)-(F) hereof except Section 2(C)(1), if there
is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse
Debt during any Fiscal Year, then, to the extent required by Regulations Section
1.704-2(i)(4), each Partner who has a share of the Partner Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance with
Regulations Section 1.704-2(i)(5), shall be specially allocated items of
Partnership income and gain for such year (and, if necessary, subsequent years)
in an amount equal to such Partner's share of the net decrease in Partner
Minimum Gain attributable to such Partner Nonrecourse Debt, determined in
accordance with Regulations Section 1.704-2(i)(4). The items to be so allocated
shall be determined in accordance with Regulations Sections 1.704-2(i)(4) and
1.704-2(j). This Section 2(C)(2) is intended to comply with the minimum gain
chargeback requirement in Regulations Section 1.704-2(i)(4) and shall be
interpreted consistently therewith.
(3) Qualified Income Offset. In the event any
Limited Partner unexpectedly receives any adjustments, allocations, or
distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) or
(6), items of Partnership income and gain (consisting of a pro rata portion of
each item of Partnership income, including gross income, and gain for such year)
shall be specially allocated to such Partner in an amount and manner sufficient
to eliminate, to the extent required by the Regulations, the Adjusted Capital
Account Deficit of such Partner as quickly as possible, provided that an
allocation pursuant to this Section 2(C)(3) shall be made if and only to the
extent that such Partner would have an Adjusted Capital Account Deficit after
all other allocations provided for in Sections 2(A)-(F) hereof have been
tentatively made as if this Section 2(C)(3) were not in the Agreement.
(4) Gross Income Allocation. In the event any
Limited Partner has a deficit Capital Account at the end of any Fiscal Year that
is in excess of the sum of (i) the amount such Partner
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is obligated to restore, and (ii) the amount such Partner is deemed to be
obligated to restore pursuant to the penultimate sentences of Regulations
Sections 1.704-2(g)(1) and 1.704-2(i)(5), such Partner shall be specially
allocated items of Partnership income and gain (consisting of a pro rata portion
of each item of Partnership income, including gross income, and gain for such
year) in the amount of such excess as quickly as possible, provided that an
allocation pursuant to this Section 2(C)(4) shall be made if and only to the
extent that such Partner would have a deficit Capital Account in excess of such
sum after all other allocations provided for in Sections 2(A)-(F) hereof have
been tentatively made as if Section 2(C)(3) and this Section 2(C)(4) were not in
the Agreement.
(5) Nonrecourse Deductions. Nonrecourse Deductions
for any Fiscal Year or other period shall be specially allocated to the Partners
in proportion to their Percentages of Partnership Interest.
(6) Partner Nonrecourse Deductions. Any Partner
Nonrecourse Deductions for any Fiscal Year or other period shall be specially
allocated to the Partner who bears the economic risk of loss with respect to the
Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are
attributable in accordance with Regulations Section 1.704-2(i)(1).
(7) Section 754 Adjustment. To the extent an
adjustment to the adjusted tax basis of any Partnership Asset pursuant to Code
Section 734(b) or Code Section 743(b) is required, pursuant to Regulations
Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be treated
as an item of gain (if the adjustment increases the basis of the asset) or loss
(if the adjustment decreases such basis), and such gain or loss shall be
specially allocated to the Partners in a manner consistent with the manner in
which their Capital Accounts are required to be adjusted pursuant to such
Regulations Section.
(D) Other Allocation Rules.
(1) For purposes of determining the Profits, Losses
or any other items allocable to any period, Profits, Losses and any such other
items shall be determined on a daily, monthly, or other basis, as determined by
the General Partner using any permissible method under Code Section 706 and the
Regulations thereunder.
(2) Except as otherwise provided in this Agreement,
all items of Partnership income, gain, loss, deduction and any other allocations
not otherwise provided for shall be divided among the Partners in the same
proportions as they share Profits and Losses, as the case may be, for the year.
(3) The Partners are aware of the income tax
consequences of the allocations made by Sections 2(A)-(F) hereof and hereby
agree to be bound by the provisions of Sections 2(A)-(F) hereof in reporting
their shares of Partnership income and loss for income tax purposes.
(4) Solely for purposes of determining a Partner's
proportionate share of the "excess nonrecourse liabilities" of the Partnership
within the meaning of Regulations Section 1.752-3(a)(3), the Partners' interests
in Partnership profits shall be equal to their Percentages of Partnership
Interest.
(E) Tax Allocations - Code Section 704(c).
(1) In accordance with Code Section 704(c) and the
Regulations thereunder, income, gain, loss and deduction with respect to any
property contributed to the capital of the Partnership
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shall, solely for tax purposes, be allocated among the Partners so as to take
account of any variation between the adjusted basis of such property to the
Partnership for federal income tax purposes and its initial Gross Asset Value
(computed in accordance with the definition in Section 2.1 of the Agreement).
(2) In the event the Gross Asset Value of any
Partnership Asset is adjusted, subsequent allocations of income, gain, loss and
deduction with respect to such asset shall take account of any variation between
the adjusted basis of such asset for federal income tax purposes and its Gross
Asset Value in the same manner as under Code Section 704(c) and the Regulations
thereunder.
(3) Any elections or other decisions relating to such
allocations shall be made by the General Partner in any manner that reasonably
reflects the purpose and intention of this Agreement. Allocations pursuant to
this Section 2(E) are solely for purposes of federal, state and local taxes and
shall not affect, or in any way be taken into account in computing, any
Partner's Capital Account or share of Profits, Losses, other items, or
distributions pursuant to any provision of this Agreement.
(F) Regulatory Compliance. The foregoing provisions of this
Section 2 relating to the allocation of Profits, Losses and other items for
federal income tax purposes are intended to comply with Treasury Regulations
Sections 1.704-1(b) and 1.704-2, and shall be interpreted and applied in a
manner consistent with such Treasury Regulations.
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TO COME
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TO COME
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Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We have issued our report dated August 25, 1997 accompanying the
financial statement of Resource Asset Investment Trust contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts."
GRANT THORNTON LLP
Philadelphia, Pennsylvania
September 2, 1997
