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As filed with the Securities and Exchange Commission on November 24, 1997.
Registration No. 333-35077
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
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, Tenth Floor, Philadelphia, PA 19102
(Address of principal executive offices)
Jay J. Eisner
President and Chief Operating Officer
Resource Asset Investment Trust
1521 Locust Street, Tenth Floor
Philadelphia, PA 19102
(Name and address of agent for service)
COPIES TO:
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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
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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.
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 NOVEMBER 24, 1997
PROSPECTUS
7,500,000 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.
All of the 7,500,000 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, 815,000 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.
It is currently anticipated that the initial public offering price for
the Common Shares will be $15 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
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Underwriters. See "Underwriting." Application has been made for listing the
Company's Common Shares on the Nasdaq Stock Market under the symbol "RAIT."
See "Risk Factors" beginning on page 13 for certain factors
relevant to an investment in the Common Shares including, among others:
o The Company's principal business activity will be to provide
mortgage 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 of loss than
institutional and senior lien financing.
o Discounted loans acquired by the Company (including eight
discounted loans with an aggregate loan receivable amount of
$72.4 million to be acquired from RAI for $17.1 million as
part of the Company's Initial Investments) typically will be
in default under their original loan terms, but will be
subject to forbearance agreements between lenders and
borrowers that postpone exercise of default remedies so long
as certain payment and other conditions are met. These loans
may be subject to high rates of default following expiration
of the forbearance agreements.
o The Company has committed only 26% of the net proceeds of the
Offering (assuming the Underwriters do not exercise their
overallotment option) to specific investments. Accordingly,
investors will not have an opportunity to evaluate a material
portion of the Company's investments.
o The Company has broad discretion in acquiring real properties
or interests in real properties.
o The Company's investments will be sensitive to many economic
factors over which the Company has no control.
o The Company's senior management has limited prior experience
in managing a REIT.
o The Company's investment policies may be revised by the Board
of Trustees without shareholder approval.
o The Company is a newly-formed entity with no history of
operations upon which to base an investment decision.
o The Company may incur debt in its business activities and,
accordingly, will be subject to the risks associated with the
use of leverage.
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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.
o As a result of relationships among the Company, RAI,
Brandywine Construction & Management, Inc. ("Brandywine") and
their affiliates, conflicts of interest may arise in
connection with the price at which investments are sold or
services provided to the Company by RAI, Brandywine and their
affiliates.
o The Company will be taxed as a regular corporation if it fails
to qualify as a REIT.
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.
===============================================================================
Price to Underwriting
Public Discount(1) Proceeds to Company(2)
- -------------------------------------------------------------------------------
Per Share............. $ $ $
Total(3)(4)........... $ $ $
===============================================================================
(1) Does not reflect: (i) reimbursement by the Company of certain out-of-pocket
expenses incurred by the Underwriters, to a maximum of $100,000; (ii) a
warrant granted to Friedman, Billings, Ramsey & Co., Inc., the
representative of the Underwriters (the "Representative"), to purchase up
to 431,250 Common Shares at the initial public offering price, exercisable
for a period of five years commencing one year following 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."
(cover page continued on following page.)
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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(2) Before deducting expenses in connection with the Offering, estimated at
$714,000, 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
1,125,000 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 include the
proceeds of the sale of 815,000 Common Shares to RAI and 34,000 Common
Shares to directors, trustees and officers of either the Company or RAI and
members of their respective families, in each case net of the Underwriting
Discount.
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. The Company will purchase 92% of its initial mortgage
loan investments (the "Initial Investments") from RAI for $27.7 million, which
(at the anticipated offering price) will constitute 24% of the proceeds of this
offering and the sale of Common Shares to RAI (21% if the Underwriters exercise
their over-allotment option). In addition, the Company will reimburse RAI for
legal, accounting and filing fees and expenses, executive salaries, rent and
other organizational expenses (which are estimated to be $526,900) and for the
expenses incurred by RAI, including an allocation of employee compensation, in
sponsoring the Company (which are estimated to be $562,000).
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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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TABLE OF CONTENTS
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PROSPECTUS SUMMARY............................. 5 Uninsured and Underinsured Losses
FORMATION AND STRUCTURE........................ 12 May Affect Value of, or Returns
RISK FACTORS................................... 13 From, Property Interests............. 17
Investment Activity Risks.................... 13 Investments in Joint Ventures,
Financing Considerations................... 13 Partnerships or Other Interests
Value of Company's Financings May Result in Less Control by
Dependent on Conditions Company.............................. 17
Beyond Company's Control............... 13 Compliance with Americans with
Longer Term, Subordinate and Disabilities Act and Other
Non-Conforming Financing Is Governmental Rules and Regulations
Illiquid and Value May Decrease........ 13 Will Decrease Returns on Property
Lengthy Financing Commitment Interests............................ 18
Periods May Reduce Company's Property Taxes Decrease Returns
Returns................................ 13 on Property Interests................ 18
Investment in Subordinate Real Properties with Environmental
Financing May Involve Increased Problems May Create Liability for
Risk of Loss........................... 13 the Company............................ 18
Investment in Non-Conforming Considerations Relating to Initial
Loans May Involve Increased Investments............................
Risk of Loss........................... 14 Multifamily and Commercial Loans
Interest Rate Changes May Included in Initial Investments
Adversely Affect Company's Involve a Greater Risk of Loss than
Investments............................ 14 Single Family Loans.................. 18
Lack of Geographic Diversification Geographic Concentration of Initial
Exposes Company's Investments Investments in Pennsylvania May Make
to Higher Risk of Loss Due to Company's Performance Subject to
Regional Economic Factors.............. 15 Economic Conditions in Pennsylvania.... 19
Competition for Financing May Initial Investments Include Loans
Inhibit Company's Ability to in Default Under Original Loan Terms
Achieve Objectives..................... 15 and Thus May Involve Higher Payment
Participations May Reduce Interest Risks than Performing Loans............ 19
Rates Without Resulting in Other Investment Activity Risks.......... 19
Additional Returns..................... 15 Appropriate Investments May Not Be
Loans Secured by Interests in Available and Full Investment of
Entities Owning Real Properties Net Proceeds May Be Delayed.......... 19
May Involve Increased Risk Newly-Formed Entity; Limited Prior
of Loss................................ 16 REIT Management Experience of
Usury Statutes May Impose Senior Management.................... 19
Interest Ceilings and Substantial Importance of Key Personnel............ 19
Penalties for Violations............... 16 Leverage Can Reduce Income
Discounted Loans May Have High Available for Distribution and
Rates of Default....................... 16 Cause Losses......................... 20
Construction Financing May Increase Legal and Tax Risks...................... 20
Repayment Risk......................... 16 Failure to Maintain REIT Status
Real Property Considerations............... 17 Would Result in Company Being
Value of Company's Property Taxed as a Regular Corporation....... 20
Interests Dependent on Conditions "Phantom Income" May Require
Beyond Company's Control................. 17 Company to Borrow or Sell Assets
Property Interests are Illiquid to Meet REIT Distribution
and Value May Decrease................... 17 Requirements......................... 20
Gain on Disposition of Assets
Deemed Held for Sale in Ordinary
Course Subject to 100% Tax........... 21
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Loss of Investment Company Act Management............................... 40
Exemption Would Affect Company Trustees and Executive Officers.......... 40
Adversely............................ 21 Option Plan.............................. 42
Investment in Common Stock by Employment Agreements.................... 43
Certain Benefit Plans May Indemnification of Trustees and
Give Rise to Prohibited Executive Officers..................... 43
Transaction under ERISA DISTRIBUTION POLICY.......................... 44
and the Code......................... 22 CAPITALIZATION............................... 44
Board of Trustees May Change MANAGEMENT'S DISCUSSION AND
Policies Without Shareholder ANALYSIS OF FINANCIAL CONDITION............ 45
Consent.............................. 22 DESCRIPTION OF SHARES OF BENEFICIAL
Limitation of Liability of INTEREST................................... 46
Officers and Trustees................ 22 General..................................
Conflicts of Interest in the Common Shares............................ 46
Business of the Company.............. 22 Preferred Shares......................... 47
Failure to Develop Active Market Restrictions on Ownership and
for Common Shares May Result Transfer............................... 47
in Decreased Market Price............ 22 Dividend Reinvestment Plan............... 49
Ownership Limitation May Restrict Reports to Shareholders.................. 49
Business Combination Transfer Agent and Registrar............. 49
Opportunities........................ 23 CERTAIN PROVISIONS OF MARYLAND
Preferred Shares May Prevent LAW AND OF THE COMPANY'S
Change in Control.................... 23 DECLARATION OF TRUST AND
Maryland Anti-Takeover Statutes BYLAWS..................................... 49
May Restrict Business Board of Trustees........................ 49
Combination Opportunities............ 23 Business Combinations.................... 50
Future Offerings of Capital Stock Control Share Acquisitions............... 50
May Result in Dilution of the Amendment of Declaration of
Book Value Per Common Share.......... 23 Trust and Bylaws....................... 51
CONFLICTS OF INTEREST........................ 24 Meetings of Shareholders................. 51
USE OF PROCEEDS.............................. 26 Advance Notice of Trustees'
INVESTMENT OBJECTIVES AND Nominations and New Business........... 51
POLICIES................................... 27 Dissolution of the Company............... 51
General.................................. 27 Indemnification; Limitation of Trustees'
Types of Financing....................... 27 and Officers' Liability................ 51
Loan Origination Sources................. 28 Indemnification Agreements............... 52
Certain Financial Guidelines............. 29 Possible Anti-Takeover Effect of
Location of Properties Relating Certain Provisions of Maryland
to Financings.......................... 29 Law and of Declaration of
Types of Properties Relating Trust and Bylaws....................... 52
to Financings.......................... 29 Maryland Asset Requirements.............. 52
Acquisition of Loans at Discount......... 30 COMMON SHARES AVAILABLE FOR
Lending Procedures....................... 30 FUTURE SALE................................ 53
Acquisition of Property Interests........ 31 OPERATING PARTNERSHIP
Leverage................................. 32 AGREEMENT.................................. 53
Portfolio Turnover....................... 32 General.................................. 53
Other Policies........................... 32 General Partner Not to Withdraw.......... 54
Initial Investments...................... 33 Capital Contribution..................... 54
THE COMPANY.................................. 40 Redemption Rights........................ 55
Operations............................... 55
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Distributions............................ 55 Default Interest and Limitations
Allocations.............................. 55 on Prepayments..................... 74
Term..................................... 56 Forfeitures in Drug and RICO
Tax Matters.............................. 56 Proceedings........................ 74
FEDERAL INCOME TAX Environmental Matters.................... 74
CONSIDERATIONS............................. 56 General................................ 74
Taxation of RAIT......................... 56 CERCLA................................. 74
Requirements for Qualification........... 57 Certain Other Federal and State
Income Tests........................... 58 Laws................................. 75
Asset Tests............................ 61 Superlien Laws......................... 75
Distribution Requirements.............. 62 Additional Considerations.............. 75
Recordkeeping Requirements............. 63 Environmental Site Assessments......... 75
Failure to Qualify....................... 63 Applicability of Usury Laws.............. 76
Taxation of Taxable U.S. Shareholders Americans With Disabilities Act.......... 76
Generally.............................. 63 UNDERWRITING................................. 76
Taxation of Shareholders on the LEGAL MATTERS................................ 78
Disposition of Common Shares........... 65 EXPERTS...................................... 78
Capital Gains and Losses................. 65 ADDITIONAL INFORMATION....................... 79
Information Reporting Requirements GLOSSARY..................................... 79
and Backup Withholding................. 65 FINANCIAL STATEMENT.......................... F-1
Taxation of Tax-Exempt Shareholders...... 65
Taxation of Non-U.S. Shareholders........ 66
State and Local Taxes.................... 67
Sale of RAIT's Property.................. 67
BENEFIT PLAN CONSIDERATIONS.................. 68
Employee Benefit Plans,
Tax-Qualified Retirement Plans
and IRAs............................... 68
Status of the Company under ERISA's
Plan Asset Rules....................... 69
CERTAIN LEGAL ASPECTS OF
REAL PROPERTY LOANS AND
INVESTMENTS................................ 70
General.................................. 70
Types of Mortgage Instruments............ 70
Leases and Rents......................... 70
Condemnation and Insurance............... 71
Foreclosure.............................. 71
General................................ 71
Foreclosure Proceedings Vary From State
to State............................. 71
Judicial Foreclosure................... 71
Non-Judicial Foreclosure/Power
of Sale.............................. 72
Equitable Limitations on
Enforceability of Certain
Provisions........................... 72
Post-Sale Redemption................... 72
Anti-Deficiency Legislation............ 72
Bankruptcy Laws.......................... 73
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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 $15 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 113.
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 acquire or provide loans secured by mortgages on
real property (or interests in such loans) ("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. See "Investment Objectives and
Policies - General."
Investment Objectives and Policies. The Company intends to purchase or
originate Financing relating to multi-family residential, office and other
commercial properties for its own account. The Company will emphasize wraparound
loans and, to a lesser extent, other forms of junior lien and subordinated
financing with principal amounts or, with respect to acquired loans, acquistion
prices 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 for its portfolio. 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. The wraparound lender pays
principal and interest to holders of the senior lien loans from payments it
receives on the wraparound loan.
The Company will seek to include in its loans provisions allowing it to
participate in any appreciation in the value of the properties underlying the
Financings or 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.
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The Company's Financings will consist of direct loans to borrowers and
the acquisition of existing loans. In its direct Financings, the Company will
seek 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
Financings, the Company will focus on Financings that, because of one or more
past defaults under the original loan terms (due to complex ownership structures
of the entities that own the property underlying the Financings, lack of a
strong operating history for the property, historical credit or cash flow
problems of the borrower or the underlying property, 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 Financings 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 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 amount that the Company must distribute to
its shareholders in order to avoid a corporate income tax 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 "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 Financings 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 Risks - Leverage Can Reduce Income Available for Distribution
and Cause Losses."
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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's principal business activity will be to provide
mortgage 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 of loss than institutional and senior
lien financing.
o Discounted loans acquired by the Company (including eight
discounted loans with an aggregate loan receivable amount of
$72.4 million to be acquired from RAI for $17.1 million as
part of the Company's Initial Investments) typically will be
in default under their original loan terms, but will be
subject to forbearance agreements between lenders and
borrowers that postpone exercise of default remedies so
long as certain payment and other conditions are met. These
loans may be subject to high rates of default following
expiration of the forbearance agreements. See "Investment
Objectives and Policies - Acquisition of Loans at Discount"
and " - Initial Investments."
o The Company has committed only 26% of the net proceeds of this
Offering (assuming the Underwriters do not exercise their
overallotment option) to specific investments. Accordingly,
investors will not have an opportunity to evaluate a material
portion of the Company's investments.
o The Company has broad discretion in acquiring real properties
or interests in real properties. See "Risk Factors - Real
Property Considerations."
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 The Company's senior management has limited prior experience
in managing a REIT.
o The Company's investment policies may be revised by the Board
of Trustees without shareholder approval.
o The Company is a newly-formed entity with no history of
operations upon which to base an investment decision.
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o Geographic concentration of the Company's Financings and
Property Interests in Philadelphia, Pennsylvania, and the
Baltimore/Washington, D.C. corridor may subject them to
regional economic fluctuations.
o Environmental risks may adversely affect the value of the
Company's Financings and Property Interests.
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.
o As a result of relationships among the Company, RAI,
Brandywine and their affiliates, conflicts of interest may
arise in connection with the price and terms at which
investments are sold or services provided to the Company by
RAI, Brandywine and their affiliates. See "Conflicts of
Interest."
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 amount that the Company must distribute to its
shareholders in that year in order to avoid corporate income
tax 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
distribute all of its taxable income, the Company could be
subject to corporate income tax and 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.
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Initial Investments
The Company has identified 12 loans for acquisition at an aggregate
investment estimated at $27.7 million and will acquire certain senior debt
relating to four of such loans at a cost of $2.5 million (the "Initial
Investments"). The 12 loans will be purchased from RAI; the senior debt will be
acquired from third parties. Two of the Initial Investments were originated by
the Company and will be purchased from RAI at cost. Eight of the acquired loans
are being acquired at a discount to the outstanding balance due from the
borrower on the loan. The aggregate outstanding balance was $72.4 million at
October 31, 1997. The Company's investment, on a cost basis, in the Initial
Investments is 70% of the appraised value of the underlying properties. There is
an aggregate of $17.9 million of debt held by third parties (including the $2.5
million to be acquired by the Company) that is secured by the properties
underlying certain of the Initial Investments and to which such Initial
Investments are subordinated. See "Investment Objectives and Policies - Initial
Investments" and "Use of Proceeds."
Management of the Company
The Company will be internally managed through its Board of Trustees
and senior officers. For a description of the background of such persons, see
"The Company - Trustees and Executive Officers."
Conflicts of Interest
The relationships among the Company, RAI, Brandywine and their
affiliates may give rise to conflicts of interest. RAI 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 up 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, 92% by
cost will be purchased by the Company from RAI (this includes two of such loans
that were originated by the Company and will be acquired from RAI at cost).
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RAI will also be reimbursed for legal, accounting and filing fees, salaries of
the Company's executive officers, rent and other organizational expenses
advanced to the Company prior to the completion of the Offering (which are
estimated to be $526,900) and for expenses incurred by RAI in sponsoring
the Company, including an allocation of compensation of RAI employees (which are
estimated to be $562,000). See "Investment Objectives and Policies - Initial
Investments" and "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 may also from time to time (but is
not obligated to) retain RAI to perform due diligence investigations on
properties underlying proposed Financings (excluding Financings being acquired
from RAI) or on Property Interests the Company is considering for acquisition.
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. Accordingly, the
Company's relationship with RAI, Brandywine and their affiliates will be subject
to various conflicts of interest including conflicts over the price at which
investments are sold or services rendered to the Company by those entities.
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
or their affiliates ("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 (including the Initial Investments) 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 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 (including the Initial Investments) or services
arrangement, and every transaction with RAI, Brandywine and their affiliates, or
relating to any property in which any such persons (including Mrs. Cohen) has an
interest, receive the prior approval of a majority of the Independent Trustees
(who, in giving such approval, may rely upon information provided by RAI,
Brandywine 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. The non-Independent Trustees are
Betsy Z. Cohen and Jonathan Z. Cohen. The Independent Trustees (Jerome S.
Goodman, Joel R. Mesznik, Daniel Promislo and Jack L. Wolgin) currently
constitute two-thirds of the Company's Trustees.
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Since both the Company and RAI seek to originate or acquire mortgage
loans, there may be conflicts of interest between the Company and RAI regarding
the allocation of loan opportunities. Also, since Mrs. Cohen is the Chairman and
Chief Executive Officer of JeffBanks, Inc. ("JeffBanks") (a banking institution
with which the Company will have normal depository relationships, and from
which, subject to the approval of a majority of the Independent Trustees, it may
sublease office space) similar conflicts may arise between the Company and
JeffBanks. 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 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 proposes to provide a new 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. RAI has also agreed that if, after expiration of the two year period,
RAI sponsors a REIT with investment objectives similar to those of the Company,
RAI's representative on the Board of Trustees (should RAI have a representative
on the Board at that time) will recuse himself from considering or voting upon
matters relating to Financings which may be deemed to be within the lending
guidelines of both of the Company and the REIT sponsored by RAI.
The Offering
Shares offered to the public(1)(2)............................. 7,500,000
Shares to be outstanding after offering(1)(2).................. 8,315,100
Proposed Nasdaq symbol......................................... RAIT
(1) Assumes that the Underwriters' option to purchase up to an additional
1,125,000 shares to cover over-allotments is not exercised. Includes
815,000 shares to be purchased by RAI and up to 34,000 shares that may
be sold to officers, directors and trustees of the Company, RAI and
members of their respective families. Excludes 431,250 shares issuable
pursuant to warrants granted to the Representative (see
"Underwriting").
(2) Does not include 1,000,000 shares reserved for issuance pursuant to a
stock option plan the Company intends to establish at or before the
completion of the Offering.
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Use of Proceeds
The Company has contracted (subject to the approval of the Independent
Trustees) to acquire the Initial Investments upon completion of this Offering
for an investment cost of approximately $30.2 million, which is equal to
approximately 26% of the expected net proceeds of this Offering (23% 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, $27.7 million will be acquired
from RAI; $2.5 million will be acquired from third parties, as described in the
next paragraph. Two of the Initial Investments (with an aggregate purchase price
of approximately $8.3 million) were originated by the Company and will be
acquired from RAI at RAI's cost. In addition, the Company will reimburse RAI for
legal, accounting and filing fees and expenses, executive salaries, rent and
other organizational expenses (which are estimated to be $526,900) and for the
expenses incurred by RAI in sponsoring the Company, including an allocation of
employee compensation (which are estimated to be $562,000).
At the time of their acquisition, the Initial Investments being
acquired from RAI will be subject to $17.9 million of loan participation
interests or other debt that is senior to the loan interests acquired from RAI.
The Company anticipates acquiring $2.5 million of such senior lien interests
from the proceeds of this Offering. However, the Company also anticipates that,
following acquisition, the Company will seek to borrow against the loans as to
which it has acquired the prior senior lien 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 lien interests. There can be no assurance, however, that any such
borrowings or refinancings will occur. For certain information concerning the
senior interests to be acquired see "Investment Objectives and Policies -
Initial Investments."
The balance of the Offering proceeds (including any funds obtained from
borrowing against or refinancing 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 12 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. It is anticipated
that distributions will generally be taxable as ordinary income or return on
capital, although in certain circumstances a portion of any distribution may
constitute long-term
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capital gain or a return of capital. 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. See "Distribution Policy."
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, Ledgewood Law Firm, P.C., counsel to the
Company, has rendered its opinion, based on certain assumptions and
representations about the Company's proposed method of operation, investment
activities and other matters, that the Company will qualify to be taxed as a
REIT under the Code, and the Company'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. 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," "Federal Income Tax Considerations - Taxation of RAIT" and "Description
of Shares of Beneficial Interest - Restrictions on Ownership and Transfer."
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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 |
|-----------|-------------|
| 90.2%
|-----------|-------------| (1) |-----------------|
| RAIT |---------| RAI |
|-------------------------| 9.8% |----|------------|
(2) | 100% | 100% (2) |
|-------------------| |-------------------| |
| RAIT Limited, Inc.| | RAIT General, Inc.| |
|("Initial Limited | |("General Partner")| |
| Partner") | | | |
|-------------------| |-------------------| |
(3) | 99% | 1% (3) |
|--------------------------| (4) |
| RAIT Partnership, L.P. |-------------|
|("Operating Partnership") |
|--------------------------|
(1) RAIT will sell approximately 9.8% of its Common Shares to RAI and
approximately 90.2% to public investors, assuming the Underwriters do not
exercise their overallotment option.
(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 initially owns 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 "Investment Objectives and Policies - 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 "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.
Investment Activity Risks
Financing Considerations
Value of Company's Financings Dependent on Conditions Beyond Company's
Control. 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 (including all of
the Company's Initial Investments) 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
(including all of the Company's Initial Investments) 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 (including those in
which the properties underlying the Initial Investments are located), 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.
Longer Term, Subordinate and Non-Conforming Financing is Illiquid and
Value May Decrease. The Company's Financings (including eight of the Initial
Investments) typically will have maturities between 4 and 10 years. The
Company's financings generally (and the Initital Investments in particular) will
not conform to standard loan underwriting criteria. Many of the Company's
Financings will be subordinate loans. As a consequence, the Company's Financings
will be relatively illiquid investments, and the Company will be unable to vary
its portfolio promptly in response to changing economic, financial and
investment 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." As a result of the
foregoing, the fair market value of some or all of the Company's
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Financings may decrease in the future. 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.
Lengthy Financing Commitment Periods May Reduce Company's Returns. The
Company will typically issue a loan commitment to a borrower prior to closing of
a loan. During the period of time the funds are committed by the Company but not
used by the borrower, the funds will be held in temporary investments which the
Company does not anticipate will produce substantial investment returns. If
there is a substantial period between loan commitment and loan closing, or if a
borrower determines not to utilize the Financing to which the Company has
committed, the Company's investment returns (and, thus, its ability to make
distributions to shareholders) will be adversely affected.
Investment in Subordinate Financing May Involve Increased Risk of Loss.
The Company will emphasize wraparound loans and, to a lesser extent, other
junior lien loans or subordinated financing. Six of the Initial Investments
(after acquisition by the Company of senior debt with respect to four of the
other Initial Investments) will be junior lien loans. Because of their
subordinate position, subordinate or junior lien 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 risk of loss 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 that is most advantageous to the Company.
After the Company acquires senior participations relating to the
Initial Investments, five of the Initial Investments (aggregating 22% of the
Initial Investments, by cost) will not be
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collateralized by recorded or perfected liens. Certain of the Company's 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 with respect to mortgage loans. In
addition, such loans generally will be subject and subordinate not only to
existing prior liens encumbering the underlying property, 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. For a description of the collateral or
other security pertaining to these loans, see "Investment Objectives and
Policies - Initial Investments." The Company will endeavor to structure such
loans so that they will qualify as interests in real property or interests in
mortgages on real property as defined in the Code and as interpreted by the
Internal Revenue Service. Financings that would not so qualify will be
undertaken only in amounts that will not jeopardize RAIT's qualifications as a
REIT. See "Federal Income Tax Considerations - Requirements for Qualification."
Investment in Non-Conforming Loans May Involve Increased Risk of Loss.
The Company anticipates that a material portion of its Financings (including all
of the Initial Investments) will consist of loans that do not conform to
conventional loan criteria (see "Investment Objectives and Policies - General"
for a general description of conforming loans) due to past defaults by borrowers
resulting from complex ownership structures of the entities that own properties
underlying the Financings, lack of a strong operating history for the
properties, historical credit or cash flow problems of the borrowers or with
respect to the underlying properties or other factors. As a result, these loans
may be subject to a higher risk of default and consequent loss to the Company
than conventional loans. Any such loss may reduce distributions to shareholders
or adversely affect the value of the Common Shares.
Interest Rate Changes May Adversely Affect Company's Investments. The
fair market 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 fair market 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 Financings or Property
Interests may not be reflected in increased rates of return on the Financings 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 will affect amounts available for distribution to the
Company's shareholders.
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Lack of Geographic Diversification Exposes Company's Investments to
Higher Risk of Loss Due to Regional Economic Factors. 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) or in the Baltimore/Washington, D.C. corridor (where the other
Initial Investment is located). See "Investment Objectives and Policies -
Location of Properties Relating to Financings." 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, adverse economic developments of a
primarily regional nature, which may result in reduced rates of return, or
higher rates of default, on the Company's Financing than might be incurred with
a more geographically diverse investment portfolio.
Competition for Financing May Inhibit Company's Ability to Achieve
Objectives . 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. This
competition could reduce yields obtainable by the Company in its Financings and
adversely affect its ability to obtain participations in the appreciation in the
value of or revenues from properties subject to its Financings. See "Investment
Objectives and Policies - Types of Financing." It may also increase the price
(and thus reduce potential yields) on discounted loans the Company seeks to
acquire. See "Investment Objectives and Policies - Acquisition of Loans at
Discount." Many of the Company's anticipated competitors, including General
Electric Capital Corporation, Goldman Sachs' Whitehall Street Real Estate Fund,
BlackRock Capital Finance, IMH Commercial Holdings and Ocwen Asset Investment
Corporation, may have substantially greater assets than the Company, and thus an
ability to make larger loans to more creditworthy borrowers or have a more
diversified loan portfolio to reduce the risks of loss from any one loan. 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
further reduce the yields available thereon or increase the credit risk inherent
in the available loans.
Participations May Reduce Interest Rates Without Resulting in
Additional Returns. In structuring Financings it originates, 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
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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.
One of the Initial Investments originated by the Company provides that, upon
sale or refinancing of the underlying property, the Company will receive 25% of
the first $600,000 of appreciation in value of the underlying property, and 15%
of any additional appreciation, over the current appraised value of the
underlying property (with a minimum $100,000 payment required).
There may be uncertainty whether amounts receivable pursuant to
participations can be deemed to be a charge for "interest" for purposes of
determining whether a loan will violate state laws regarding maximum interest
rates that may be charged by lenders ("usury laws"). Accordingly, any such
provisions obtained by the Company in connection with its Financings may
increase the possibility that a loan may be deemed to violate usury laws. See
"Risk Factors - Investment Activity Risks - Financing Considerations: Usury
Statutes May Impose Interest Ceilings and Substantial Penalties for Violations."
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.
Loans Secured by Interests in Entities Owning Real Property May Involve
Increased Risk of Loss. 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 Interests May Result in Less Control by Company." Loans
secured by interests in such entities may also not be deemed to be "Qualified
Interests" for Investment Company Act purposes. Depending upon the number of
interests the Company holds which are not "Qualified Interests," the Company may
be required to change its method of operations or to register as an investment
company under the Investment Company Act, which could have an adverse effect on
the Company and the market price for its Common Shares. See "Risk Factors -
Legal and Tax Risks - Loss of Investment Company Act Exemption Would Affect
Company Adversely." In addition, loans secured by such interests, to the extent
they are not deemed to be controlling interests in partnerships under the Code,
may not be treated as "real estate assets" for purposes of the Code requirement
that 75% of the value of an entity's assets must be cash items, government
securities and real estate assets in order for it to quality as a REIT. See
"Federal Income Tax Considerations - Requirements for Qualification - Asset
Tests."
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Usury Statutes May Impose Interest Ceilings and Substantial Penalties
for Violations. 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 which could result in reduced investment returns to the Company or,
possibly, loss on an investment.
Discounted Loans May Have High Rates of Default. 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. Typically, discounted loans are in default as to payment under the
original loan terms or other requirements. Of the twelve Initial Investments,
eight will be acquired at a discount to both outstanding balances and appraised
values. Each of the eight loans is in default under its original loan terms but
is current with respect to payments required by and other terms of the related
forbearance agreements. 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.
Construction Financing May Increase Repayment Risk. 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 loan, or (ii) where the
loan is secured by property with a pre-construction value that is within the
Company's investment guidelines. The Company may depart from its guidelines,
typically where there are 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 these 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, the
financial strength of guarantors and other reasons.
Real Property Considerations
Value of Company's Property Interests Dependent on Conditions Beyond
Company's Control. Although the Company will emphasize originating or acquiring
Financings, the Company will also acquire Property Interests. See "Investment
Objectives and Policies Acquisition of 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
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capital appreciation generated by the 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
will 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.
Property Interests Are Illiquid and Value May Decrease. 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. As a consequence, the fair market
value of some or all of the Company's Property Interests may decrease in the
future. In addition, provisions in the Code and related regulations impose a
100% tax on gain realized by a REIT with respect to property deemed to be held
primarily for sale in the ordinary course of business. These provisions may
materially adversely affect the Company's ability to sell Property Interests
without adversely affecting distributions to the Company's shareholders. See
"Risk Factors - Legal and Tax Risks - Gain on Disposition of Assets Deemed Held
for Sale in Ordinary Course Subject to 100% Tax."
Uninsured and Underinsured Losses May Affect Value of, or Returns from,
Property Interests. The Company intends to maintain (or cause to be maintained)
comprehensive insurance on 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 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.
In such a case, the Company's returns from an affected property would be
reduced, or some portion or all of the Company's investment in the property
would be lost.
Investments in Joint Ventures, Partnerships or Other Interests May
Result in Less Control by Company. 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
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<PAGE>
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 Governmental
Rules and Regulations Will Decrease Returns on Property Interests. 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 Property Interests. 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 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.
Real Properties with Environmental Problems May Create Liability for the Company
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
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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
the Company and its ability to make distributions to its shareholders if such
remedial costs were incurred or if property vacancy resulted. See "Certain Legal
Aspects of Real Property Loans and Investments - Environmental Matters."
Considerations Relating to Initial Investments
Multifamily and Commercial Loans Included in the Initial Investments
Involve a Greater Risk of Loss than Single Family Loans. The properties
underlying the Initial Investments are secured by existing multifamily or
commercial properties. Multifamily and commercial real property loans are
considered to involve a higher degree of risk than single family residential
lending because of a variety of factors, including generally larger loan
balances, dependency on successful operation of the property and tenants
operating businesses therein for repayment, and (as is the case with the Initial
Investments) loan terms that often require little or no amortization but,
instead, provide for balloon payments at stated maturity. In addition, the value
of multifamily and commercial real estate can be affected significantly by the
supply and demand in the market for that type of property. Market values may
vary as a result of economic events, governmental regulations or other factors
outside the control of the borrower or the Company, such as the imposition in
the future of rent control laws in the case of the Initial Investments involving
multifamily properties, which may impact the future cash flow of the underlying
property. See "Risk Factors - Financing Considerations" and " - Real Property
Considerations."
The successful operation of a multifamily or commercial real estate
project also generally is dependent on the performance and viability of the
property manager of that project. With the exception of the Initial Originated
Loans, (see "Investment Objectives and Policies - Initial Investments") the
properties underlying the Initial Investments are managed, or management is
supervised by, Brandywine (an affiliate of RAI, see "Conflicts of Interest").
The property manager is responsible for responding to changes in the local
market, planning and implementing the rental structure, including establishing
appropriate rental rates, and advising the owner so that maintenance and capital
improvements can be carried out in a timely fashion and at an appropriate cost.
There can be no assurance regarding the performance of Brandywine, or any other
managers.
Geographic Concentration of Initial Investments in Pennsylvania May
Make the Company's Performance Subject to Economic Conditions in Pennsylvania.
Eleven of the twelve Initial Investments are with respect to real properties
located in Philadelphia, Pennsylvania. Philadelphia has, in the past, been
subject to adverse economic conditions which have not affected other regions of
the country, or has been disproportionately affected by adverse national or
regional economic conditions, including a decline in its residential population.
The Company's performance and its ability to make distributions to its
shareholders likely will be materially affected by future economic conditions in
Philadelphia. See "Risk Factors - Investment Activity Risks - Financing
Considerations: Lack of Geographic Diversification Exposes Company's Investments
to Higher Risk of Loss Due to Regional Economic Factors."
Initial Investments Include Loans in Default Under Original Loan Terms
and Thus May Involve Higher Payment Risks than Performing Loans. Eight of the
twelve Initial Investments involve the acquisition of discounted loans that are
in default with respect to payment of debt service under their original loan
terms. Each such loan is currently subject to, and in compliance with, a
forebearance agreement pursuant to which the loan is not foreclosed provided
that minimum payment requirements and certain other conditions are met. See
"Investment Objectives and Policies - Acquisition of Loans at Discount" and " -
Initial Investments." These Initial Investments may have greater risk of future
defaults and delinquencies as compared to newly-originated, higher quality
loans. Returns on an investment of this type depend upon the borrower's ability
to make required payments under the forbearance agreements, the ability of the
borrower to obtain refinancing or otherwise pay the loan upon expiration of the
forbearance agreement, or the ability of the Company to foreclose upon or sell
the underlying property upon a default. There can be no assurance that the
borrowers will be able to pay such loans upon termination of the forbearance
agreements or, if the Company forecloses upon and sells the underlying property,
that the Company will be able to do so successfully or in a timely fashion.
<PAGE>
Other Investment Activity Risks
Appropriate Investments May Not Be Available and Full Investment of Net
Proceeds May Be Delayed. Other than the Initial Investments (which will be
acquired utilizing approximately 26% of the Offering proceeds, including the
sale of shares to RAI; 23% if the Underwriters exercise their over-allotment
option), 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 that the Company does not
anticipate will produce substantial investment returns. See "Use of Proceeds."
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Newly-Formed Entity; Limited REIT Management Experience of Senior
Management. 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, on the diligence and skill of its senior management,
which has limited 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.
Importance of Key Personnel. The Company believes that its future
success will depend to a significant extent upon the continued services of the
Company's senior management (Mrs. Cohen, Mr. Eisner, Mr. Jay Cohen 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 either person, or on any other officer. Mr. Eisner,
Mr. Jay Cohen and Ms. DiStefano will devote all of their business time to the
Company's business. Mrs. Cohen is Chairman and Chief Executive Officer of
JeffBanks and its subsidiary banks, and is a director of two other public
companies, to which she expects to devote substantial amounts of her time. Mrs.
Cohen's obligations to these businesses will limit the amount of time she has
available to devote to the Company's business.
Leverage Can Reduce Income Available for Distribution and Cause Losses.
The Company is permitted to leverage its portfolio through borrowings although,
in general (except with respect to certain Initial Investments as to which it
will acquire senior debt interests), 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 - 'Phantom
Income' May Require Company to Borrow or Sell Assets to Meet REIT Distribution
Requirements." 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. Utilizing leverage to acquire investments 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 to acquire
investments 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
Failure to Maintain REIT Status Would Result in Company Being Taxed as
a Regular Corporation. 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 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
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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.
"Phantom Income" May Require Company to Borrow or Sell Assets to Meet
REIT Distribution Requirements. The Company must distribute at least 95% of its
annual net taxable income (excluding any net capital gain or retained 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 will 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 sometimes will be considered
to have OID and, if so, will accrue OID at a rate based on the expected overall
yield on the mortgage, which generally will exceed the stated interest rate. The
income generated by such investments for federal income tax purposes will
consist of amortization of the OID and the coupon interest associated with the
investments. 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
amount that the Company must distribute to its shareholders in order to avoid
corporate income tax for that year, notwithstanding the fact that there may be
no corresponding contemporaneous receipt of cash by the Company. The Company may
also be required to accrue interest at a rate greater than the rate at which it
is receiving interest. In particular, this may happen where there has been a
default with respect to the loan.
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 retained cash flow from the investments. REIT
taxable income in excess of cash received may also arise in certain property
sales and where a "significant" modification is made to a loan. See "Federal
Income Tax Considerations - Requirements for Qualification - Distribution
Requirements." The occurrence of any such situation could have the effect of
requiring the Company, in order to avoid corporate income tax and 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
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capital 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.
Gain on Disposition of Assets Deemed Held for Sale in Ordinary Course
Subject to 100% Tax. 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 a trade or 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
- - Requirements for Qualification - Income Tests."
Loss of Investment Company Act Exemption Would Affect the Company
Adversely. 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 the Securities and Exchange Commission (the "Commission"), in order to
qualify for a "no action" position by the Commission with respect to the
availability of the 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.
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Investment in Common Stock by Certain Benefit Plans May Give Rise to
Prohibited Transaction under ERISA and the Code. 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 (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 Benefit Plans, Tax Qualified Retirement Plans
and IRAs."
Board of Trustees May Change 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. 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. The
Company will also enter into indemnification agreements with its trustees and
executive officers containing similar provisions. 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. There are
relationships between the Company, RAI, Brandywine and their affiliates
resulting from affiliations among their respective managements, RAI's
anticipated ownership of 9.8% of the Common Shares and RAI's affiliation with
Brandywine. As a result of these relationships, there is a risk that conflicts
of interest may arise among the Company, RAI, Brandywine and their affiliates in
connection with the price and terms at which investments are sold or services
provided to the Company by RAI, Brandywine and their affiliates. For a more
detailed discussion of these relationships, see "Conflicts of Interest."
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Failure to Develop Active Market for Common Shares May Result in
Decreased Market Price. 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 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
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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."
Future Offerings of Capital Stock May Result in Dilution of the Book
Value per Common Share. The Company may issue additional Common Shares,
securities convertible into Common Shares or Preferred Shares in the future to
finance its capital needs. To the extent such securities are issued for cash or
property having a net tangible book value less than the net tangible book value
of the Common Shares on the date of issuance, holders will realize an immediate
dilution in the net tangible book value of their Common Shares. The actual or
perceived effect of such sales of securities may result in the reduction of the
market price of the Common Shares.
CONFLICTS OF INTEREST
The relationships among the Company, RAI, Brandywine and their
affiliates may give rise to conflicts of interest. RAI 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). 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%. Jonathan Z. Cohen is RAI's nominee to the Board of Trustees.
Mr. Cohen is the son of Betsy Z. Cohen, the Chairman and Chief Executive Officer
of the Company, and Edward E. Cohen, the Chairman, Chief Executive Officer and a
principal shareholder of RAI. RAI is advancing funds to the Company for legal,
accounting and filing fees and expenses, salaries of the Company's executive
officers, rent and other organizational expenses (which are estimated to be
$526,900) and for the expenses incurred by RAI in sponsoring the Company
including an allocation of compensation of RAI employees (which are estimated to
be $562,000). These advances are without interest and will be repaid from the
proceeds of this Offering. See "Use of Proceeds."
Of the Initial Investments 92% will be purchased by the Company from
RAI. Two of the Initial Investments (27% of the Initial Investments, by cost)
were originated by the Company and will be acquired from RAI at RAI's cost. See
"Investment Objectives and Policies - Initial Investments." The Company
anticipates that, subject to the limitations referred to below, it will purchase
additional investments from RAI. The Company may from time to time retain RAI to
perform due diligence investigations on properties subject to Financings (other
than Financings being acquired from RAI) or on Property Interests that the
Company is considering for acquisition. Brandywine, an affiliate of RAI, may
provide real estate management and/or management supervisory services for
properties that the Company owns or for which it has provided Financing.
Brandywine currently manages, or supervises the management of nine of the
properties underlying the Initial Investments.
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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 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 and their affiliates, or
relating to any property in which any such person 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 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. The non-Independent Trustees are Betsy Z. Cohen and Jonathan
Z. Cohen. The Independent Trustees (Jerome S. Goodman, Joel R. Mesznik, Daniel
Promislo and Jack L. Wolgin) currently constitute two-thirds of the Company's
Trustees.
The Company anticipates that it will have customary banking
relationships with the bank affiliates of JeffBanks, which may also refer to the
Company financing proposals that are not within JeffBanks' normal underwriting
criteria. The Company anticipates that it may (subject to the approval of a
majority of the Independent Trustees) sublease office space from JeffBanks.
Furthermore, 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.
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, with respect to real estate loans, it
seeks to provide customary commercial lending services emphasizing 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
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that conflicts will be further mitigated because the anticipated sources of the
Company's loan referrals will be 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 proposes to provide a new 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. RAI has also agreed that if, after expiration of the two year period,
RAI sponsors a REIT with investment objectives similar to those of the Company,
RAI's representative on the Board of Trustees (should RAI have a representative
on the Board at that time) will recuse himself from considering or voting upon
matters relating to Financings which may be deemed to be within the lending
guidelines of both the Company and the REIT sponsored by RAI.
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 in such opportunity 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, previously has 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 the firm, of which he was previously a member, and receives certain
debt service payments from the firm in connection with his withdrawal from the
firm as a member and its redemption of his interest in the firm. The interests
of the Company, RAI, Brandywine, JeffBanks or their affiliates could become
adverse in the future. 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.
USE OF PROCEEDS
The Company has contracted (subject to the consent of the Independent
Trustees) to acquire the Initial Investments upon completion of this Offering
for an investment cost of approximately $30.2 million, which is equal to
approximately 26% of the expected net proceeds of this Offering and the sale of
shares to RAI (23% 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,
$27.7 million will be acquired from RAI; $2.5 million will be acquired from
third parties, as described in the next paragraph. Two of the Initial
Investments were originated by the Company and will be purchased from RAI at
cost. The purchase price for each of the Initial Investments (except for the two
Initial Investments to be acquired at cost) 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 legal, accounting
and filing fees and expenses, salaries of the Company's executive officers, rent
and other organizational expenses
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(which are estimated to be $526,900) and for the expenses incurred by RAI in
sponsoring the Company, including an allocation of the compensation of RAI
employees (which are estimated to be $562,000).
At the time of their acquisition, the Initial Investments being
acquired from RAI will be subject to $17.9 million of loan participation
interests or other debt that is senior to the loan interests acquired from RAI.
The Company anticipates acquiring $2.5 million of such senior lien interests
from the proceeds of this Offering. However, the Company also anticipates that,
following acquisition, the Company will seek to borrow against the loans as to
which it has acquired the prior senior lien 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 lien interests. There can be no assurance, however, that any such
borrowings or refinancings will occur. For certain information concerning the
senior interests to be acquired (including interest rate and maturity date) see
"Investment Objectives and Policies - Initial Investments."
The balance of the Offering proceeds (including any funds obtained from
borrowings against 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 12 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 acquire or provide
loans secured by mortgages on real property (or interests in such loans) in
situations that, generally, do not conform to the underwriting standards of
institutional lenders or sources which provide financing through securitization.
The Company's Financings 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 refinancings 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
service providers has enhanced the opportunity for unregulated financial
service 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 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: Investment In Subordinate Financing May Involve Increased Risk
of Loss."
The Company anticipates acquiring some loans that are not
collateralized by recorded or perfected liens, including five of the Initial
Investments (after the Company's acquisition of senior debt with respect to four
of the other Initial Investments). It is not anticipated that these loans will
constitute more than 10% of the Company's assets. See "Risk Factors - Investment
Activity Risks - Financing Considerations." Management believes that, with
respect to any such loans (including 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.
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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,
usually 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 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 background in
the banking, 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 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 loans 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
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underlying the Financing will have a current appraised value of not less than
25% below the Company's estimate of the property's 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. The "appraised
value" of a property for purposes of the guidelines would be the estimate by an
independent real estate appraiser of the fair market value of the property,
taking into account standard valuation methodologies. The Company's estimate as
to replacement cost will be based upon information developed by the Company from
developers, contractors and other persons regarding construction costs both
generally and with respect to similar properties in the area.
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 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 Financings
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. 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. 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. These Financings may (although it
is not currently anticipated that they will) constitute a material portion of
the Company's investment portfolio.
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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 - Financing
Considerations - Construction Financing May Increase Repayment Risk." 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. In general, however, the Company will not make loans or
investments (including Property Interest investments) that, in the aggregate,
will exceed (i) with respect to any one property, 5% of the Company's total
assets, or (ii) with respect to any one person or his or its affiliates, 10% of
the Company's total assets. One of the Initial Investments (loan 108) exceeds
such limitations, and will constitute approximately 9.7% 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 defaults under the original loan terms (due to
complex structures of the entities that own the underlying property, lack of a
strong operating history for the underlying property, historical credit or cash
flow problems of the borrower or with respect to the underlying property, 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 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 discounted
loans it acquires will be obtained from RAI, the Company's sponsor, which
specializes in acquiring and resolving
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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 $27.7 million, by
cost, will be acquired from RAI). See "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 - Real Properties with Environmental Problems May Create Liability for
the Company." 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 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.
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<PAGE>
Acquisition of 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 amount that the Company must distribute to its shareholders to
avoid corporate income tax 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 "Federal Income Tax
Considerations - Requirements for Qualification - Distribution Requirements."
The Company is not limited in the amount it may invest in Property
Interests. In general, however, the Company will not make loans or investments
(including Financings) that, in the aggregate, will exceed (i) with respect to
any one property, 5% of the Company's total assets, or (ii) with respect to any
one person or his or its affiliates, 10% of the Company's total assets. One of
the Initial Investments (loan 108) exceeds such limitations, and will constitute
approximately 9.7% of the 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 intends to acquire Property Interests primarily in
Philadelphia, Pennsylvania and the Baltimore/Washington Corridor. The Property
Interests will involve the same types of properties as those for which the
Company intends to provide financing. See "Investment Objectives and Policies -
Types of Properties Relating to Financings." The Company will not manage any of
its 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 "Conflicts of
Interest". Brandywine may also be retained by the Company to supervise a local
property manager. In instances where Brandywine is managing a property or
supervising a local manager, the fees paid to Brandywine and the local
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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 the entity that owns the 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 Interests May Result in Less Control by the Company." The
Company will endeavor to structure such investments so that they qualify as real
estate assets within the meaning of the Code and the income therefrom qualifies
as income from interests in real estate within the meaning of the Code. The
Company will closely monitor any such investment that does not qualify as a real
estate asset so that the Company's qualification as a REIT will not be
jeopardized. See "Federal Income Tax Considerations - Requirements for
Qualification."
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 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,
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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 - Leverage Can Reduce Income Available for Distribution and Cause
Losses." 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" and "Risk Factors - Legal and Tax Risks - Gain on
Disposition of Assets Deemed Held for Sale in Ordinary Course Subject to 100%
Tax") 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 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 will enter into an agreement with RAI to purchase the
Initial Investments at an aggregate cost of approximately $27.7 million and will
purchase senior debt in the amount of $2.5 million held by third parties with
respect to four of the loans included in the Initial Investments. Had the
Company purchased the Initial Investments as of October 31, 1997, RAI would
have realized a gain on sale of approximately $5.4 million.
The Company anticipates that the Initial Investments will be accounted
for as loans and recorded at cost. Interest on these loans will be recognized as
revenue when earned according
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to the terms of the loans. Additionally, the Company will amortize into income
over the estimated life of the loans the difference between its cost basis in
them and the future cash collections, if any, that are both reasonably
estimatable and probable, using the constant interest method. Also, any changes
in the amortization of discount as a result of changes in anticipated cash flows
will be adjusted currently and treated as a change in estimate.
The Company is acquiring (i) eight loans purchased at discounts of
between 18.8% and 55.8% from the Company's share of the outstanding loan
receivable balances, and at ratios of between 59% to 97% of investment cost to
appraised values of the underlying properties (the "Discounted Loans"), (ii) two
loans purchased at no discount to the outstanding loan receivable balance (the
"Non-Discounted Loans") and (iii) two loans originated by the Company which will
be purchased from RAI at RAI's cost ($8.3 million) (the "Initial Originated
Loans"). The Discounted Loans are subject to an aggregate of approximately $13.8
million of senior financing ($2.5 million of senior lien interests that the
Company intends to purchase, and which are included in the Initial Investments;
and $11.3 million of senior lien interests 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. 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,
together with accrued interest and penalties (except for loan 108 in which it
will receive a share proportionate to its participation interest). In addition,
these loans (except for loan 108) 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. For loan 108, the Company will
receive increases in revenues and value pursuant to the terms of the
participation. Since debt service based on the original terms of these loans is
in excess of payments currently being made, the Company anticipates that the
outstanding balances, as originally underwritten, will increase.
The Non-Discounted Loans consist of two subordinated loans, each with a
current return of 18% (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 Discounted and
Non-Discounted Loans, as of October 31, 1997, was $78.7 million of which $72.4
million (or approximately 92%) represented the aggregate outstanding balance of
Discounted Loans. The appraised value of the properties underlying the
Discounted and Non-Discounted Loans is $54.1 million.
The Initial Originated Loans consist of loans on two separate
properties. The loans on the first property are a first mortgage loan in the
amount of $6.1 million requiring interest only payments at 9.7%, and a second
participating mortgage loan in the amount of $1.3 million requiring interest
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only payments at 11%. The second participating mortgage loan also provides for
the holder to receive a participation of the greater of $100,000 or 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. The
loan on the second property is a first mortgage loan in the amount of $900,000
requiring interest only payments of 10.7%.
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The following table sets forth certain information regarding each of the Initial
Investments as of October 31, 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)
- ----------- ---------------- -------- -------- ------------------ ------------------ -------------- --
Discounted Loans:
<S> <C> <C> <C> <C> <C> <C>
101 10/31/03 Multifamily Philadelphia, PA $ 1,563,222 $ 786,000 $ 600,000
102 10/31/03 Multifamily Philadelphia, PA 1,483,290 1,140,000 896,000
103 12/31/04 Office Arlington, VA 5,781,753 2,555,000 878,706
104 08/31/01 Multifamily Philadelphia, PA 5,402,669 3,075,000 1,101,275
105 09/02/99 Multifamily Philadelphia, PA 1,586,891 735,000 600,000
106 12/02/99 Multifamily Philadelphia, PA 3,046,887 2,008,000 1,258,072
107 03/28/01 Multifamily Philadelphia, PA 713,559 580,000 448,523
108 01/01/02 Office Philadelphia, PA 52,779,919 19,995,097 7,995,097
----------- ----------- -----------
Total Discounted Loans 72,358,230 30,874,097 13,777,673
----------- ----------- -----------
Non-Discounted Loans:
109 10/31/99 Multifamily Philadelphia, PA 1,639,614 1,639,614 886,996
110 12/29/00 Multifamily Philadelphia, PA 4,711,741 4,711,741 3,182,642
----------- ----------- -----------
Total Non-Discounted Loans 6,351,355 6,351,355 4,069,638
----------- ----------- -----------
Total Discounted and Non-Discounted Loans 78,709,585 37,225,452 17,847,311
----------- ----------- -----------
Initial Originated Loans:
111 12/31/02 Retail/Office Philadelphia, PA 7,530,000 7,380,000 -
112 12/31/02 Retail Philadelphia, PA 900,000 900,000 -
----------- ----------- -------------
Total Initial Originated Loans 8,430,000 8,280,000 -
----------- ----------- -------------
Total Initial Investments $87,139,585 $45,505,452 $17,847,311
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratio of Senior
Debt to Appraised Monthly
Ratio of Company's Value After Revenues from Ratio of
Appraised Value Investment Plus Certain Senior Operations Cash Flow to
of Underlying Senior Debt to Debt Acquisitions Company's Net or Monthly Senior Debt
Property(6) Appraised Value(7) by the Company(8) Investment(9) Debt Service(10) Service(11)
---------------- ------------------ ----------------- -------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
$ 900,000 87% 0% $ 786,000 $ 6,700 n/a
1,200,000 95% 0% 1,140,000 9,600 n/a
2,800,000 91% 31% 1,676,294 16,800 2.98
3,200,000 96% 34% 1,973,725 14,800 2.29
800,000 92% 0% 735,000 6,800 n/a
2,200,000 91% 57% 749,928 8,200 1.73
600,000 97% 0% 580,000 5,700 n/a
34,000,000 59% 24% 12,000,000 115,600 3.19
----------- -- ---- ----------- --------
45,700,000 68% 25% 19,640,947 184,200
----------- -- ---- ----------- --------
2,700,000 61% 33% 752,618 11,289 3.02
5,725,000 82% 56% 1,529,099 22,936 1.84
----------- -- ---- ----------- --------
8,425,000 75% 48% 2,281,717 34,225
----------- -- ---- ----------- --------
54,125,000 69% 28% 21,922,664 218,425
----------- -- ---- ----------- --------
8,400,000 88% 0% 7,380,000 61,063 n/a
2,200,000 41% 0% 900,000 7,950 n/a
----------- -- ----------- --------
10,600,000 78% 0% 8,280,000 69,013
----------- -- -- ----------- --------
$64,725,000 70% 24% $30,202,664 $287,438 3.51
=========== == ==== =========== ======== ====
</TABLE>
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<PAGE>
(1) Loans 111 and 112 were funded by RAI on September 30, 1997.
(2) Loans 101 through 108 are subject to forbearance agreements which expire
on the specified dates or, with respect to loans 101 through 104, will be
modified to expire on such dates prior to acquisition by the Company.
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 109
through 112 are not subject to forbearance agreements; the dates specified
are the maturity dates of the loans.
(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 October 31,
1997.
(4) Consists of the purchase price to be paid by the Company plus the
outstanding balance, as of October 31, 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 $75,000 for such loans in the aggregate.
(5) Outstanding balance of all senior indebtedness relating to the underlying
property as of September 30, 1997.
(6) The Company retained independent appraisal firms (Joseph Dennis Pasquarella
& Co. with respect to loans 101, 102, 104, 107, 109 and 110, Johnson,
McClellan, Sullins & Page with respect to loan 103, M. Richard Cohen with
respect to loans 105, 106 and 108, and Louis A. Iatarola Realty Appraisal
Group, Ltd. with respect to loans 111 and 112) to appraise the properties
underlying the Initial Investments. The purpose of the appraisals was to
develop an estimate of the fair market value of each of the properties
appraised. The appraisals were conducted in February, July, August,
September and October 1997. The appraised values generally were developed
based on consideration of the cost, sales comparison and income valuation
approaches. The cost approach determines a value based upon the market
value of the land plus the depreciated replacement cost of the
improvements. The sales comparison approach analyzes sales of other
going-concern properties in comparison to the subject properties and
assumes that purchaser and seller are willing, knowledgeable and uncoerced,
and that a reasonable time is allowed for exposure of the property in the
market. The income approach develops a going-concern value of the subject
properties by determining projected operating income from historical
revenue and expense data, and multiplying that income by a factor
determined by the appraiser as representing a rate of return on investment
that the current market would find acceptable in investments of a like
kind, adjusted for such factors as returns on other investment media,
liquidity risk and similar matters. After determining value estimates using
the three different approaches, the appraisers analyze the
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<PAGE>
estimates in light of information regarding the property, which may include
such factors as property location, age, use and condition (interior and
exterior), leasing information, highest and best use (that is, the use of
the property which is physically possible, appropriately supported,
financially feasible and which results in the highest value) and other
factors, and reconcile the valuation estimates into a final valuation
opinion. 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. The appraisers also assumed that (i) legal title to the properties
is good and marketable, (ii) the improvements on the properties do not
encroach on adjacent land, (iii) economic conditions existing at the time
of the appraisals will continue, (iv) the properties are managed
competently and are in the hands of responsible ownership and (v) that
there are no hidden conditions or environmental problems. As a consequence
of the foregoing, 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.
(7) The purchase price paid by RAI for each loan acquired from RAI, and RAI's
cost basis as of October 31, 1997 in each loan, are as follows:
Loan No. RAI's Cost Basis RAI's Purchase Price
-------- ---------------- --------------------
101 $ 785,295 $ 569,513
102 1,134,958 859,547
103 2,549,375 2,325,558
104 2,238,616 1,614,174
105 733,073 456,356
106 2,005,723 1,299,780
107 577,165 474,064
108 16,197,970 12,424,680
109 1,489,489 1,362,884
110 4,154,877 3,757,701
111 7,380,000 7,380,000
112 900,000 900,000
----------- -----------
Total $40,146,541 $33,424,257
=========== ===========
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), plus senior debt, and 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. With respect to loans 111 and 112, the
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amount is stated net of principal repayments of $200,000 and $100,000,
respectively, in October 1997. Accretion of discount by RAI subsequent to
October 31, 1997 will increase RAIT's cost basis in, and thus decrease
RAI's book profit from the sale of, the loans to the Company. 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. With respect to loan 108, the amounts represent an
allocation to the interest being acquired by the Company.
(8) The Company will acquire senior lien interests previously sold by RAI in
connection with loans 101, 102, 105 and 107. See "Use of Proceeds." In
connection with the sale of these senior lien interests, RAI had
subordinated its interests in the loans to the interests of the senior
lienor. After acquisition of the senior lien 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 and 107 where, because the Company
anticipates acquiring the senior indebtedness (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 107 represent the
monthly revenues from operations for the underlying properties. Amounts set
forth for loans 108 through 112 represent the monthly debt service required
to be paid on the loans. With respect to loans 108 through 112, the monthly
revenues from operations with respect to the underlying properties are
$174,800, $15,400, $23,200, $64,000 and $12,500, respectively. For purposes
of this table, (i) "monthly revenues from operations" consist of the
monthly rent roll as of October 31, 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.
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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. The
loan was in default under its original terms at the time it was acquired by RAI
in June, 1992. The forbearance agreement with respect to this loan will
terminate (upon its extension, which will occur prior to the Company's
acquisition of the loan) on October 31, 2003 when all principal, accrued
interest and other amounts become due and payable. The loan documents provide
that the holder of the loan (the Company, upon loan acquisition) (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. The Company will
acquire the senior participation interest in this loan following the close of
this Offering.
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 October 31, 1997, resulted in an interest
rate of 8.5%). The loan was in default under its original terms at the time it
was acquired by RAI in March, 1993. The forbearance agreement with respect to
this loan will terminate (upon its extension, which will occur prior to the
Company's acquisition of the loan) on October 31, 2003 when all principal,
accrued interest and other amounts become due and payable. The loan documents
provide that the holder of the loan (the Company, upon loan acquisition) (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. The Company
will acquire the senior participation interest in this loan following the close
of this Offering.
Loan 103. Loan evidenced by a note in the original principal amount of
$4,812,000, bearing interest at an annual rate of 0.5% over the Maryland
National Bank prime rate (which, as of October 31, 1997, resulted in an interest
rate of 9.0%). The loan was in default under its original terms at the time it
was acquired by RAI in December, 1994. The forbearance agreement with respect to
this loan will terminate (upon its extension, which will occur prior to the
Company's acquisition of the loan) on December 31, 2004 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 $878,706. The loan documents provide that the holder of the loan (the
Company, upon loan acquisition) (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 October 31, 1997, resulted in an
interest rate of 7.5%). The loan was in default under its original terms at the
time it was acquired by RAI in July, 1994. The forbearance agreement with
respect to this loan will terminate (upon its extension, which will occur prior
to the Company's acquisition of the loan) on August 31, 2004 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
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$1,101,275. The loan documents provide that the holder of the loan (the Company,
upon loan acquisition) (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 12.5%. The loan was
in default under its original terms at the time it was acquired by RAI in
September, 1994. The forbearance agreement with respect to this loan terminates
on 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 (the Company, upon loan acquisition) (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.
The Company will acquire the senior participation interest in this loan
following the close of this Offering.
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. The loan was in default under its original terms at the time it was
acquired by RAI in December, 1994. The forbearance agreement with respect to
this loan terminates on 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 $1,258,072. The loan documents provide that the
holder of the loan (the Company, upon loan acquisition) (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 107. 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%. The loan was in default under its original terms at the time it was
acquired by RAI in March, 1996. The forbearance agreement with respect to this
loan terminates on 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 (the Company, upon loan acquisition) (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. The Company will acquire the senior
participation interest in this loan following the close of this Offering.
Loan 108. Wraparound participation in the amount of $20 million,
interest at 11.1%, subject to a senior participation held by an unaffiliated
third party in the amount of $8 million, with interest at 9.5%. The wraparound
participation is secured by a loan evidenced by notes in
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<PAGE>
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%. The loan was in default under its original
terms at the time it was acquired by RAI in December, 1996. The forbearance
agreement with respect to this loan terminates on 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 (the Company, upon loan acquisition) 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. The
loan may be paid in full by the borrower by (i) payment to the holder of a
specified amount of cash (currently $27 million but increasing in 1998 and
thereafter) and giving the holder a preferred partnership interest entitling the
holder to all net cash flow from the property to specified limits (currently $10
million, but increasing in 1998 and thereafter).
Loan 109. Loan evidenced by a note in the original principal amount of
$765,000, bearing interest at an annual rate of 18% until October 31, 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 $886,996. The loan documents
provide that the holder of the loan (the Company, upon loan acquisition) (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 110. 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 $3,182,642. The loan
documents provide that the holder of the loan (the Company, upon loan
acquisition) (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 111. Loan evidenced by notes in the original principal amount of
$7,380,000 bearing interest at rates of 9.7% with respect to the original
principal amount of $6,080,000 and 11% with respect to the original principal
amount of $1,300,000. The notes are secured by first and second mortgages on a
retail/office property in Philadelphia, Pennsylvania and mature December 31,
2002. With respect to the $1,300,000 note, the borrower must make an additional
interest payment of $50,000 at the time the loan is repaid. In addition, the
loan provides for the holder to receive a participation of the greater of
$100,000 or the increase
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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. The loan documents provide that the holder of the loan holds a
deed-in-lieu of foreclosure which may be recorded upon default by the borrower.
All tenants of the property pay rents directly to the holder of the loan.
Loan 112. Loan evidenced by a note in the original principal amount of
$900,000 bearing interest at a rate of 10.6%. The note is secured by a first
mortgage on four retail properties in Philadelphia, Pennsylvania and matures
December 31, 2002. The loan documents provide that the holder of the loan holds
a deed-in-lieu of foreclosure which may be recorded upon default by the
borrower. All tenants of the property pay rents directly to the holder of the
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, 10th 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, 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 "Conflicts of
Interest."
Trustees and Executive Officers
The following sets forth certain information regarding the trustees and
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Betsy Z. Cohen 55 Chairman, Chief Executive Officer and Trustee
Jay J. Eisner 40 President, Chief Operating Officer and Secretary
Jay R. Cohen 56 Executive Vice President
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 81 Trustee**
</TABLE>
- ----------
* Trustee nominated by RAI
** Independent Trustee
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<PAGE>
Betsy Z. Cohen was elected in August 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 September 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, and Jay Cohen,
Executive Vice President of the Company, is a cousin of Mrs. Cohen.
Jay J. Eisner, a certified public accountant, was elected in August
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.
Jay R. Cohen was elected in October 1997 to serve as Executive Vice
President of the Company. From 1995 through September 1997, Mr. Cohen was
Executive Vice President and Treasurer of CRIIMI MAE, Inc., Rockville, Maryland,
a REIT investing in mortgage loans. Prior thereto, from 1983 he served in
various executive capacities with predecessor REITs to CRIIMI MAE, including
service as Executive Vice President and Treasurer of CRI Insured Mortgage
Association, Inc., CRI Liquidating REIT, Inc. and Capital Housing and Mortgage
Partners, Inc. During such period Mr. Cohen also served as President of Crico
Mortgage Company, Inc., a manager of REITs and master limited partnerships. Mr.
Cohen is a cousin of Mrs. Cohen.
Ellen J. DiStefano, a certified public accountant, was elected in
October 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 in September 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.
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Jerome S. Goodman was elected in August 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
1995. Mr. Goodman has been a director of Aetna US Healthcare (and its
predecessor, US Healthcare) since 1988.
Joel R. Mesznik was elected in August 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 in August 1997 to serve as a trustee of the
Company. Mr. Promislo is the Managing Director of Wolf, Block, Schorr and
Solis-Cohen, a Philadelphia, Pennsylvania law firm (with which he was Of
Counsel from 1994 to October 1997, and a partner from 1977 to 1994, 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
October 1997, Chairman of the Board of Directors, of WHYY, Inc., the principal
public television station in the Philadelphia metropolitan area.
Jack L. Wolgin was elected in August 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 $10,000 plus $1,000 for each
meeting of the Board of Trustees, and $500 for each meeting of a committee
thereof
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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
------------------- ----------------------
Securities
Name and Principal Underlying LTIP
Position Salary Bonus Options Payouts All Other
-------- ------ ----- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Betsy Z. Cohen $250,000 (1) 225,000 -- $ --
Chairman and Chief
Executive Officer(1)
Jay J. Eisner 150,000 (1) 75,000 -- --
President, Chief
Operating Officer and
Secretary(1)
Jay R. Cohen 200,000 (1) 50,000 -- 4,200(2)
Executive Vice
President
Ellen J. DiStefano 125,000 (1) 35,000 -- 8,800(2)
Chief Financial Officer
</TABLE>
- ----------
(1) Bonuses may be paid in the discretion of the Board of Trustees. No such
bonuses have been provided for as of the date hereof.
(2) Automobile allowance.
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 "Conflicts of
Interest," the trustees and officers of the Company and their affiliates may not
be participants in the Company's investments.
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<PAGE>
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 share option plan on or before the
completion of this Offering (the "Option Plan"), which will provide for both
incentive and non-qualified options to purchase Common Shares. The maximum
aggregate number of Common Shares that may be issued pursuant to options granted
under the Option Plan is 1,000,000. The purpose of the Option Plan is to provide
a means of performance-based compensation in order to provide incentives for the
Company's key employees.
It is anticipated that the Option Plan will provide for an option
exercise price equal to the price of the shares in this Offering (currently
anticipated to be $15 per share), a term of ten years, and vesting of options in
equal increments over the four years following the date of grant. The Company
has agreed, once the Option Plan has been established, to issue options to
acquire Common Shares as follows: Betsy Z. Cohen - 225,000 shares; Jay J. Eisner
- - 75,000 shares; Jay R. Cohen - 50,000 shares and Ellen J. DiStefano - 35,000
shares. In addition, the Company intends to issue options to acquire 500 shares
under the Option Plan upon the foregoing terms to each of the trustees.
Employment Agreements
At the close of the Offering, the Company will enter into employment
agreements with Betsy Z. Cohen, its Chairman and Chief Executive Officer, and
Jay J. Eisner, its President and Chief Operating Officer, providing for
compensation and the grant of options as set forth in "The Company - Trustees
and Executive Officers - Summary Compensation Table" and "- Option Plan." Other
material terms of these agreements are described below.
The agreement with Mrs. Cohen will provide that she will devote only
such time to the Company as is reasonably required to fulfill her duties. The
agreement will have a term of one year which is automatically extended so that
on any day the agreement is in effect it will have a then current term of one
year. The automatic extensions cease upon notice by the Company of its election
to terminate the agreement at the end of the one year period then in effect or
upon 90 days notice by Mrs. Cohen after the initial one year term. The agreement
terminates upon Mrs. Cohen's death, and may be terminated by the Company for
cause (material and willful misconduct, conduct that would result in material
injury to the reputation of the Company or continued deliberate negligent
performance or non-performance of duties) or disability of Mrs. Cohen for more
than an aggregate of 180 days during any 365 day period. The agreement may be
terminated by Mrs. Cohen upon 45 days notice for "good reason"
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(generally, relocation of the Company out of the Philadelphia area, a change in
control of the Company, a substantial change in Mrs. Cohen's duties, the
Company's failure to continue coverage under benefit plans or a material breach
of the agreement by the Company), subject to a 30-day cure period. In the event
of a termination other than for cause, Mrs. Cohen (or her estate) will receive a
lump sum benefit equal to her "average annual compensation." As used in the
agreement, "average compensation" means the average of Mrs. Cohen's compensation
(including the annualized current year's compensation) in the three most highly
compensated years during the previous five years, except that if she has been
employed for less than three years, it means the highest annual compensation
received during the period. In addition, upon termination, all options to
acquire Common Shares held by Mrs. Cohen vest on the later of the effective date
of termination or six months after the options were granted.
Except as to compensation, number of option shares, and the requirement
that Mr. Eisner devote his full-time services to the business and affairs of the
Company, Mr. Eisner's employment agreement, including the formula for
calculating the termination benefit, is substantially similar to that of Mrs.
Cohen.
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. 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. In
addition, the Company will enter into indemnification agreements with its
trustees and officers containing similar provisions. See "Certain Provisions of
Maryland Law and of the Company's Declaration of Trust and Bylaws -
Indemnification; Limitation of Trustees' and Officers' Liability" and "-
Indemnification Agreements."
DISTRIBUTION POLICY
In order to avoid corporate income taxation of 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 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
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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 or return on capital, although (as referred to in the previous
paragraph) a portion of such distributions may constitute long-term capital gain
or 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 RAIT" and "- Taxation of Taxable U.S. Shareholders
Generally."
CAPITALIZATION
The capitalization of the Company, as of November 15, 1997, and as
adjusted to reflect the sale of the Common Shares offered hereby at an assumed
price of $15 per share, is as follows:
<TABLE>
<CAPTION>
Actual As Adjusted(1)
------ --------------
<S> <C> <C>
Preferred Shares, par value $.01;
25,000,000 shares authorized; no shares
outstanding, actual; no shares outstanding,
as adjusted................................................... $ -- $ --
Common Shares, par value $.01; 200,000,000 shares authorized; 100 shares
outstanding, actual; 8,315,100 shares
outstanding, as adjusted(1)(2)................................ 1 83,151
------- ------------
Additional paid-in capital............................................. 999 115,198,099
------- ------------
Total.................................................... $1,000 $115,281,255
====== ============
</TABLE>
(1) Includes 815,000 Common Shares to be purchased by RAI, and 34,000 which may
be purchased by directors, trustees and officers of the Company or RAI and
members of their respective families, at the initial public offering price,
less underwriting discounts and commissions, and is stated after deducting
Offering expenses, estimated to be $714,000, payable by the Company.
(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an additional 1,125,000 Common Shares, and excludes 431,250 shares
issuable pursuant to warrants granted to the Representative and 1,000,000
shares reserved for issuance to executive officers of the Company in
connection with future grants of employee options.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
The Company has been organized and will elect to qualify as a REIT
under the Code and, as such, anticipates distributing annually at least 95% of
its taxable income, subject to certain adjustments. Cash for such distributions
is expected to be generated from the Company's operations, although the Company
also may borrow funds to make distributions. The Company's revenues will be
derived from interest paid on Financings, rents received from Property
Interests, the proceeds from any sales of loans or properties (see "Risk Factors
- - Legal and Tax Risks - Gain on Disposition of Assets Deemed Held for Sale in
Ordinary Course Subject to 100% Tax"), proceeds from any participations and
borrowings (see "Investment Objectives and Policies - Leverage") and interest
and revenues from other (generally short-term) investments.
The principal sources of the Company's funds will be the proceeds of
this Offering, proceeds from borrowings and proceeds from future equity
offerings. From the net proceeds of this Offering, approximately $30.2 million
will be used to purchase the Initial Investments.
The Company anticipates that the Initial Investments will be accounted
for as loans and recorded at cost. Interest on these loans will be recognized as
revenue when earned according to the terms of the loans. Additionally, with
respect to mortgage loans it acquires at a discount, the Company will amortize
into income over the estimated life of the loans the difference between its cost
basis in them and the future cash collections, if any, that are both reasonably
estimatable and probable, using the constant interest method. Also, any changes
in the amortization of discount as a result of changes in anticipated cash flows
will be adjusted currently and treated as a change in estimate.
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 (currently RAI and, upon acquisition, the Company),
has agreed not to foreclose provided the borrower pays (subject to a stated
minimum) all revenues from the underlying property (after operating expenses) to
the holder of the loan. Accordingly, the Company, once it acquires these loans,
will receive the increase, (or, with respect to loan 108 in which it will
acquire a partial interest, a share of the increase) if any, in the revenue from
the underlying properties, after payment of operating expenses, to a maximum
aggregate amount equal to the required payments on the loan as originally
underwritten.
In addition, these loans will permit the Company to capture, upon a
sale or refinancing of the underlying properties, some or all of the increase in
the value of the underlying property to a maximum amount equal to the then
outstanding balance of the loan as originally underwritten, together with
accrued interest (except for loan 108, in which the Company will receive amounts
attributable to its proportionate interest in the loan). Since, based on the
original terms of these loans, debt service is in excess of payments currently
being made, the Company anticipates that the outstanding balances, as originally
underwritten, will increase.
Although the debt service required under the original terms of the
Discounted Loans and Non-Discounted Loans is in excess of payments currently
being made by the borrowers, following the acquisition of the Discounted Loans
and Non-Discounted Loans by RAI the borrowers have made all required payments
under their forbearance agreements and any senior indebtedness to which the
property is subject. The
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primary risks to the Company's investment in these loans are (i) a decrease in
property cash flow, which would reduce the yield to the Company; (ii) a decrease
in the value of the property, which, if the value decreased below the Company's
cost, would require the Company to recognize a loss on its investment; and (iii)
a default on any senior indebtedness to which the property is subject, which
could require the Company to satisfy the senior indebtedness or risk losing its
investment. The Company does not believe that there is a substantial risk of
default on the senior indebtedness to which the properties underlying the
Discounted and Non-Discounted Loans are subject since the cash flow from the
properties, both individually and in the aggregate, is substantially in excess
of debt service on such senior indebtedness. See "Investment Objectives and
Policies - Initial Investments."
The Initial Investments comprise approximately 26% of the assets to be
purchased with the net proceeds of this Offering and the sale of shares to RAI
(23% if the Underwriters exercise their over-allotment option) and most of the
net proceeds of the offering initially will be invested in readily marketable
securities. Accordingly, the Company does not anticipate a need to sell the
Initial Investments for liquidity purposes. The Company intends to establish
working capital reserves to a maximum of 3% of the Offering proceeds, these
funds together with funds derived from operations representing a return of
principal, are 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, $.01 par value per share. Upon completion of this Offering, 8,315,100
Common Shares will be issued and outstanding (9,440,100 Common Shares if the
Underwriters exercise their over-allotment option) and no Preferred Shares will
be issued and outstanding. An additional 1,431,250 Common Shares will be
reserved for issuance in connection with the warrant to be issued to the
Representative and the proposed management option plan.
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. 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
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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.
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.
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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 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,
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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. No such
waiver or opinion has been required with respect to RAI's ownership rights,
which are established as part of the Declaration of Trust.
The Company's Declaration of Trust further prohibits any person from
actually or constructively owning Common or Preferred Shares that would (i)
cause the Company to be "closely held" under Section 856(h) of the Code, (ii)
cause the Company 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 (iii) cause the Company's shares to be owned by fewer than 100
persons. Any person, including RAI, 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 (including transfers by RAI) or any other event would
(i) 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, (ii) result in the Company being "closely held," (iii) result in
the Common Shares being owned by fewer than 100 persons, or (iv) cause the
Company to own constructively 10% or more of the ownership interests in a tenant
of its real property, 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 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
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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.
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 (including RAI) must file a completed
questionnaire with the Company containing
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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 American
Stock Transfer & Trust Company.
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.
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, and (ii) 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
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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. Under the MGCL,
RAI would be deemed to be an Interested Shareholder if it increased the number
of Common Shares held by it above 10%. RAI is permitted to own up to 15% of the
Common Shares. See "Description of Shares of Beneficial Interest - Restrictions
on Ownership and Transfer". It is anticipated, however, that the Company's Board
of Trustees will resolve to "opt out" of the business combination provisions of
the MGCL.
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
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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. Since RAI can hold no more than 15% of the Common Shares, its shares
would not be deemed to be Control Shares under the MGCL.
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.
Amendment of 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
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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 Trustees' 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.
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
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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 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
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
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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
8,315,100 Common Shares (9,440,100 Common Shares if the Underwriters exercise
their over-allotment option). Of the outstanding shares, 7,466,000 (8,625,000 if
the Underwriters exercise their over-allotment option) will be freely tradeable
without restriction or further registration under the Securities Act unless
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act. Of the remaining shares, 34,000 shares will become
eligible for future sale commencing 180 days following conclusion of the
Offering (the date of the expiration of the period the holders of these shares
will agree with the Underwriters not to offer, sell or otherwise dispose of
their shares).
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 registration
under the Securities Act unless an exemption from registration is available,
including exemptions contained in Rule 144.
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
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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.
Additionally, upon the conclusion of this Offering, there will be
outstanding warrants and options that will be granted at the initial public
offering price to the Representative and to executive officers, directors and
employees of the Company, none of which will be exercisable until one year from
the date of grant. The number of shares to be subject to such warrants and stock
options will be 818,750 shares, assuming the Underwriters fully exercise their
over-allotment option.
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.
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, 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; (v) cause the early termination of the
Operating Partnership (other than as set forth in the Operating Partnership
Agreement) or (vi) modify the provisions of the Operating Partnership Agreement
addressing amendments thereto, will require the consent of the Limited Partners
affected thereby.
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General Partner Not to Withdraw
The General Partner may not voluntarily withdraw from the Operating
Partnership or transfer or assign its interest in the Operating Partnership.
Upon the involuntary withdrawal of the General Partner, the Operating
Partnership will dissolve unless, within ninety days after such involuntary
withdrawal, a majority in interest of the remaining Partners agree in writing to
the continuation of the Partnership and the appointment of 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
8,315,100 Common Shares (9,440,100 shares if the Underwriters exercise their
over-allotment option) 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 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, the Operating Partnership
Agreement authorizes the General Partner 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
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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
Limited Partners (other than the Initial Limited Partner) have the
right (the "Redemption Right") to cause the Operating Partnership to redeem
their Units. Redemptions may be either for cash or, at the election of the
General Partner, for Common Shares on the basis of one Common Share for each
Unit redeemed. Notwithstanding the right of the General Partner to redeem Units
for Common Shares, the redemption price will be paid in cash 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 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, 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.
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Distributions
The Operating Partnership Agreement provides 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
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.
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 (except to the
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extent discussed below), 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.
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
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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 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, RAIT may elect to
retain and pay income tax on its net long-term capital gains. Finally, 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
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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, 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 Ownership and 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
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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 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
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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
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 highest principal amount of a loan
outstanding during the taxable year may exceed the fair market value of the real
property securing the loan as of the time that the loan was acquired, which will
result in a
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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
related 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 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
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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% 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
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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, 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
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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 certain
interests in 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 balances of the loans do 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 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.
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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 and
retained capital gains) 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 "Federal Income Tax Considerations - Taxation of
Taxable U.S. Shareholders Generally" for a discussion of an election RAIT may
make to retain and pay income tax on its net long-term capital gains, in which
case it will be deemed to have distributed such amount). 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 will be 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. Moreover,
pursuant to Treasury Regulations, RAIT may be required 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 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 also may be required to accrue interest at a rate greater than
the rate at which it is receiving interest with respect to defaulted loans. 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
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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 makingsuch 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, because OID is not taken into account in
determining whether RAIT satisfies the 95% distribution requirement, to
distribute all of its taxable income and thereby 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 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.
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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 paid by RAIT, 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.
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
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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 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 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 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.
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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 non-corporate
taxpayers is 28% for assets held for more than one year but not more than 18
months, and 20% for assets held for more than 18 months. Thus, the tax rate
differential between capital gain and ordinary income for non-corporate
taxpayers 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. These regulations were issued in final form on October 6,
1997 and will be effective for payments made after December 31, 1998. The new
regulations have eased certain of the recordkeeping and bookkeeping requirements
pertaining to backup withholding. See "Federal Income Tax Considerations -
Taxation of Non-U.S. Shareholders."
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
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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 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 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
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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
final regulations in October 1997 that, for payments made after December 31,
1998, 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 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
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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, no 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 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
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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 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.
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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. 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
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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 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
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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."
Of the Initial Investments, seven are (or, after the intended acquisition of
senior lien interests, will be) secured by 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. After
the acquisition of senior interests, four of the Company's mortgage-secured
Financings will be first lien mortgages and three will be junior lien mortgages.
With respect to Financings which may be acquired by the Company, it is possible
that the Company will 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 "Certain Legal Aspects of Real Property Loans and Investments -
Foreclosure" and "- Bankruptcy Laws."
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 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
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of the beneficiary. None of the Initial Investments involves a deed of trust or
deed to secure debt.
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. Each of the mortgage secured Initial
Investments has an assignment of rents and leases. In addition, each of the
Initial Investments (except for loans 108, 111 and 112) requires that all income
from the underlying property be paid to the lender.
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 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. The properties underlying
the Discounted Loans included as part of the Initial Investments are not
currently generating income sufficient to pay the debt service requirements
under the original loan terms. However, each of such properties is generating
revenues to sufficient to pay debt service required under the forbearance
agreements relating to the loans.
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). Each of the mortgage-secured Initial Investments contains
provisions allowing the holder to collect proceeds and condemnation awards. The
laws of certain states may limit the ability of mortgagees or beneficiaries to
apply the proceeds of hazard
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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
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. The laws of
the states in which the properties securing the Initial Investments are located
do not contain these limitations.
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 (which is the method applicable
to the mortgage secured Initial Investments), 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
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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 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 (excluding Pennsylvania
with respect to mortgages on properties of the type underlying the Initial
Investments), 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
(including the Initial Investments) 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
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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 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."
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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.
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 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
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payment of prepayment fees or yield maintenance penalties. The notes and
mortgages in the Initial Investments include such provisions. 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.
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 Matters
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. See "Risk Factors - Real Properties with Environmental Problems May
Create Liability for the Company." 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
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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.
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.
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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 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. 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.
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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. In Pennsylvania and Virginia (the states in
which the properties securing the Initial Investments are located), loans with
respect to properties such as those included in the Initial Investments are not
so limited.
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 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,
owner, landlord, or other applicable persons. 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.................................... 7,500,000
==========
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.
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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.
At the request of the Company, the Underwriters have reserved up to
34,000 Common Shares for sale to officers, directors and trustees of the
Company, RAI and members of their respective immediate families, at the initial
public offering price net of any underwriting discounts or commissions. The
number of shares of Common Stock available for sale to the general public will
be reduced to the extent persons purchase such reserved shares. Any reserved
shares which are not so purchased will be offered by the Underwriters to the
general public on the same basis as the other shares offered hereby.
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
1,125,000 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.
The Company has agreed to issue, at the completion of the Offering, to
the Representative and/or its designees, warrants to purchase up to 375,000
Common Shares (431,250 Common Shares if the over-allotment option is exercised),
representing 5% of the Common Shares outstanding after completion of the
Offering) at a purchase price equal to the initial offering price per share. The
warrants may not be sold, transferred, assigned or hypothecated for one year
following the date of this Prospectus, except to officers, directors and
shareholders of the Representative. The warrants are exercisable one year from
the date of this Prospectus and have a term of five years from the date of this
Prospectus (the "Warrant Exercise Term"). The Company has also registered the
Common Shares underlying the Warrants. During the Warrant Exercise Term, the
Representative is given the opportunity to profit from a rise in market price of
the Common Shares. To the extent that the warrants are exercised, dilution to
the interest of the holders of the Common Shares may occur. In addition, the
terms upon which the Company will be able to obtain additional equity capital
may be adversely affected because the holders of the warrants can be expected to
exercise them at a time when the Company likely would be able to obtain any
needed capital on terms more favorable to the Company than those provided in the
warrants.
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.
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The Company has granted to the Representative preferential rights for
two years from the date of the registration statement, assuming completion of
the Offering, to act as the exclusive underwriter for, or advisor to, the
Company in specified transactions or offerings.
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 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
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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.
RAI and the other persons purchasing the reserved Common Shares
described above will agree not to offer, sell or contract to sell or otherwise
dispose of those shares without the prior consent of the Representative for a
period of 180 days following the conclusion of the Offering.
Entities associated with the Representative are the beneficial owners
of 314,005 shares of RAI's common stock, representing 6.7% of all common shares
issued and outstanding. The Representative currently makes a market in RAI's
common stock and in RAI's 12% Senior Notes.
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 "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.
Iatarola 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.
"Financings" shall mean any one or more of the mortgage 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, 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 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.
"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.
"Qualified Interests" shall mean mortgages and other liens on and
interests in real estate, within the meaning of the Investment Company Act.
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"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 as defined in the
Code.
"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.
"Underwriting Agreement" shall mean the agreement pursuant to which the
Underwriters will underwrite the Common Stock.
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"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
<PAGE>
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.
/s/ Grant Thornton LLP
- --------------------------------
GRANT THORNTON LLP
Philadelphia, Pennsylvania
August 25, 1997
F-2
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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
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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).
RAI may acquire Common Shares after the Offering up to a maximum of 15% of
the 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. 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 estate management or
management supervisory services to properties underlying the Company's
investments. Accordingly, the Company's relationship with RAI, Brandywine
and their affiliates will be subject to various potential conflicts of
interest, including conflicts over the price at which investments are sold
or services rendered to the Company by those entities.
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 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 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 and their affiliates, or relating to any
property in which any such
F-5
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
Notes to Consolidated Balance Sheet - (Continued)
August 25, 1997
persons has an interest, receive the prior approval of a majority of the
Independent Trustees (who, in giving such approval, may rely upon
information provided by RAI, Brandywine 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.
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. The maximum
aggregate number of Common Shares that may be issued pursuant to options
granted under the Option Plan is 1,000,000. 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.
Upon 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 will terminate on
the tenth anniversary of the Closing Date. In addition, the Company will
grant to the Trustees of the Company options to acquire common shares under
terms described above.
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>
RESOURCE ASSET INVESTMENT TRUST
Notes to Consolidated Balance Sheet - (Continued)
August 25, 1997
NOTE E - PUBLIC OFFERING OF COMMON SHARES
The Company has filed 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 common 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........................................................ 5
Formation and Structure................................................... 12
Risk Factors.............................................................. 13
Conflicts of Interest..................................................... 24
Use of Proceeds........................................................... 26
Investment Objectives and Policies........................................ 27
The Company............................................................... 40
Distribution Policy....................................................... 44
Capitalization............................................................ 44
Management's Discussion and Analysis
of Financial Condition.................................................. 45
Description of Shares of Beneficial Interest.............................. 46
Certain Provisions of Maryland Law
and of the Company's Declaration of
Trust and Bylaws ....................................................... 49
Common Shares Available for Future Sale................................... 53
Operating Partnership Agreement........................................... 53
Federal Income Tax Considerations......................................... 56
Benefit Plan Considerations............................................... 68
Certain Legal Aspects of Real Property
Loans and Investments................................................... 70
Underwriting.............................................................. 76
Legal Matters............................................................. 78
Experts................................................................... 78
Additional Information.................................................... 79
Glossary.................................................................. 79
Financial Statement....................................................... F-1
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>
7,500,000 Shares
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.......................... $ 54,886
NASD filing fee............................... 18,612
Nasdaq Stock Market listing fee............... 50,000
Printing and engraving expenses............... 50,000*
Legal fees and expenses....................... 400,000*
Accounting fees and expenses.................. 35,000*
Blue Sky fees and expenses.................... 15,000*
Transfer agent and custodian fees............. 10,000*
Miscellaneous................................. 80,502*
--------
Total.................................... $ 714,000
========
- ----------
*Estimated
Item 32. Sales to Special Parties
Not applicable.
Item 33. Recent Sales of Unregistered Securities
Not applicable.
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 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.
II-1
<PAGE>
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.
In addition, the Company will enter into Indemnity Agreements (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.
II-2
<PAGE>
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
1 Form of Underwriting Agreement
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)
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
ITEM 37. Undertakings
The undersigned registrant hereby undertakes:
1. to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
a. to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
b. to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement; and
c. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
2. That, for the purpose of determining any liability under the 1933
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein and the offering of those
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
II-3
<PAGE>
The undersigned Registrant hereby undertakes that for the purpose of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant under 497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was declared effective.
The undersigned Registrant hereby undertakes that for the purpose of
determining any liability under the Securities Act of 1933, each post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
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,
II-4
<PAGE>
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-5
<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 Amendment
No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania, on the ___ day of November, 1997.
RESOURCE ASSET INVESTMENT TRUST
By: /s/ Betsy Z. Cohen
----------------------------------------------------
Betsy Z. Cohen, Chairman and Chief Executive Officer
II-6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
/s/ Betsy Z. Cohen
- ----------------------------------
BETSY Z. COHEN, Chairman, November 20, 1997
Chief Executive Officer
and Trustee
(Chief Executive Officer)
/s/ Jay J. Eisner
- ----------------------------------
JAY J. EISNER, President November 20, 1997
and Chief Operating Officer
/s/ Ellen J. Distefano
- ----------------------------------
ELLEN J. DISTEFANO November 20, 1997
Chief Financial Officer
/s/ Jonathan Z. Cohen
- ----------------------------------
JONATHAN Z. COHEN, Trustee November 20, 1997
/s/ Jerome S. Goodman
- ----------------------------------
JEROME S. GOODMAN, Trustee November 20, 1997
/s/ Joel R. Mesznak
- ----------------------------------
JOEL R. MESZNIK, Trustee November 20, 1997
/s/ Daniel Promislo
- ----------------------------------
DANIEL PROMISLO, Trustee November 20, 1997
/s/ Jack L. Wolgin
- ----------------------------------
JACK L. WOLGIN, Trustee November 20, 1997
By: /s/ Betsy Z. Cohen
---------------------------------------
BETSY Z. COHEN, as attorney-in-fact
for each such person pursuant to power
of attorney heretofore filed as part of
this Registration Statement
II-7
<PAGE>
EXHIBIT INDEX
1 Form of Underwriting Agreement
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)
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
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
7,500,000 Shares of Beneficial Interest
UNDERWRITING AGREEMENT
_______, 1997
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
as Representative of the several Underwriters
c/o Friedman, Billings, Ramsey & Co., Inc.
1001 19th Street North
Arlington, Virginia 22209
Dear Sirs:
Resource Asset Investment Trust, a Maryland real estate investment
trust (the "Company"), confirms its agreement with Friedman, Billings, Ramsey &
Co., Inc. and each of the other Underwriters listed on Schedule I hereto
(collectively, the "Underwriters"), for whom Friedman, Billings, Ramsey & Co.,
Inc. is acting as representative (in such capacity, the "Representative"), with
respect to (i) the sale by the Company and the purchase by the Underwriters,
acting severally and not jointly, of the respective numbers of common shares of
beneficial interest of the Company, $.01 par value per share (the "Common
Shares"), set forth in Schedule I hereto and (ii) the grant by the Company to
the Underwriters, acting severally and not jointly, of the option described in
Section 1(b) hereof to purchase all or any part of 1,125,000 additional shares
of Common Shares to cover over-allotments, if any. The 7,500,000 Common Shares
to be purchased by the Underwriters (the "Initial Shares") and all or any part
of the 1,125,000 Common Shares subject to the option described in Section 1(b)
hereof (the "Option Shares") are hereinafter called, collectively, the "Shares".
The Company acknowledges that at its request, the Underwriters have reserved up
to 34,000 of the Initial Shares for sale to certain persons listed in Schedule
III hereto at the initial public offering price of the Shares.
The Company understands that the Underwriters propose to make a public
offering of the Shares as soon as the Underwriters deem advisable after this
Agreement has been executed and delivered.
<PAGE>
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-11 (No. 333-35077) and a
related preliminary prospectus for the registration of the Shares under the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations thereunder (the "Securities Act Regulations"). The Company has
prepared and filed such amendments thereto, if any, and such amended preliminary
prospectuses, if any, as may have been required to the date hereof, and will
file such additional amendments thereto and such amended prospectuses as may
hereafter be required. The registration statement has been declared effective
under the Securities Act by the Commission. The registration statement as
amended at the time it became effective (including all information deemed to be
a part of the registration statement at the time it became effective pursuant to
Rule 430A(b) of the Securities Act Regulations) is hereinafter called the
"Registration Statement," except that, if the Company files a post-effective
amendment to such registration statement which becomes effective prior to the
Closing Time (as defined below), "Registration Statement" shall refer to such
registration statement as so amended. Any registration statement filed pursuant
to Rule 462(b) of the Securities Act Regulations is hereinafter called the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the 462(b) Registration Statement. Each prospectus
included in the registration statement, or amendments thereof or supplements
thereto, before it became effective under the Securities Act and any prospectus
filed with the Commission by the Company with the consent of the Underwriters
pursuant to Rule 424(a) of the Securities Act Regulations is hereinafter called
the "Preliminary Prospectus." The term "Prospectus" means the final prospectus,
as first filed with the Commission pursuant to paragraph (1) or (4) of Rule
424(b) of the Securities Act Regulations, and any amendments thereof or
supplements thereto. The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus.
The Company also will issue and sell at the Closing Time (as
hereinafter defined) to the Representative for its own account warrants (the
"Warrants") to purchase at an exercise price of $ __ per share up to an
aggregate of 375,000 Common Shares (the "Warrant Shares"), which Warrant Shares
will be registered under the Securities Act pursuant to the Registration
Statement and which issuance will be consummated in accordance with the terms
and conditions of the Warrant Agreement in the form filed as an exhibit to the
Registration Statement (the "Warrant Agreement").
The Company and the Underwriters agree as follows:
1. Sale and Purchase:
(a) Initial Shares. Upon the basis of the warranties and
representations and other terms and conditions herein set forth, the Company
agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter agrees, severally and not jointly, to purchase from the Company at
the purchase price per share of $__, the number of Initial Shares set forth in
Schedule I opposite such Underwriter's name, plus any additional number of
Initial Shares which such Underwriter may become obligated to purchase pursuant
to the provisions of Section 8 hereof subject, in each case, to such adjustments
among the Underwriters as the Representative in its sole discretion shall make
to eliminate any sales or purchases of fractional shares.
2
<PAGE>
(b) Option Shares. In addition, upon the basis of the warranties and
representations and other terms and conditions herein set forth, the Company
hereby grants an option to the Underwriters, severally and not jointly, to
purchase from the Company all or any part of the Option Shares at the purchase
price per share set forth in paragraph (a) above plus any additional number of
Option Shares which such Underwriter may become obligated to purchase pursuant
to the provisions of Section 8 hereof. The option hereby granted will expire 30
days after the date hereof and may be exercised in whole or in part from time to
time only for the purpose of covering over-allotments, which may be made in
connection with the offering and distribution of the Initial Shares, upon notice
by the Representative to the Company setting forth the number of Option Shares
as to which the several Underwriters are then exercising the option and the time
and date of payment and delivery for such Option Shares. Any such time and date
of delivery (a "Date of Delivery") shall be determined by the Representative,
but shall not be later than three full business days (or earlier, without the
consent of the Company, than two full business days) after the exercise of said
option, nor in any event prior to the Closing Time, as hereinafter defined. If
the option is exercised as to all or any portion of the Option Shares, each of
the Underwriters, acting severally and not jointly, will purchase that
proportion of the total number of Option Shares then being purchased which the
number of Initial Shares set forth in Schedule I opposite the name of such
Underwriter bears to the total number of Initial Shares, subject in each case to
such adjustments as the Representative in its sole discretion shall make to
eliminate any sales or purchases of fractional shares.
(c) Terms of Public Offering. The Company is advised by you that the
Shares are to be offered to the public initially at $__ per share (the "Public
Offering Price") and to certain dealers selected by you at a price that
represents a concession not in excess of $__ per share under the Public Offering
Price, and that any Underwriter may allow, and such dealers may reallow, a
concession, not in excess of $__ per share, to any Underwriter or to certain
other dealers. The Underwriters may from time to time increase or decrease the
Public Offering Price of the Shares after the initial public offering to such
extent as the Underwriters may determine.
(d) Warrants. Upon the basis of the warranties and representations and
other terms and conditions herein set forth, the Company also agrees to issue to
the Representative, in further consideration of the Representative's efforts in
connection with the sale and purchase of the Initial Shares and the Option
Shares, the Warrants to purchase at an exercise price of $__ per share up to an
aggregate of 375,000 Warrant Shares (431,250 Warrant Shares if the option
described in Section 1(b) is exercised).
2. Payment and Delivery:
(a) Initial Shares and Warrants. Payment of the purchase price for the
Initial Shares shall be made to the Company by wire transfer of immediately
available funds or certified or official bank check payable in federal
(same-day) funds at the offices of ___________________ located at
____________________ (unless another place shall be agreed upon by the
Representative and the Company) against delivery of the certificates for the
Initial Shares to the Representative for the respective accounts of the
Underwriters and the delivery of the Warrants, represented by one or more
certificates as the Representative may specify, to the Representative. Such
payment and delivery shall be made at 9:30 a.m., New York City time, on the
third (fourth, if pricing occurs after 4:30 p.m., New York City time) business
day after the date hereof (unless
3
<PAGE>
another time, not later than ten business days after such date, shall be agreed
to by the Representative and the Company). The time at which such payment and
delivery are actually made is hereinafter sometimes called the "Closing Time."
Certificates for the Initial Shares shall be delivered to the Representative in
definitive form registered in such names and in such denominations as the
Representative shall specify. For the purpose of expediting the checking of the
certificates for the Initial Shares by the Representative, the Company agrees to
make such certificates available to the Representative for such purpose at least
one full business day preceding the Closing Time.
(b) Option Shares. In addition, payment of the purchase price for the
Option Shares shall be made to the Company by wire transfer of immediately
available funds or certified or official bank check payable in federal
(same-day) funds at the offices of _____________________________ located at
________________________________ (unless another place shall be agreed upon by
the Representative and the Company), against delivery of the certificates for
the Option Shares to the Representative for the respective accounts of the
Underwriters. Such payment and delivery shall be made at 9:30 a.m., New York
City time, on each Date of Delivery. Certificates for the Option Shares shall be
delivered to the Representative in definitive form registered in such names and
in such denominations as the Representative shall specify. For the purpose of
expediting the checking of the certificates for the Option Shares by the
Representative, the Company agrees to make such certificates available to the
Representative for such purpose at least one full business day preceding the
relevant Date of Delivery.
3. Representations and Warranties of the Company and the Partnership:
The Company and RAIT Partnership, L.P., a Delaware limited partnership (the
"Partnership"), represent and warrant to the Underwriters that:
(a) the Company and each Subsidiary of the Company set forth on
Schedule II hereto (each a "Subsidiary" and, collectively the "Subsidiaries")
(other than the Partnership) has been duly formed or incorporated, as the case
may be, and is validly existing and in good standing under the laws of its
respective jurisdiction of formation or incorporation with all requisite
corporate power and authority to own, lease and operate its respective
properties and to conduct its respective business as now conducted and as
proposed to be conducted as described in the Registration Statement and
Prospectus and, in the case of the Company, to authorize, execute and deliver
this Agreement, the Warrant Agreement and the other agreements described in the
Prospectus and listed on Schedule III attached hereto (the "Other Transaction
Documents") and to consummate the transactions described in each such agreement;
(b) the Company and the Subsidiaries are duly qualified or registered
to transact business in each jurisdiction in which they conduct their respective
businesses as now conducted and as proposed to be conducted as described in
the Registration Statement and the Prospectus and in which the failure,
individually or in the aggregate, to be so qualified or registered could
reasonably be expected to have a material adverse effect on the assets,
operations, business, prospects or condition (financial or otherwise) of the
Company and the Subsidiaries taken as a whole, and the Company and the
Subsidiaries are in good standing in each jurisdiction in which they own or
lease real property or maintain an office or in which the nature or conduct of
their respective businesses as now conducted or proposed to be conducted as
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described in the Registration Statement and the Prospectus requires such
qualification, except where the failure to be in good standing could be
reasonably expected not to have a material adverse effect on the assets,
operations, business, prospects or condition (financial or otherwise) of the
Company and the Subsidiaries taken as a whole;
(c) the Partnership has been duly formed and is validly existing as a
limited partnership under the laws of the jurisdiction of its organization, with
all requisite partnership power and authority to own, lease and operate its
properties and to conduct its business as now conducted and as proposed to be
conducted as described in the Registration Statement and the Prospectus. The
Partnership has been duly qualified or registered to do business as a foreign
partnership in each jurisdiction in which it conducts its business as now
conducted and as proposed to be conducted as described in the Registration
Statement and the Prospectus, and in which the failure, individually or in the
aggregate, to be so qualified or registered could be reasonably expected to have
a material adverse effect on the assets, operations, business, prospects or
condition (financial or otherwise) of the Company and the Subsidiaries taken as
a whole;
(d) the Company and the Subsidiaries are in compliance in all material
respects with all applicable laws, rules, regulations, orders, decrees and
judgments;
(e) neither the Company nor any of the Subsidiaries is in breach of, or
in default under (nor has any event occurred which with notice, lapse of time,
or both would constitute a breach of, or default under), its respective
declaration of trust, charter, by-laws, certificate of limited partnership or
partnership agreement, as the case may be, or in the performance or observance
of any obligation, agreement, covenant or condition contained in any license,
indenture, mortgage, deed of trust, loan or credit agreement or other agreement
or instrument to which the Company or any of the Subsidiaries is a party or by
which any of them or their respective properties is bound, except for such
breaches or defaults which could be reasonably expected not to have a material
adverse effect on the assets, operations, business, prospects or condition
(financial or otherwise) of the Company and the Subsidiaries taken as a whole,
and the issuance, sale and delivery by the Company of the Shares, the execution,
delivery and performance of this Agreement and the Other Transaction Documents
(as such term is defined in Section 3(a) hereof), and consummation of the
transactions contemplated hereby and thereby will not conflict with, or result
in any breach of, or constitute a default under (nor constitute any event which
with notice, lapse of time, or both would constitute a breach of, or default
under), (i) any provision of the declaration of trust, charter, by-laws,
certificate of limited partnership or partnership agreement, as the case may be,
of the Company or any of the Subsidiaries, (ii) any provision of any license,
indenture, mortgage, deed of trust, loan or credit agreement or other agreement
or instrument to which the Company or any of the Subsidiaries is a party or by
which any of them or their respective properties may be bound or affected, or
(iii) any federal, state, local or foreign law, regulation or rule or any
decree, judgment or order applicable to the Company or any of the Subsidiaries,
except in the case of clause (ii) for such breaches or defaults which could be
reasonably expected not to have a material adverse effect on the assets,
operations, business, prospects or condition (financial or otherwise) of the
Company and the Subsidiaries taken as a whole; or result in the creation or
imposition of any material lien, charge, claim or encumbrance upon any property
or asset of the Company or the Subsidiaries;
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<PAGE>
(f) the Company has full legal right, power and authority to enter
into and perform this Agreement and to consummate the transactions contemplated
herein; this Agreement has been duly authorized, executed and delivered by the
Company and is a legal, valid and binding agreement of the Company enforceable
in accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, and by general principles of equity, and except to the extent
that the indemnification and contribution provisions of Section 9 hereof may be
limited by federal or state securities laws and public policy considerations in
respect thereof;
(g) the Partnership has full legal right, power and authority to enter
into and perform this Agreement and to consummate the transactions contemplated
herein; this Agreement has been duly authorized, executed and delivered by the
Partnership and constitutes a valid and binding agreement of the Partnership
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, and by general principles of equity, and except to
the extent the indemnification and contribution provisions set forth in Section
9 hereof may be limited by federal or state securities laws and the public
policy considerations in respect thereof underlying such laws;
(h) the Limited Partnership Agreement of the Partnership, including
any amendment thereto (the "Partnership Agreement") has been duly and validly
authorized, executed and delivered by or on behalf of the partners of the
Partnership and constitutes a valid and binding agreement of the parties
thereto, enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or by general principles of equity;
(i) the issuance and sale of the Shares to the Underwriters hereunder
have been duly authorized by the Company; when issued and delivered against
payment therefor as provided in this Agreement, the Shares will be validly
issued, fully paid and non-assessable and the issuance of the Shares will not be
subject to any preemptive or similar rights; except as contemplated herein, no
person or entity holds a right to require or participate in the registration
under the Securities Act of the Shares pursuant to the Registration Statement;
no person or entity has a right of participation or first refusal with respect
to the sale of the Shares by the Company; except as set forth in the Prospectus,
there are no contracts, agreements or understandings between the Company and any
person or entity granting such person or entity the right to require the Company
to file a registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such securities
with the Shares registered pursuant to the Registration Statement; the form of
certificates evidencing the Shares complies with all applicable legal
requirements and, in all material respects, with all applicable requirements of
the declaration of trust and bylaws of the Company and the requirements of the
Nasdaq National Market;
(j) the issuance of the Warrants has been duly authorized; when issued
and delivered pursuant to the terms of the Warrant Agreement, the Warrants will
constitute legal, valid and binding obligations of the Company enforceable in
accordance with their terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting
6
<PAGE>
creditors' rights generally, and by general principles of equity; the Warrant
Shares have been duly reserved for issuance upon exercise of the Warrants in
accordance with the terms of the Warrant Agreement; and the Warrants will
conform in all material respects to the description thereof in the Registration
Statement and the Prospectus;
(k) the Warrant Agreement and the Other Transaction Documents have
been duly authorized and will be, upon execution and delivery by the Company,
legal, valid and binding agreements of the Company enforceable in accordance
with their terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, and by general principles of equity;
(l) no approval, authorization, consent or order of or filing with any
federal, state or local governmental or regulatory commission, board, body,
authority or agency is required in connection with the execution, delivery and
performance of this Agreement and the Other Transaction Documents, the
consummation of the transaction contemplated hereby and thereby, the sale and
delivery of the Shares, issuance of the Warrants or the Warrant Shares by the
Company as contemplated hereby or in the Warrant Agreement other than (i) such
as have been obtained, or will have been obtained at the Closing Time or the
relevant Date of Delivery, as the case may be, under the Securities Act or the
Securities Exchange Act of 1934, (ii) such approvals as have been obtained in
connection with the approval of the quotation of the Shares on the Nasdaq
National Market and (iii) any necessary qualification under the securities or
blue sky laws of the various jurisdictions in which the Shares are being offered
by the Underwriters;
(m) each of the Company and the Subsidiaries has all necessary
licenses, authorizations, consents and approvals and has made all necessary
filings required under any federal, state or local law, regulation or rule, and
has obtained all necessary authorizations, consents and approvals from other
persons required in order to conduct their respective businesses as described in
the Registration Statement and Prospectus, except to the extent that any failure
to have any such licenses, authorizations, consents or approvals, to make any
such filings or to obtain any such authorizations, consents or approvals could
reasonably be expected not to have, individually or in the aggregate, have a
material adverse effect on the assets, operations, business, prospects or
condition (financial or otherwise) of the Company and the Subsidiaries taken as
a whole; neither the Company nor any of the Subsidiaries is in violation of, in
default under, or has received any notice regarding a possible violation,
default or revocation of any such license, authorization, consent or approval or
any federal, state, local or foreign law, regulation or rule or any decree,
order or judgment applicable to the Company or any of the Subsidiaries, the
effect of which could reasonably be expected to be material and adverse to the
assets, operations, business, prospects or condition (financial or otherwise) of
the Company and the Subsidiaries taken as a whole; and no such license,
authorization, consent or approval contains a materially burdensome restriction
that is not adequately disclosed in the Registration Statement and the
Prospectus;
(n) each of the Registration Statement and any Rule 462(b)
Registration Statement has become effective under the Securities Act and no stop
order suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement has been issued under the Securities Act and no
proceedings for that purpose have been instituted or are pending or, to the
7
<PAGE>
knowledge of the Company, are threatened by the Commission, and any request on
the part of the Commission for additional information has been complied with;
(o) the Company and the transactions contemplated by this Agreement
meet the requirements and conditions for using a registration statement on Form
S-11 under the Securities Act, set forth in the General Instructions to Form
S-11; the Preliminary Prospectus and the Registration Statement comply and the
Prospectus and any further amendments or supplements thereto will comply, when
they have become effective or are filed with the Commission, as the case may be,
in all material respects with the requirements of the Securities Act and the
Securities Act Regulations and, in each case, present, or will present, fairly
the information required to be shown; the Registration Statement did not, and
any amendment thereto will not, in each case as of the applicable effective
date, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and the Preliminary Prospectus does not, and the Prospectus or any
amendment or supplement thereto will not, as of the applicable filing date and
at the Closing Time and on each Date of Delivery (if any), contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the Company makes no warranty or representation with respect to any
statement contained in the Registration Statement or the Prospectus in reliance
upon and in conformity with the information concerning the Underwriters and
furnished in writing by or on behalf of the Underwriters through the
Representative to the Company expressly for use in the Registration Statement or
the Prospectus (that information being limited to that described in the last
sentence of the first paragraph of Section 9(b) hereof);
(p) the Preliminary Prospectus was and the Prospectus delivered to the
Underwriters for use in connection with this offering will be identical to the
versions of the Preliminary Prospectus and Prospectus created to be transmitted
to the Commission for filing via the Electronic Data Gathering Analysis and
Retrieval System ("EDGAR"), except to the extent permitted by Regulation S-T;
(q) all legal or governmental proceedings, contracts or documents
which are material and of a character required to be filed as exhibits to the
Registration Statement or to be summarized or described in the Prospectus have
been so filed, summarized or described as required;
(r) there are no actions, suits, proceedings, inquiries or
investigations pending or, to the Company's knowledge, threatened against the
Company or any of the Subsidiaries or any of their respective officers and
directors or to which the properties, assets or rights of any such entity is
subject, at law or in equity, before or by any federal, state, local or foreign
governmental or regulatory commission, board, body, authority, arbital panel or
agency which could reasonably be expected to result in a judgment, decree, award
or order having a material adverse effect on the assets, operations, business,
prospects or condition (financial or otherwise) of the Company and the
Subsidiaries taken as a whole, or which could adversely affect the consummation
of the transactions contemplated by this Agreement in any material respect;
8
<PAGE>
(s) the financial statements, including the notes thereto, included in
the Registration Statement and the Prospectus present fairly the financial
position of the Company and the Subsidiaries as of the dates indicated and the
results of operations and changes in financial position and cash flows of the
Company and the Subsidiaries for the periods specified; such financial
statements have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis during the periods involved (except as
indicated in the notes thereto); the financial statement schedules included in
the Registration Statement and the Prospectus under the captions fairly present
the information required to be shown therein; no other financial statements or
schedules are required by Form S-11 or otherwise to be included in the
Registration Statement or Prospectus; the unaudited pro forma financial
information, including the notes thereto, included in the Prospectus or any
Preliminary Prospectus complies as to form in all material respects to the
applicable accounting requirements of the Securities Act and the Securities Act
Regulations, and management of the Company believes that the assumptions
underlying the pro forma adjustments are reasonable; such pro forma adjustments
have been properly applied to the historical amounts in the compilation of the
information and such information fairly presents with respect to the Company and
the Subsidiaries, the financial position, results of operations and other
information purported to be shown therein at the respective dates and for the
respective periods specified;
(t) Grant Thornton LLP, whose reports on the audited financial
statements of the Company and the Subsidiaries are included as part of the
Registration Statement and Prospectus, are and were during the periods covered
by their reports independent public accountants within the meaning of the
Securities Act and the Securities Act Regulations;
(u) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as may be
otherwise stated in the Registration Statement or Prospectus, there has not been
(i) any material adverse change in the assets, operations, business, prospects
or condition (financial or otherwise), present or prospective, of the Company
and the Subsidiaries taken as a whole, whether or not arising in the ordinary
course of business, (ii) any transaction, which is material to the Company and
the Subsidiaries taken as a whole, planned or entered into by the Company or any
of the Subsidiaries, (iii) any obligation, contingent or otherwise, directly or
indirectly incurred by the Company or any of the Subsidiaries, which is material
to the Company and the Subsidiaries taken as a whole or (iv) any dividend or
distribution of any kind declared, paid or made with respect to the capital
stock of the Company or with respect to the partnership interests of the
Partnership;
(v) there are no persons with registration or other similar rights to
have any equity securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the Securities Act except as provided
in the Warrant Agreement;
(w) the authorized shares of beneficial interest of the Company
conform in all material respects to the description thereof contained in the
Prospectus; the Company has an authorized, issued and outstanding capitalization
as set forth in the Prospectus under the caption
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<PAGE>
"Capitalization;" immediately after the Closing Time, _____ Common Shares will
be issued and outstanding (subject to the Underwriter's option described in
Section 1(b) hereof) and no shares of beneficial interest of any other class of
beneficial interest will be issued and outstanding. All of the issued and
outstanding shares of beneficial interest of the Company have been duly
authorized and are validly issued, fully paid and non-assessable, and have been
offered, sold and issued by the Company in compliance with all applicable laws
(including, without limitation, federal and state securities laws); none of the
issued shares of beneficial interest of the Company have been issued in
violation of any preemptive or similar rights granted by the Company; except as
disclosed in the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and no commitment, plan or arrangement to
issue, any shares of beneficial interest of the Company or any security
convertible into or exchangeable for shares of beneficial interest of the
Company;
(x) all of the issued and outstanding shares of capital stock of RAIT
General, Inc., a Maryland corporation ("RAIT General"), and RAIT Limited, Inc.,
a Maryland corporation ("RAIT Limited"), have been duly authorized and are
validly issued, fully paid and non-assessable, and are owned of record and
beneficially by the Company, and have been offered, sold and issued by RAIT
General and RAIT Limited in compliance with all applicable laws (including, but
not limited to, federal and state securities laws); none of the issued shares of
capital stock of RAIT General and RAIT Limited have been issued in violation of
any preemptive or similar rights; except as disclosed in the Prospectus, there
is no outstanding option, warrant or other right calling for the issuance of,
and no commitment, plan or arrangement to issue, any shares of capital stock of
RAIT General or RAIT Limited or any security convertible into or exchangeable
for capital stock of RAIT General or RAIT Limited;
(y) when the Warrant Shares have been issued and duly delivered
against payment therefor as contemplated by the Warrant Agreement, the Warrant
Shares will be validly issued, fully paid and nonassessable, free and clear of
any pledge, lien, encumbrance, security interest, or other claim; the issuance
and sale of the Warrants and the Warrant Shares by the Company is not subject to
preemptive or other similar rights arising by operation of law, under the
declaration of trust or by-laws of the Company, under any agreement to which the
Company or any of its Subsidiaries is a party or by which they are bound;
(z) immediately after the Closing Time, all of the issued and
outstanding units of partnership interest in the Partnership ("Common Units")
will be validly issued, fully paid and non-assessable; none of the Common Units
has been or will be issued or is owned or held in violation of any preemptive
right; the Common Units have been or will be offered, sold and issued by the
Partnership in compliance with all applicable laws (including, without
limitation, federal and state securities laws);
(aa) each of the Company, the Subsidiaries, and each of their
respective officers, directors and controlling persons has not taken, and will
not take, directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares;
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(bb) neither the Company nor any of its affiliates (i) is required to
register as a "broker" or "dealer" in accordance with the provisions of the
Securities Exchange Act of 1934 or the rules and regulations thereunder, or (ii)
directly, or indirectly through one or more intermediaries, controls or has any
other association with (within the meaning of Article 1 of the By-laws of the
National Association of Securities Dealers, Inc. (the "NASD")) any member firm
of the NASD;
(cc) the Company has not relied upon the Representative or legal
counsel for the Representative for any legal, tax or accounting advice in
connection with the offering and sale of the Shares or the Warrant Shares;
(dd) any certificate signed by any officer of the Company or any
Subsidiary delivered to the Representative or to counsel for the Underwriters
pursuant to or in connection with this Agreement shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby;
(ee) the Company and the Subsidiaries have good and marketable title
in fee simple to all real property, if any, and good title to all personal
property owned by them, in each case free and clear of all liens, security
interests, pledges, charges, encumbrances, mortgages and defects, except such as
are disclosed in the Prospectus or the financial statements thereto or such as
do not materially and adversely affect the value of such property and do not
interfere with the use made or proposed to be made of such property by the
Company and the Subsidiaries; and any real property and buildings held under
lease by the Company or any Subsidiary are held under valid, existing and
enforceable leases, with such exceptions, liens, security interests, pledges,
charges, encumbrances, mortgages and defects, as are disclosed in the Prospectus
or are not material and do not interfere with the use made or proposed to be
made of such property and buildings by the Company or such Subsidiary; the
Company or a Subsidiary has obtained an owner's title insurance policy, from a
title insurance company licensed to issue such policy, on any real property
owned by the Company or any Subsidiary, that insures the Company's or the
Subsidiary's fee or leasehold interest in such real property (other than the
leasehold interest of the Company with respect to its principal executive
offices as described in the Registration Statement), with coverage in an amount
at least equal to the fair market value of such fee or leasehold interest in the
real property, or a lender's title insurance policy insuring the lien of its
mortgage securing the real property with coverage equal to the maximum aggregate
principal amount of any indebtedness held by the Company or a Subsidiary and
secured by the real property;
(ff) [neither the purchase nor the origination, as the case may be, of
the Initial Purchased Loans and the Initial Direct Loans, as such terms are
defined in the Prospectus, (collectively, the "Initial Investments"), nor the
execution and delivery of, or performance by the borrowers thereunder of any
mortgage, deed of trust, deed, indenture, note, loan or credit agreement or any
other agreement or instrument in connection therewith, with the exception of the
Company or any of its Subsidiaries recording a deed-in-lieu of foreclosure with
respect to any Initial Investment, has resulted in or, with notice and an
opportunity to cure, would result in a breach of or default under any mortgage,
deed of trust, indenture, note, loan or credit agreement or any other agreement
or instrument relating to any mortgage or other loan that may have
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<PAGE>
priority over any such Initial Investment with respect to the assets of the
borrower thereunder and that is in existence at the time the Company or any of
the Subsidiaries purchases or originates any such Initial Investment;]
(gg) to the knowledge of the Company and the Partnership, there are no
statutes or regulations applicable to the Company or any of the Subsidiaries or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company or any
of the Subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus which have not been so disclosed and properly
described therein; all agreements between the Company or any of the Subsidiaries
and third parties expressly referenced in the Prospectus are legal, valid and
binding obligations of the Company or one or more of the Subsidiaries,
enforceable in accordance with their respective terms, except to the extent
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally and by general
principles of equity;
(hh) no relationship, direct or indirect, exists between or among the
Company or any of the Subsidiaries on the one hand, and the directors, trustees,
officers, shareholders, customers or suppliers of the Company or any of the
Subsidiaries on the other hand, which is required by the Act to be described in
the Registration Statement and the Prospectus which is not so described;
(ii) the Company and each Subsidiary owns or possesses adequate
license or other rights to use all patents, trademarks, service marks, trade
names, copyrights, software and design licenses, trade secrets, manufacturing
processes, other intangible property rights and know-how, if any, (collectively
"Intangibles") necessary to entitle the Company and each Subsidiary to conduct
its business as described in the Prospectus, and neither the Company, nor any
Subsidiary, has received notice of infringement of or conflict with (and knows
of no such infringement of or conflict with) asserted rights of others with
respect to any Intangibles which could materially and adversely affect the
assets, operations, business, prospects or condition (financial or otherwise) of
the Company or any Subsidiary;
(jj) each of the Company and the Subsidiaries has filed on a timely
basis all necessary federal, state, local and foreign income and franchise tax
returns, if any such returns were required to be filed, through the date hereof
and have paid all taxes shown as due thereon; and no tax deficiency has been
asserted against the Company or any of the Subsidiaries, nor does the Company or
any of the Subsidiaries know of any tax deficiency which is likely to be
asserted against any such entity which if determined adversely to any such
entity, could materially adversely affect the assets, operations, business,
prospects or condition (financial or otherwise) of any such entity,
respectively; all tax liabilities, if any, are adequately provided for on the
respective books of such entities;
(kk) each of the Company and the Subsidiaries maintains insurance
(issued by insurers of recognized financial responsibility) of the types and in
the amounts generally deemed adequate, if any, for their respective businesses
and consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance
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covering real and personal property owned or leased by the Company and the
Subsidiaries against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect;
(ll) except as otherwise disclosed in the Prospectus, neither the
Company, any of the Subsidiaries nor, to the best of their knowledge, any former
owner of any real property owned by the Company or the Subsidiaries has
authorized or conducted or has knowledge of the generation, transportation,
storage, presence, use, treatment, disposal, release, or other handling of any
hazardous substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated
biphenyls ("PCBs"), petroleum product or waste (including crude oil or any
fraction thereof), natural gas, liquefied gas, synthetic gas or other material
defined, regulated, controlled or potentially subject to any remediation
requirement under any environmental law (collectively, "Hazardous Materials"),
on, in, under or affecting any real property currently leased or owned or by any
means controlled by the Company or any of the Subsidiaries, including any real
property underlying any Financing, as such term is defined in the Registration
Statement, (collectively, the "Real Property"), except in material compliance
with applicable laws; to the knowledge of the Company and the Partnership, the
Real Property, and the Company's, the Subsidiaries' and the former owners of the
Real Property's operations with respect to the Real Property, are and were in
compliance with all federal, state and local laws, ordinances, rules,
regulations and other governmental requirements relating to pollution, control
of chemicals, management of waste, discharges of materials into the environment,
health, safety, natural resources, and the environment (collectively,
"Environmental Laws"), and the Company and the Subsidiaries are in compliance
with, all licenses, permits, registrations and government authorizations
necessary to operate under all applicable Environmental Laws; except as
otherwise disclosed in the Prospectus, neither the Company nor the Subsidiaries
or any former owner of any of the Real Property has received any written or oral
notice from any governmental entity or any other person and there is no pending
or threatened claim, litigation or any administrative agency proceeding that:
alleges a violation of any Environmental Laws by the Company or any of the
Subsidiaries; or that the Company or any of the Subsidiaries is a liable party
or a potentially responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., or
any state superfund law; has resulted in or could result in the attachment of an
environmental lien on any of the Real Property; or alleges that the Company or
any of the Subsidiaries is liable for any
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contamination of the environment, contamination of the Real Property, damage to
natural resources, property damage, or personal injury based on their activities
or the activities of their predecessors or third parties (whether at the Real
Property or elsewhere) involving Hazardous Materials, whether arising under the
Environmental Laws, common law principles, or other legal standards; in the
ordinary course of its business as necessary and appropriate, the Company will
conduct a periodic review of the effect of Environmental Laws on the business,
operations and properties of the Company and the Subsidiaries, in the course of
which it identifies and evaluates associated costs and liabilities (including,
without limitation, any capital or operating expenditures) required for
clean-up, closure of properties or compliance with Environmental Laws or any
permit, license or approval, any related constraints on operating activities and
any potential liabilities to third parties;
(mm) there are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any permit, license or approval, any related constraints on operating
activities and any potential liabilities to third parties) which could, singly
or in the aggregate, reasonably be deemed to have a material adverse effect on
the assets, operations, business, prospects or condition (financial or
otherwise) of the Company and the Subsidiaries, taken as a whole;
(nn) none of the entities which prepared appraisals of the Real
Property, nor the entities which prepared Phase I environmental assessment
reports with respect to the Real Property, was employed for such purpose on a
contingent basis or has any substantial interest in the Company or any of the
Subsidiaries, and none of their directors, officers or employees is connected
with the Company or any of the Subsidiaries as a promoter, selling agent, voting
trustee, officer, director or employee;
(oo) neither the Company nor any of the Subsidiaries nor, to the best
of the Company's knowledge, any officer, director or trustee purporting to act
on behalf of the Company or any of the Subsidiaries has at any time; (i) made
any contributions to any candidate for political office, or failed to disclose
fully any such contributions, in violation of law, (ii) made any payment to any
state, federal or foreign governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments required
or allowed by applicable law, (iii) made any payment outside the ordinary course
of business to any investment officer or loan broker or person charged with
similar duties of any entity to which the Company or any of the Subsidiaries
sells or from which the Company or any of the Subsidiaries buys loans or
servicing arrangements for the purpose of influencing such agent, officer,
broker or person to buy loans or servicing arrangements from or sell loans to
the Company or any of the Subsidiaries, or (iv) engaged in any transactions,
maintained any bank account or used any corporate funds except for transactions,
bank accounts and funds which have been and are reflected in the normally
maintained books and records of the Company and the Subsidiaries;
(pp) except as otherwise disclosed in the Prospectus, there are no
material outstanding loans or advances or material guarantees of indebtedness by
the Company or any of the Subsidiaries to or for the benefit of any of the
officers or directors of the Company or any of the Subsidiaries or any of the
members of the families of any of them;
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(qq) neither the Company nor any of the Subsidiaries nor, to the
Company's knowledge, any employee or agent of the Company or any of the
Subsidiaries, has made any payment of funds of the Company or of any Subsidiary
or received or retained any funds in violation of any law, rule or regulation or
of a character required to be disclosed in the Prospectus;
(rr) the Company is organized in conformity with the requirements for
qualification as a real estate investment trust under the Internal Revenue Code
of 1986, as amended (the "Code"), and the Company's proposed method of operation
will enable it to meet the requirements for taxation as a real estate investment
trust under the Code; the Partnership will be treated as a partnership for
federal income tax purposes and not as a corporation or association taxable as a
corporation;
(ss) the Shares have been approved for listing, upon official notice of
issuance, on the Nasdaq National Market;
(tt) in connection with this offering, the Company has not offered and
will not offer its Common Shares or any other securities convertible into or
exchangeable or exercisable for Common Shares in a manner in violation of the
Securities Act or the Securities Act Regulations; the Company has not
distributed and will not distribute any Prospectus or other offering material in
connection with the offer and sale of the Shares, except as contemplated herein;
(uu) the Company has complied and will comply with all the provisions
of Florida Statutes, Section 517.075 (Chapter 92-198, Laws of Florida); neither
the Company nor any of the Subsidiaries or their respective affiliates does
business with the government of Cuba or with any person or affiliate located in
Cuba;
(vv) neither the Company nor any of the Subsidiaries is, or solely as
a result of transactions contemplated hereby and the application of the proceeds
from the sale of the Shares, will become an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "1940 Act"); and
(ww) the Company has not incurred any liability for any finder's fees
or similar payments in connection with the transactions herein contemplated.
4. Certain Covenants of the Company and the Partnership: The Company
and the Partnership hereby covenant with each Underwriter:
(a) to furnish such information as may be required and otherwise to
cooperate in qualifying the Shares for offering and sale under the securities or
blue sky laws of such states as the Representative may designate and to maintain
such qualifications in effect as long as required for the distribution of the
Shares, provided that the Company shall not be required to qualify as a foreign
corporation or to consent to the service of process under the laws of any such
state (except service of process with respect to the offering and sale of the
Shares);
(b) if, at the time this Agreement is executed and delivered, it is
necessary for a post-effective amendment to the Registration Statement to be
declared effective before the offering of
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<PAGE>
the Shares may commence, the Company will endeavor to cause such post-effective
amendment to become effective as soon as possible and will advise the
Representative promptly and, if requested by the Representative, will confirm
such advice in writing, when such post-effective amendment has become effective;
(c) to prepare the Prospectus in a form approved by the Underwriters
and file such Prospectus with the Commission pursuant to Rule 424(b) within the
time period prescribed by law, on the day following the execution and delivery
of this Agreement and to furnish promptly (and with respect to the initial
delivery of such Prospectus, not later than 10:00 a.m. (New York City time) on
the day following the execution and delivery of this Agreement) to the
Underwriters as many copies of the Prospectus (or of the Prospectus as amended
or supplemented if the Company shall have made any amendments or supplements
thereto after the effective date of the Registration Statement) as the
Underwriters may reasonably request for the purposes contemplated by the
Securities Act Regulations, which Prospectus and any amendments or supplements
thereto furnished to the Underwriters will be identical to the version created
to be transmitted to the Commission for filing via EDGAR, except to the extent
permitted by Regulation S-T;
(d) to advise the Representative promptly and (if requested by the
Representative) to confirm such advice in writing, when the Registration
Statement has become effective and when any post-effective amendment thereto
becomes effective under the Securities Act Regulations;
(e) to advise the Representative immediately, confirming such advice
in writing, of (i) the receipt of any comments from, or any request by, the
Commission for amendments or supplements to the Registration Statement or
Prospectus or for additional information with respect thereto, or (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, or of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes and, if
the Commission or any other government agency or authority should issue any such
order, to make every reasonable effort to obtain the lifting or removal of such
order as soon as possible; to advise the Representative promptly of any proposal
to amend or supplement the Registration Statement or Prospectus and to file no
such amendment or supplement to which the Representative shall reasonably object
in writing;
(f) before amending or supplementing the Registration Statement or the
Prospectus, or, during any period of time in which a Prospectus relating to the
Shares is required to be delivered under the Securities Act Regulations, to
furnish to the Representative a copy of each such proposed amendment or
supplement before filing any such amendment or supplement with the Commission;
(g) to furnish to the Underwriters for a period of five years from the
date of this Agreement (i) as soon as available, copies of all annual, quarterly
and current reports or other communications supplied to holders of Common
Shares, (ii) as soon as practicable after the filing thereof, copies of all
reports filed by the Company with the Commission, the NASD or any
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<PAGE>
securities exchange and (iii) such other publicly available information as the
Underwriters may reasonably request regarding the Company and its Subsidiaries;
(h) to advise the Underwriters promptly during any period of time in
which a Prospectus relating to the Shares is required to be delivered under the
Securities Act Regulations (i) of any material change in the Company's assets,
operations, business, prospects or condition (financial or otherwise) or (ii) of
the happening of any event which would require the making of any change in the
Prospectus then being used so that the Prospectus would not include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and, during such time,
to prepare and furnish, at the Company's expense, to the Underwriters promptly
such amendments or supplements to the Prospectus as may be necessary to reflect
any such change;
(i) to furnish promptly to the Representative a signed copy of the
Registration Statement, as initially filed with the Commission, and of all
amendments or supplements thereto (including all exhibits filed therewith) and
such number of conformed copies of the foregoing as the Underwriters may
reasonably request;
(j) to furnish to the Underwriters, not less than two business days
before filing with the Commission subsequent to the effective date of the
Prospectus and during the period referred to in paragraph (h) above, a copy of
any document proposed to be filed with the Commission pursuant to Section 13,
14, or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act");
(k) to apply the net proceeds of the sale of the Shares substantially
in accordance with its statements under the caption "Use of Proceeds" in the
Prospectus;
(l) to make generally available to its security holders as soon as
practicable, but in any event not later than the end of the fiscal quarter first
occurring after the first anniversary of the effective date of the Registration
Statement, an earnings statement complying with the provisions of Section 11(a)
of the Securities Act (in form, at the option of the Company, complying with the
provisions of Rule 158 of the Securities Act Regulations) covering a period of
12 months beginning on the effective date of the Registration Statement;
(m) to use its best efforts to effect and maintain the inclusion of
the Shares on the Nasdaq National Market and to file with the Nasdaq National
Market all documents and notices required by the Nasdaq National Market of
companies that have securities that are included on the Nasdaq National Market;
(n) to refrain during a period of [180] days from the date of the
Prospectus, without the prior written consent of the Representative, from (i)
offering, pledging, selling, contracting to sell, selling any option or contract
to purchase, purchasing any option or contract to sell, granting any option for
the sale of, or otherwise disposing of or transferring, directly or indirectly,
any Common Shares or any securities convertible into or exercisable or
exchangeable for Common Shares, or filing any registration statement under the
Securities Act with respect to any of the
17
<PAGE>
foregoing or (ii) entering into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Shares, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Shares or such other securities, in cash or otherwise; the foregoing
sentence shall not apply to (A) the Shares to be sold hereunder, (B) the
Warrants and Warrant Shares or (C) any Common Shares issued by the Company upon
the exercise of an option outstanding on the date hereof or upon the exercise of
option pursuant to any management option plan described in the prospectus
pursuant to a dividend reinvestment plan adopted hereafter and referred to in
the Prospectus;
(o) to comply with the terms of the Warrant Agreement;
(p) the Company shall not, and shall use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the underwriting syndicate contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which could be reasonably likely to cause or result
in, or which could be reasonably likely to in the future reasonably be expected
to cause or result in, the stabilization or manipulation of the price of any
security of the Company, to facilitate the sale or resale of any of the Shares,
(ii) sell, bid for, purchase or pay anyone any compensation for soliciting
purchases of the Shares or (iii) pay or agree to pay to any person any
compensation for soliciting any order to purchase any other securities of the
Company;
(q) the Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Shares;
(r) the Company will use its best efforts (i) to meet the requirements
to qualify as a real estate investment trust under the Code and (ii) to cause
the Partnership to be treated as a partnership for federal income tax purposes;
(s) the Company will comply with all of the provisions of any
undertakings in the Registration Statement;
(t) the Company and the Subsidiaries will conduct their affairs in such
a manner so as to ensure that neither the Company nor any Subsidiary will be an
"investment company" or an entity "controlled" by an investment company within
the meaning of the 1940 Act;
(u) if at any time during the 30-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in the Representative's
reasonable opinion the market price of the Common Shares has been or is likely
to be materially affected (regardless of whether such rumor, publication or
event necessitates a supplement to or amendment of the Prospectus) and after
written notice from the Representative advising the Company to the effect set
forth above, to forthwith prepare, consult with the Representative concerning
the substance of, and disseminate a
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<PAGE>
press release or other public statement, reasonably satisfactory to the
Representative, responding to or commenting on such rumor, publication or event;
and
(v) to maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
5. Payment of Expenses; Right of First Refusal:
(a) The Company agrees to pay all costs and expenses incident to the
performance of the Company's obligations under this Agreement and the Warrant
Agreement, whether or not the transactions contemplated hereunder or thereunder
are consummated or this Agreement and the Warrant Agreement are terminated,
including, but not limited to, all fees and expenses of and filing with the
Commission and the NASD; all Blue Sky fees and expenses, including filing fees
and disbursements of the Representative's Blue Sky counsel, (but excluding the
fees of such counsel), fees and disbursements of counsel and accountants for the
Company, and printing costs, including costs of printing the prospectus, and any
amendments thereto; all underwriting documents, Blue Sky Memoranda, a reasonable
quantity of prospectuses requested by the Representative, and the Company's road
show costs and expenses.
(b) The Company agrees to reimburse the Representative upon request for
its out-of-pocket expenses incurred in connection with its obligations under
this Agreement whether or not the Offering is consummated, including the fees
and disbursements (other than filing fees and related expenses) of the
Representative's legal counsel, Blue Sky counsel (which shall undertake all Blue
Sky matters), and road show costs and expenses. The foregoing expense
reimbursement shall not exceed $100,000.
(c) If this Agreement shall be terminated by the Underwriters, or any
of them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the transactions contemplated herein.
(d) For a period of two years from completion of the Offering, the
Company shall appoint the Representative to act as:
(i) exclusive financial advisor in connection with any sale by the
Company of all or substantially all of its assets or any merger, acquisition or
other transaction entered into or completed by the Company where the Company is
not the survivor or where the Company's shareholders obtain or retain, as the
case may be, equity interests representing less than 50% of the voting rights or
equity in the survivor;
(ii) lead underwriter or placement agent in connection with any public
or private offering of equity or debt securities or other capital markets
financing entered into or completed by the Company, excluding (A) any securities
offered or sold pursuant to any employee stock option plan, (B) any securities
offered or sold to RAI or its affiliates, and (C) any debt financing arranged by
the Company through a bank or other institutional lender or lenders in
situations where such bank or other institutional lender is acting solely as a
lender and not being compensated for services that traditionally would be deemed
those of an underwriter or placement agent;
(iii) lead underwriter in connection with any securitization or similar
transaction entered into or completed by the Company; and
(iv) exclusive agent in connection with the exercise of warrants or
options in the Company pursuant to a cashless exercise or other exercise
program.
6. Conditions of the Underwriters' Obligations: The obligations of the
Underwriters hereunder are subject to (i) the accuracy of the representations
and warranties on the part of the Company in all material respects on the date
hereof and at the Closing Time and on each Date of Delivery, (ii) the
performance by the Company of its obligations hereunder in all material
respects, and (iii) the following further conditions:
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<PAGE>
(a) If, at the time this Agreement is executed and delivered, it is
necessary for a post-effective amendment to the Registration Statement to be
declared effective before the offering of the Shares may commence, such
post-effective amendment shall have become effective not later than 5:30 p.m.,
New York City time, on the date hereof, or at such later date and time as shall
be consented to in writing by you.
(b) The Company shall furnish to the Underwriters at the Closing Time
and on each Date of Delivery an opinion of Ledgewood Law Firm, P.C., counsel for
the Company, addressed to the Underwriters and dated the Closing Time and each
Date of Delivery and in form satisfactory to Hunton & Williams, counsel for the
Underwriters, stating that:
(i) the authorized shares of beneficial interest of the
Company conform as to legal matters to the description thereof
contained in the Prospectus and meets the requirements of Form S-11
under the Securities Act; the Company has an authorized capitalization
as set forth in the Prospectus under the caption "Capitalization"; the
outstanding shares of beneficial interest or capital stock, as the case
may be, of the Company and the Subsidiaries (other than the
Partnership) have been duly and validly authorized and issued and are
fully paid and non-assessable; all of the authorized and validly issued
shares of capital stock of or interests in the Subsidiaries, as the
case may be, are directly or indirectly owned of record and
beneficially by the Company; except as disclosed in the Prospectus,
there are no authorized and validly issued (i) securities or
obligations of the Company or any of the Subsidiaries convertible into
or exchangeable for any shares of beneficial interest of the Company or
any capital stock or interests in any such Subsidiary or (ii) warrants,
rights or options to subscribe for or purchase from the Company or any
such Subsidiary any such shares of beneficial interest, capital stock,
interests or any such convertible or exchangeable securities or
obligations; except as set forth in the Prospectus or contemplated by
this Agreement, there are no outstanding obligations of the Company or
any such Subsidiary to issue any shares of beneficial interest, capital
stock or interests, any such convertible or exchangeable securities or
obligation, or any such warrants, rights or options;
(ii) the Company and the Subsidiaries (other than the
Partnership) each has been duly formed or incorporated, as the case may
be, and is validly existing and in good standing under the laws of its
respective jurisdiction of formation or incorporation with the
requisite power and authority to own its respective properties and to
conduct its respective business as described in the Registration
Statement and Prospectus and, in the case of the Company, to execute
and deliver this Agreement, the Warrant Agreement and the Other
Transaction Documents and to consummate the transactions described in
each such agreement;
(iii) the Company and the Subsidiaries (other than the
Partnership) are duly qualified in or registered by and are in good
standing in each jurisdiction specifically referred to in the
Registration Statement and Prospectus as jurisdictions in which
property securing loans proposed to be made or acquired by the Company
is
20
<PAGE>
located and in which the failure, individually or in the aggregate, to
be so qualified could reasonably be expected to have a material
adverse effect on the assets, operations, business, prospects or
condition (financial or otherwise) of the Company and the Subsidiaries
taken as a whole. Except as disclosed in the Prospectus, no Subsidiary
is prohibited or restricted by its charter, bylaws, certificate of
limited partnership or partnership agreement, as the case may be, or,
to the knowledge of such counsel, otherwise, directly or indirectly,
from paying dividends to the Company, or from making any other
distribution with respect to such Subsidiary's capital stock or
interests or from paying the Company or any other Subsidiary, any
loans or advances to such Subsidiary from the Company or such other
Subsidiary, or from transferring any such Subsidiary's property or
assets to the Company or to any other Subsidiary; to such counsel's
knowledge, other than as disclosed in the Prospectus, the Company does
not own, directly or indirectly, any capital stock or other equity
securities of any other corporation or any ownership interest in any
partnership, joint venture or other association;
(iv) The Partnership has been duly formed and is validly
existing as a limited partnership under the laws of the jurisdiction of
its organization, with all requisite partnership power and authority to
own, lease and operate its properties and to conduct its business as
now conducted as described in the Registration Statement and the
Prospectus. The Partnership has been duly qualified or registered to do
business as a foreign partnership in those jurisdictions specifically
referred to in the Registration Statement and Prospectus as
jurisdictions in which property securing loans proposed to be made or
acquired by the Partnership is located and in which the failure,
individually or in the aggregate, to be so qualified or registered
would have a material adverse effect on the assets, operations,
business, prospects or condition (financial or otherwise) of the
Company and the Subsidiaries taken as a whole;
(v) to such Counsel's knowledge, the Company and the
Subsidiaries are in compliance in all material respects with all
applicable laws, rules, regulations and, orders;
(vi) to such counsel's knowledge, except as disclosed on the
Registration Statement and the Prospectus, neither the Company nor any
of its Subsidiaries is in material breach of, or in material default
under (nor has any event occurred which with notice, lapse of time, or
both would constitute a material breach of, or material default under)
its respective declaration of trust, charter, by-laws, certificate of
limited
21
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partnership or partnership agreement, as the case may be, or in the
performance or observation of any obligation agreement, covenant, or
condition contained in any license, indenture, mortgage, deed of
trust, loan or credit agreement or any other agreement or instrument
to which the Company or any of the Subsidiaries is a party or by which
any of them or their respective properties may be bound or affected,
except such breaches or defaults which would not have a material
adverse effect on the assets, operations, business, prospects or
condition (financial or otherwise) of the Company and the Subsidiaries
taken as a whole;
(vii) the execution, delivery and performance of this
Agreement, the Warrant Agreement and the Other Transaction Documents by
the Company and the consummation by the Company of the transactions
contemplated under this Agreement, the Warrant Agreement or the Other
Transaction Documents, as the case may be, do not and will not conflict
with, or result in any breach of, or constitute a default under (nor
constitute any event which with notice, lapse of time, or both would
constitute a breach of or default under), (i) any provisions of the
declaration of trust, charter, by-laws, certificate of limited
partnership or partnership agreement, as the case may be, of the
Company or any Subsidiary, (ii) to such counsel's knowledge, any
provision of any license, indenture, mortgage, deed of trust, loan or
credit agreement or other agreement or instrument to which the Company
or any Subsidiary is a party or by which any of them or their
respective properties may be bound or affected, or (iii) to such
counsel's knowledge, any law or regulation or any decree, judgment or
order applicable to the Company or any Subsidiary, except in the case
of clauses (ii) and (iii) for such conflicts, breaches or defaults,
laws, regulations, decrees, judgments or orders, which individually or
in the aggregate could not be reasonably expected to have a material
adverse effect on the assets, operations, business, prospects or
condition (financial or otherwise) of the Company and the Subsidiaries
taken as a whole; or, with the exception of the Other Transaction
Documents, result in the creation or imposition of any lien,
encumbrance, or to such counsel's knowledge, charge or claim upon any
property or assets of the Company or the Subsidiaries;
(viii) the Company has full trust right, power and authority
to enter into and perform this Agreement and to consummate the
transactions contemplated herein; this Agreement has been duly
authorized, executed and delivered by the Company and is a legal, valid
and binding agreement of the Company enforceable in accordance with its
terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, and by general principles of equity, and except that
enforceability of the indemnification and contribution provisions set
forth in Section 9 hereof may be limited by the federal or state
securities laws of the United States or public policy underlying such
laws;
(ix) the Partnership has full partnership right, power and
authority to enter into and perform this Agreement and to consummate
the transactions contemplated herein. This Agreement has been duly
authorized, executed and delivered by the Partnership and constitutes a
valid and binding agreement of the Partnership enforceable in
accordance with its terms, except as may be limited by bankruptcy,
insolvency,
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<PAGE>
reorganization, moratorium or similar laws affecting creditors' rights
generally, and by general principles of equity, and except that
enforceability of the indemnification and contribution provisions set
forth in Section 9 hereof may be limited by federal or state
securities laws of the United States or public policy underlying such
laws;
(x) the Warrant Agreement and the Other Transaction Documents
have been duly authorized, executed, and delivered by the Company and
are legal, valid and binding agreements of the Company enforceable in
accordance with their terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, and by general principles of equity; when
issued and delivered pursuant to the terms of the Warrant Agreement,
the Warrants will constitute legal, valid and binding obligations of
the Company enforceable in accordance with their terms, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally, and by general
principles of equity; the Warrant Shares have been duly reserved for
issuance upon exercise of the Warrants in accordance with the terms of
the Warrant Agreement; and the Warrants will conform to the description
thereof in the Registration Statement and the Prospectus;
(xi) no approval, authorization, consent or order of or
filing with any federal or state governmental or regulatory commission,
board, body, authority or agency is required in connection with the
execution, delivery and performance of this Agreement and the Other
Transaction Documents or the consummation of the transaction
contemplated hereby and thereby by the Company and the Partnership, the
sale and delivery of the Shares by the Company as contemplated hereby
other than such as have been obtained or made under the Securities Act
and except that such counsel need express no opinion as to any
necessary qualification under the state securities or blue sky laws of
the various jurisdictions in which the Shares are being offered by the
Underwriters or any approval of the underwriting terms and arrangements
by the National Association of Securities Dealers, Inc.;
(xii) to such counsel's knowledge, each of the Company and
the Subsidiaries has all necessary licenses, authorizations, consents
and approvals and has made all necessary filings required under any
federal, state or local law, regulation or rule, and has obtained all
necessary authorizations, consents and approvals from other persons,
required to conduct their respective businesses, as described in the
Registration Statement and the Prospectus, except to the extent that
any failure to have any such authorizations, consents or approvals
would not, individually or in the aggregate, have a material adverse
effect on the assets, operations, business, prospects or condition
(financial or otherwise) of the Company and the Subsidiaries, taken as
a whole; to such counsel's knowledge, neither the Company nor any of
the Subsidiaries is in violation of, in default under, or has received
any notice regarding a possible violation, default or revocation of any
such license, authorization, consent or approval or any federal, state,
local or foreign law, regulation or decree, order or judgment
applicable to the Company or any of the Subsidiaries, the effect of
which could be material and adverse to the assets, operations,
business, prospects or condition (financial or otherwise) of the
Company and the Subsidiaries taken as a whole; and no such license,
authorization, consent or approval
23
<PAGE>
contains a materially burdensome restriction that is not adequately
disclosed in the Registration Statement and the Prospectus;
(xiii) the Shares, the Warrants, and the Warrant Shares have
been duly authorized and, when the Shares and the Warrant Shares have
been issued and duly delivered against payment therefor as contemplated
by this Agreement or the Warrant Agreement, as the case may be, the
Shares and the Warrant Shares will be validly issued, fully paid and
nonassessable, and, except for any action that may have been taken by
the holder thereof, free and clear of any pledge, lien, encumbrance,
security interest, or other claim;
(xiv) immediately after the Closing Time, all of the issued
and outstanding units of partnership interest in the Partnership (the
"Common Units") will be validly issued, fully paid and non-assessable.
None of the Common Units has been or will be issued or is owned or held
in violation of any preemptive right. The outstanding Common Units have
been offered, sold and issued by the Partnership in compliance with all
federal and state securities laws;
(xv) the issuance and sale of the Shares, the Warrants, and
the Warrant Shares and the Common Units by the Company is not subject
to preemptive or other similar rights arising by operation of law,
under the declaration of trust or by-laws of the Company or the
certificate of limited partnership or Partnership Agreement of the
Partnership, under any agreement known to such counsel to which the
Company or any of the Subsidiaries is a party or, to such counsel's
knowledge, otherwise;
(xvi) neither the purchase nor the origination, as the case
may be, of the Initial Purchased Loans and the Initial Direct Loans
(collectively, the "Initial Investments"), nor the execution and
delivery of, or performance by the borrowers thereunder of any
mortgage, deed of trust, deed, indenture, note, loan or credit
agreement or any other agreement or instrument in connection therewith,
has resulted in or, with notice and an opportunity to cure, would
result in a breach of or default under any mortgage, deed of trust,
indenture, note, loan or credit agreement or any other agreement or
instrument relating to any mortgage or other loan (collectively, the
"Senior Indebtedness") that may have priority over any such Initial
Investment with respect to the assets of the borrower thereunder and
that is in existence at the time the Company or any of the Subsidiaries
purchases or originates any such Initial Investment;
(xvii) no party to any mortgage, deed of trust, indenture,
note, loan or credit agreement or any other agreement or instrument
relating to any Senior Indebtedness of which such counsel has knowledge
has the right to limit, hinder, delay or otherwise interfere with the
exercise of any remedies that the Company or any of the Subsidiaries
may have under any mortgage, deed of trust, indenture, note, loan or
credit agreement or any other agreement or instrument relating to any
of the Initial Investments, including, without limitation, the
possession of a deed-in-lieu of foreclosure and a power of attorney
granting the right to record any such deed-in-lieu of foreclosure by
the Company or any of the Subsidiaries pursuant to any documents
evidencing the Initial Investments
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(xviii) to counsel's knowledge, there are no persons with
registration or other similar rights to have any securities registered
pursuant to the Registration Statement or otherwise registered by the
Company under the Securities Act, except pursuant to the Warrant
Agreement;
(xix) the form of certificate used to evidence the Common
Shares complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the declaration of
trust and bylaws of the Company and the requirements of the Nasdaq
National Market;
(xx) the Registration Statement has become effective under
the Securities Act and, to the best of such counsel's knowledge, no
stop order suspending the effectiveness of the Registration Statement
has been issued and, to such counsel's knowledge, no proceedings with
respect thereto have been commenced or threatened;
(xxi) as of the effective date of the Registration Statement,
the Registration Statement and the Prospectus (except as to the
financial statements and other financial and statistical data contained
therein, as to which such counsel need express no opinion) complied as
to form in all material respects with the requirements of the
Securities Act and the Securities Act Regulations;
(xxii) the statements under the captions "Capitalization,"
"Risk Factors," "Distribution Policy," "Prospectus Summary - Tax Status
of the Company," "Certain Provisions of Maryland Law and of the
Company's Declaration of Trust and Bylaws," "Description of Shares of
Beneficial Interest," "Common Shares Available for Future Sale,"
"Federal Income Tax Considerations," "ERISA Considerations " and
"Certain Legal Aspects of Mortgage Loans and Real Property
Investments," in the Registration Statement and the Prospectus, insofar
as such statements constitute a summary of the legal matters referred
to therein, constitute accurate summaries thereof in all material
respects;
(xxiii) the Shares have been approved for inclusion on the
Nasdaq National Market;
(xxiv) to such counsel's knowledge, there are no actions,
suits or proceedings, inquiries, or investigations pending or
threatened against the Company or any of the Subsidiaries or any of
their respective officers and directors or to which the properties,
assets or rights of any such entity are subject, at law or in equity,
before or by any federal, state, local or foreign governmental or
regulatory commission, board, body, authority, arbital panel or agency
that are required to be described in the Prospectus but are not so
described;
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(xxv) to such counsel's knowledge, there are no contracts or
documents of a character that are required to be filed as exhibits to
the Registration Statement or to be described or summarized in the
Prospectus which have not been so filed, summarized or described; to
such counsel's knowledge, all agreements between the Company or any of
the Subsidiaries, respectively, and third parties expressly referenced
in the Prospectus (other than agreements relating to the Initial
Investments which are specifically addressed in Section 6(d)(iv)) are
legal, valid and binding obligations of the Company or the
Subsidiaries, as the case may be, enforceable in accordance with their
respective terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and by general principles of equity;
(xxvi) the Company is organized in conformity with the
requirements for qualification as a real estate investment trust
pursuant to Sections 856 through 860 of the Code, and the Company's
proposed method of operation will enable it to meet the requirements
for qualification and taxation as a real estate investment trust under
the Code; the Partnership will be treated as a partnership for federal
income tax purposes and not as a corporation or an association taxable
as a corporation;
(xxvii) neither the Company nor any of the Subsidiaries is,
or solely as a result of transactions contemplated hereby and the
application of the proceeds from the sale of the Shares as described in
the Registration Statement and the Prospectus under the caption "Use of
Proceeds," will become an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act"); and
(xxviii) to such counsel's knowledge, each of the Company and
the Subsidiaries has filed on a timely basis all necessary federal,
state, local and foreign income and franchise tax returns through the
date hereof, if any such returns are required to be filed, and have
paid all taxes shown as due thereon; and no tax deficiency has been
asserted against any such entity, nor does any such entity know of any
tax deficiency which is likely to be asserted against any such entity
which, if determined adversely to any such entity, could have a
material adverse effect on the assets, operations, business, prospects
or condition (financial or otherwise) of any such entity, respectively.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company, independent
public accountants of the Company and Underwriters at which the contents of the
Registration Statement and Prospectus were discussed and, although such counsel
is not passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or Prospectus (except as and to the extent stated in subparagraphs
(xix) and (xx) above), nothing has caused them to believe that the Registration
Statement, the Preliminary Prospectus or the Prospectus, as of their respective
effective or issue dates and as of the date of such counsel's opinion, contained
or contains any untrue statement of a material fact or omitted or omits to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (it being understood that, in each case, such counsel need
express no view with respect to the
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financial statements and other financial and statistical data included in the
Registration Statement, Preliminary Prospectus or Prospectus).
(c) The Company shall furnish to the Underwriters at the Closing Time
and on each Date of Delivery an opinion of Arnold & Porter, special counsel for
the Company, addressed to the Underwriters and dated the Closing Time and each
Date of Delivery and in form satisfactory to Hunton & Williams, counsel for the
Underwriters, stating that as a matter of Maryland law:
(i) the statements under the captions "Capitalization,"
"Certain Provisions of Maryland Law and of the Company's Declaration of
Trust and Bylaws," and "Description of Shares of Beneficial Interest,"
in the Registration Statement and the Prospectus, insofar as such
statements constitute summaries of Maryland corporate law, constitute
accurate summaries thereof in all material respects;
(ii) the Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capitalization"; the
outstanding shares of beneficial interest or capital stock, as the case
may be, of the Company and the Subsidiaries (other than the
Partnership) have been duly and validly authorized and issued and are
fully paid and non-assessable; all of the outstanding shares of capital
stock of or interests in the Subsidiaries, as the case may be, are
directly or indirectly owned of record and beneficially by the Company;
(iii) the Company and the Subsidiaries (other than the
Partnership) each has been duly formed or incorporated, as the case may
be, and is validly existing and in good standing under the laws of the
state of Maryland with the requisite power and authority to own its
respective properties and to conduct its respective business as
described in the Registration Statement and Prospectus and, in the case
of the Company, to execute and deliver this Agreement, the Warrant
Agreement and the Other Transaction Documents and to consummate the
transactions described in each such agreement;
(iv) except as disclosed in the Prospectus, no Subsidiary is
prohibited or restricted, as a matter of Maryland law, directly or
indirectly, from paying dividends to the Company, or from making any
other distribution with respect to such Subsidiary's capital stock or
interests or from paying the Company or any other Subsidiary, any loans
or advances to such Subsidiary from the Company or such other
Subsidiary, or from transferring any such Subsidiary's property or
assets to the Company or to any other Subsidiary;
(v) the Company has full corporate right, power and authority
to enter into and perform this Agreement and to consummate the
transactions contemplated herein; this Agreement has been duly
authorized, executed and delivered by the Company and is a legal, valid
and binding agreement of the Company enforceable in accordance with its
terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, and by general principles of equity, and except that
enforceability of the indemnification and contribution provisions set
forth in
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Section 9 hereof may be limited by the federal or state securities
laws of the United States or public policy underlying such laws;
(vi) the Warrant Agreement and the Other Transaction
Documents have been duly authorized, executed, and delivered by the
Company and are legal, valid and binding agreements of the Company
enforceable in accordance with their terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, and by general principles of
equity; when issued and delivered pursuant to the terms of the Warrant
Agreement, the Warrants will constitute legal, valid and binding
obligations of the Company enforceable in accordance with their terms,
except as may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally, and
by general principles of equity; the Warrant Shares have been duly
reserved for issuance upon exercise of the Warrants in accordance with
the terms of the Warrant Agreement;
(d) With respect to any loans purchased from Resource America, Inc. or
its subsidiaries identified on Schedule V ("RAI Subsidiaries"), RAI shall
furnish to the Company and the Underwriters at the Closing Time and on each Date
of Delivery an opinion of [counsel to RAI], addressed to the Company and the
Underwriters and dated the Closing Time and each Date of Delivery and in form
satisfactory to Hunton & Williams, stating that:
(i) RAI and the RAI Subsidiaries each has been duly formed or
incorporated, as the case may be, and is validly existing and in good
standing under the laws of its respective jurisdiction of formation or
incorporation with all requisite power and authority to own its
respective properties and to conduct its respective business and to
execute and deliver the Other Transaction Documents to which it is a
party and to consummate the transactions described in each such
agreement;
(ii) RAI and the RAI Subsidiaries are duly qualified or
registered to transact business in each jurisdiction in which they
conduct their respective businesses as now conducted and as proposed to
be conducted;
(iii) RAI and the RAI Subsidiaries each has full legal right,
power and authority to enter into and perform the Other Transaction
Documents to which it is a party and to consummate the transactions
contemplated therein; the Other Transaction Documents have been duly
authorized, executed and delivered by RAI and the RAI Subsidiaries as
applicable, and are legal, valid and binding agreements of RAI and the
RAI Subsidiaries, as applicable, enforceable in accordance with their
terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, and by general principles of equity; and
(iv) assuming due authorization, execution and delivery by
all parties thereto other than RAI and the RAI Subsidiaries, all
documents evidencing and securing the Initial Investments are the
legal, valid and binding agreements of the parties thereto, enforceable
in accordance with their terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
creditor's rights
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generally, and general principles of equity; provided, that with
respect to any Initial Investments which were acquired by RAI or a RAI
Subsidiary from third party lenders and not modified, novated or
reexecuted in favor of or for the benefit of RAI or a RAI Subsidiary,
such opinion may be the form of opinion addressing these items
delivered by counsel for and on behalf of the borrower in the Initial
Investment (the "Borrower's Opinion") and accompanied by the opinion
of counsel to RAI that it does not have any reason to believe such
Borrower's Opinion is not true and complete.
(e) All Initial Purchased Loans shall be acquired pursuant to purchase
agreements in form satisfactory to Hunton & Williams and containing
representations and warranties and purchaser's rights acceptable to Hunton &
Williams.
(f) The Representative shall have received from Grant Thornton LLP,
letters dated, respectively, as of the date of this Agreement, the Closing Time
and each Date of Delivery, as the case may be, addressed to the Representative
as representative of the Underwriters and in form and substance satisfactory to
the Representative.
(g) The Underwriters shall have received at the Closing Time and on
each Date of Delivery the favorable opinion of Hunton & Williams, dated the
Closing Time or such Date of Delivery, addressed to the Representative and in
form and substance satisfactory to the Representative.
(h) No amendment or supplement to the Registration Statement or
Prospectus shall have been filed to which the Underwriters shall have objected
in writing.
(i) Prior to the Closing Time and each Date of Delivery (i) no stop
order suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus or Prospectus has
been issued by the Commission, and no suspension of the qualification of the
Shares for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes, has occurred; and (ii)
the Registration Statement and the Prospectus shall not contain an untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(j) Between the time of execution of this Agreement and the Closing
Time or the relevant Date of Delivery (i) no material and unfavorable change in
the assets, results of operations, business, or condition (financial or
otherwise) of the Company and its Subsidiaries taken as a whole shall occur or
become known (whether or not arising in the ordinary course of business) or that
makes it, in the judgment of the Representative, impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, or (ii) no
transaction which is material and unfavorable to the Company shall have been
entered into by the Company or any of the Subsidiaries.
(k) At the Closing Time, the Warrant Agreement and the Other
Transaction Documents shall have been entered into and delivered by all required
parties.
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(l) At the Closing Time, the Shares shall have been approved for
inclusion in the Nasdaq National Market.
(m) The NASD shall not have raised any objection with respect to the
fairness and reasonableness of the underwriting terms and arrangements.
(n) The Representative shall have received letters from each
[stockholder] of the Company, in form and substance satisfactory to the
Representative, confirming that for a period of 180 days after the Closing Time,
such persons will not directly or indirectly (i) offer, pledge to secure any
obligation due on or within 180 days after the Closing Time, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option for the sale of, or otherwise dispose of or transfer
(other than a disposition or transfer pursuant to which the acquiror or
transferee is subject to the restrictions on disposition and transfer set forth
in this Section 6(n) to the same extent as such stockholder delivering a
letter hereunder), directly or indirectly, any Common Shares (other than by
participating as selling stockholders in a registered offering of Common Shares
offered by the Company with the consent of the Representative) or any securities
convertible into or exercisable or exchangeable for Common Shares or (ii) enter
into any swap or any other agreement or any transaction that transfers, in whole
or in part, directly or indirectly, the economic consequence of ownership of the
Common Shares, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Shares or such other
securities, in cash or otherwise, without the prior written consent of the
Representative, which consent may be withheld at the sole discretion of the
Representative.
(o) The Company will, at the Closing Time and on each Date of
Delivery, deliver to the Underwriters a certificate of two principal executive
officers to the effect that, to each of such officer's knowledge, the
representations and warranties of the Company set forth in this Agreement and
the conditions set forth in paragraphs (f), (g), (h) and (i) have been met and
are true and correct as of such date.
(p) The Company shall have furnished to the Underwriters such other
documents and certificates as to the accuracy and completeness of any statement
in the Registration Statement and the Prospectus, the representations,
warranties and statement of the Company contained herein and in the Warrant
Agreement, and the performance by the Company of its covenants contained herein
and therein, and the fulfillment of any conditions contained herein or therein,
as of the Closing Time or any Date of Delivery as the Underwriters may
reasonably request.
(q) All filings with the Commission required by Rule 424 under the
Securities Act shall have been made within the applicable time period prescribed
for such filing by such Rule.
(r) The Company shall perform such of its obligations under this
Agreement and the Warrant Agreement as are to be performed by the terms hereof
and thereof at or before the Closing Time or the relevant Date of Delivery.
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The several obligations of the Underwriters to purchase Option Shares
hereunder are subject to the delivery to the Representative on the Date if
Delivery of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of the Option
Shares and other matters related to the issuance of the Optional Shares.
7. Termination: The obligations of the several Underwriters hereunder
shall be subject to termination in the absolute discretion of the
Representative, at any time prior to the Closing Time or any Date of Delivery,
(i) if any of the conditions specified in Section 6 shall not have been
fulfilled when and as required by this Agreement to be fulfilled, or (ii) if
there has been since the respective dates as of which information is given in
the Registration Statement, any material adverse change, or any development
involving a prospective material adverse change, in or affecting the assets,
operations, business, prospects or condition (financial or otherwise) of the
Company, whether or not arising in the ordinary course of business, or (iii) if
there has occurred outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic, political or other
conditions the effect of which on the financial markets of the United States is
such as to make it, in the judgment of the Representative, impracticable to
market or deliver the Shares or enforce contracts for the sale of the Shares, or
(iv) if trading in any securities of the Company has been suspended by the
Commission or by Nasdaq or if trading generally on the New York Stock Exchange
or in the Nasdaq over-the-counter market has been suspended (including automatic
halt in trading pursuant to market-decline triggers other than those in which
solely program trading is temporarily halted), or limitations on prices for
trading (other than limitations on hours or numbers of days of trading) have
been fixed, or maximum ranges for prices for securities have been required, by
such exchange or the NASD or Nasdaq or by order of the Commission or any other
governmental authority, or (v) if there has been any downgrading in the rating
of any of the Company's debt securities or preferred stock by any "nationally
recognized statistical rating organization" (as defined for purposes of Rule
436(g) under the Securities Act), or (vi) any federal or state statute,
regulation, rule or order of any court or other governmental authority has been
enacted, published, decreed or otherwise promulgated which in the reasonable
opinion of the Representative has a material adverse affect or will have a
material adverse affect on the assets, operations, business, prospects or
condition (financial or otherwise) of the Company, or (viii) any action has been
taken by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the reasonable opinion of the Representative
has a material adverse effect on the securities markets in the United States, or
(ix) in the case of any of the events specified in clauses (i) through (viii),
such event, singly or together with any other such events, makes it, in the
judgment of the Representative, impracticable to market or deliver the Shares on
the terms and in the manner contemplated in the Prospectus.
If the Representative elects to terminate this Agreement as provided in
this Section 7, the Company and the Underwriters shall be notified promptly by
telephone, promptly confirmed by facsimile.
If the sale to the Underwriters of the Shares, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted under
this Agreement or if such sale is not carried out because the Company shall be
unable to comply in all material respects with any
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of the terms of this Agreement, the Company shall not be under any obligation or
liability under this Agreement (except to the extent provided in Sections 5 and
9 hereof) and the Underwriters shall be under no obligation or liability to the
Company under this Agreement (except to the extent provided in Section 9 hereof)
or to one another hereunder.
8. Increase in Underwriters' Commitments: If any Underwriter shall
default at the Closing Time or on a Date of Delivery in its obligation to take
up and pay for the Shares to be purchased by it under this Agreement on such
date, the Representative shall have the right, within 36 hours after such
default, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Shares which such Underwriter shall have agreed but failed to take up and
pay for (the "Defaulted Shares"). Absent the completion of such arrangements
within such 36 hour period, (i) if the total number of Defaulted Shares does not
exceed 10% of the total number of Shares to be purchased on such date, each
non-defaulting Underwriter shall take up and pay for (in addition to the number
of Shares which it is otherwise obligated to purchase on such date pursuant to
this Agreement) the portion of the total number of Shares agreed to be purchased
by the defaulting Underwriter on such date in the proportion that its
underwriting obligations hereunder bears to the underwriting obligations of all
non-defaulting Underwriters; and (ii) if the total number of Defaulted Shares
exceeds 10% of such total, the Representative may terminate this Agreement by
notice to the Company, without liability to any non-defaulting Underwriter.
Without relieving any defaulting Underwriter from its obligations
hereunder, the Company agrees with the non-defaulting Underwriters that it will
not sell any Shares hereunder on such date unless all of the Shares to be
purchased on such date are purchased on such date by the Underwriters (or by
substituted Underwriters selected by the Representative with the approval of the
Company or selected by the Company with the approval of the Representative).
If a new Underwriter or Underwriters are substituted for a defaulting
Underwriter in accordance with the foregoing provision, the Company or the
non-defaulting Underwriters shall have the right to postpone the Closing Time or
the relevant Date of Delivery for a period not exceeding five business days in
order that any necessary changes in the Registration Statement and Prospectus
and other documents may be effected.
The term Underwriter as used in this Agreement shall refer to and
include any Underwriter substituted under this Section 8 with the like effect as
if such substituted Underwriter had originally been named in this Agreement.
9. Indemnity and Contribution by the Company, the Partnership and the
Underwriters:
(a) The Company and the Partnership, jointly and severally agree to
indemnify, defend and hold harmless each Underwriter and any person who controls
any Underwriter within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any loss, expense, liability,
damage or claim (including the reasonable cost of investigation) which, jointly
or severally, any such Underwriter or controlling person may incur under the
Securities Act, the Exchange Act or otherwise, insofar as such loss, expense,
liability,
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damage or claim arises out of or is based upon (i) any breach of any
representation, warranty or covenant of the Company or the Partnership contained
herein or (ii) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (or in the Registration Statement
as amended by any post-effective amendment thereof by the Company) or in a
Prospectus (the term Prospectus for the purpose of this Section 9 being deemed
to include any Preliminary Prospectus, the Prospectus and the Prospectus as
amended or supplemented by the Company), or arises out of or is based upon any
omission or alleged omission to state a material fact required to be stated in
either such Registration Statement or Prospectus or necessary to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading, except insofar as any such loss, expense, liability,
damage or claim arises out of or is based upon any untrue statement or alleged
untrue statement or omission or alleged omission of a material fact contained in
and in conformity with information furnished in writing by the Underwriters
through the Representative to the Company or the Partnership expressly for use
in such Registration Statement or such Prospectus, provided, however, that the
indemnity agreement contained in this subsection (a) with respect to the
Preliminary Prospectus or the Prospectus shall not inure to the benefit of an
Underwriter (or to the benefit of any person controlling such Underwriter) with
respect to any person asserting any such loss, expense, liability, damage or
claim which is the subject thereof if the Prospectus or any supplement thereto
prepared with the consent of the Representative and furnished to the
Underwriters prior to the Closing Time corrected any such alleged untrue
statement or omission and if such Underwriter failed to send or give a copy of
the Prospectus or supplement thereto to such person at or prior to the written
confirmation of the sale of Shares to such person, unless such failure resulted
from noncompliance by the Company or the Partnership with Section 4(a) of this
Agreement.
If any action is brought against an Underwriter or controlling person
in respect of which indemnity may be sought against the Company or the
Partnership pursuant to the preceding paragraph, such Underwriter shall promptly
notify the Company and the Partnership in writing of the institution of such
action and the Company and the Partnership shall assume the defense of such
action, including the employment of counsel and payment of expenses, provided,
however, that any failure or delay to so notify the Company or the Partnership
will not relieve the Company or the Partnership of any obligation hereunder,
except to the extent that its ability to defend is actually impaired by such
failure or delay. Such Underwriter or controlling person shall have the right to
employ its or their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such Underwriter or such controlling
person unless the employment of such counsel shall have been authorized in
writing by the Company and the Partnership in connection with the defense of
such action or the Company and the Partnership shall not have employed counsel
to have charge of the defense of such action within a reasonable time or such
indemnified party or parties shall have reasonably concluded (based on the
advice of counsel) that there may be defenses available to it or them which are
different from or additional to those available to the Company or the
Partnership and which counsel to the Underwriter believes may present a conflict
for counsel representing the Company or the Partnership and the Underwriter (in
which case the Company and the Partnership shall not have the right to direct
the defense of such action on behalf of the indemnified party or parties), in
any of which events such fees and expenses shall be borne by the Company and the
Partnership and paid as incurred (it being understood, however, that the Company
and the Partnership shall not be liable for the
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expenses of more than one separate firm of attorneys for the Underwriters or
controlling persons in any one action or series of related actions in the same
jurisdiction representing the indemnified parties who are parties to such
action). Anything in this paragraph to the contrary notwithstanding, neither the
Company nor the Partnership shall be liable for any settlement of any such claim
or action effected without the its written consent.
(b) Each Underwriter agrees, severally and not jointly, to indemnify,
defend and hold harmless the Partnership, the Company, the Subsidiaries, their
trustees and directors, the officers that signed the Registration Statement and
any person who controls the Partnership, the Company or any Subsidiary within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act from and against any loss, expense, liability, damage or claim (including
the reasonable cost of investigation) which, jointly or severally, the Company,
the Partnership or any such person may incur under the Securities Act, the
Exchange Act or otherwise, insofar as such loss, expense, liability, damage or
claim arises out of or is based upon any untrue statement or alleged untrue
statement of a material fact contained in and in conformity with information
furnished in writing by such Underwriter through the Representative to the
Company or the Partnership expressly for use in the Registration Statement (or
in the Registration Statement as amended by any post-effective amendment thereof
by the Company) or in a Prospectus, or arises out of or is based upon any
omission or alleged omission to state a material fact in connection with such
information required to be stated either in the Registration Statement or
Prospectus or necessary to make such information, in the light of the
circumstances under which made, not misleading. The statements set forth in the
last paragraph on the cover page and under the caption "Underwriting", the
information regarding "Stabilizing" and "Passive Market Making" in the
Preliminary Prospectus and the Prospectus (to the extent such statements relate
to the Underwriters) constitute the only information furnished by or on behalf
of any Underwriter through the Representative to the Company for purposes of
Section 3(o) and this Section 9.
If any action is brought against the Company, the Partnership or any
such person in respect of which indemnity may be sought against any Underwriter
pursuant to the foregoing paragraph, the Company, the Partnership or such person
shall promptly notify the Representative in writing of the institution of such
action and the Representative, on behalf of the Underwriters, shall assume the
defense of such action, including the employment of counsel and payment of
expenses. The Company, the Partnership or such person shall have the right to
employ its own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of the Company, the Partnership or such person
unless the employment of such counsel shall have been authorized in writing by
the Representative in connection with the defense of such action or the
Representative shall not have employed counsel to have charge of the defense of
such action within a reasonable time or such indemnified party or parties shall
have reasonably concluded (based on the advice of counsel) that there may be
defenses available to it or them which are different from or additional to those
available to the Underwriters (in which case the Representative shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses shall be borne
by such Underwriter and paid as incurred (it being understood, however, that the
Underwriters shall not be liable for the expenses of more than one separate firm
of attorneys in any one action or series of related actions in the same
jurisdiction representing the indemnified parties who are parties to such
action). Anything in this paragraph to the contrary notwithstanding, no
34
<PAGE>
Underwriter shall be liable for any settlement of any such claim or action
effected without the written consent of the Representative.
(c) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under subsections (a) and (b) of this
Section 9 in respect of any losses, expenses, liabilities, damages or claims
referred to therein, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, expenses,
liabilities, damages or claims (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Partnership on the
one hand and the Underwriters on the other hand from the offering of the Shares
or (ii) if (but only if) the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company and the Partnership on the one hand and of the Underwriters
on the other in connection with the statements or omissions which resulted in
such losses, expenses, liabilities, damages or claims, as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Partnership on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total proceeds from the offering (net
of underwriting discounts and commissions but before deducting expenses)
received by the Company and the Partnership bear to the underwriting discounts
and commissions received by the Underwriters. The relative fault of the Company
and the Partnership on the one hand and of the Underwriters on the other shall
be determined by reference to, among other things, whether the untrue statement
or alleged untrue statement of a material fact or omission or alleged omission
relates to information supplied by the Company or the Partnership or by the
Underwriters and the parties', relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, claims, damages and
liabilities referred to above shall be deemed to include any legal or other fees
or expenses reasonably incurred by such party in connection with investigating
or defending any claim or action.
(d) The Company and the Partnership, on the one hand, and the
Underwriters, on the other, agree that it would not be just and equitable if
contribution pursuant to this Section 9 were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to in subsection (c)(i) and, if applicable (ii), above.
Notwithstanding the provisions of this Section 9, no Underwriter shall be
required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters' obligations
to contribute pursuant to this Section 9 are several in proportion to their
respective underwriting commitments and not joint.
10. Survival: The indemnity and contribution agreements contained in
Section 9 and the covenants, warranties and representations of the Company, the
Partnership and the Subsidiaries contained in Sections 3, 4 and 5 of this
Agreement shall remain in full force and
35
<PAGE>
effect regardless of any investigation made by or on behalf of any Underwriter,
or any person who controls any Underwriter within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act, or by or on behalf of the
Company, the Partnership, the Subsidiaries, their trustees or directors and
officers or any person who controls the Company, any Subsidiary or the
Partnership within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act, and shall survive any termination of this Agreement or the
sale and delivery of the Shares. The Company, the Partnership and each
Underwriter agree promptly to notify the others of the commencement of any
litigation or proceeding against it and, in the case of the Company, against any
of the Company's officers and directors, in connection with the sale and
delivery of the Shares, or in connection with the Registration Statement or
Prospectus.
11. Notices: Except as otherwise herein provided, all statements,
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered to Friedman,
Billings, Ramsey & Co., Inc., 1001 19th Street North, Arlington, Virginia 22209,
Attention: Syndicate Department; if to the Company, shall be sufficient in all
respects if delivered to the Company at the offices of the Company at 1521
Locust Street, Sixth Floor, Philadelphia, Pennsylvania 19102; and, if to the
Partnership, shall be sufficient in all respects if delivered to the Partnership
at the offices of the Partnership at 1521 Locust Street, Sixth Floor,
Philadelphia, Pennsylvania 19102.
12. Governing Law; Consent to Jurisdiction; Headings: THIS AGREEMENT
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE [STATE
OF NEW YORK], WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. The parties hereto
agree to be subject to, and hereby irrevocably submit to, the nonexclusive
jurisdiction of any United States federal or Virginia state court sitting in
Alexandria, Virginia, in respect of any suit, action or proceeding arising out
of or relating to this Agreement or the transactions contemplated herein, and
irrevocably agree that all claims in respect of any such suit, action or
proceeding may be heard and determined in any such court. Each of the parties
hereto irrevocably waives, to the fullest extent permitted by applicable law,
any objection to the laying of the venue of any such suit, action or proceeding
brought in any such court and any claim that any such suit, action or proceeding
has been brought in an inconvenient forum. The section headings in this
Agreement have been inserted as a matter of convenience of reference and are not
a part of this Agreement.
13. Parties in Interest: The Agreement herein set forth has been and
is made solely for the benefit of the Underwriters, the Company, the Partnership
and the controlling persons, directors and officers referred to in Sections 9
and 10 hereof, and their respective successors, assigns, executors and
administrators. No other person, partnership, association or corporation
(including a purchaser, as such purchaser, from any of the Underwriters) shall
acquire or have any right under or by virtue of this Agreement.
14. Counterparts: This Agreement may be signed by the parties in
counterparts which together shall constitute one and the same agreement among
the parties.
36
<PAGE>
If the foregoing correctly sets forth the understanding among the
Company and the Underwriters, please so indicate in the space provided below for
the purpose, whereupon this Agreement shall constitute a binding agreement among
the Company, the Partnership and the Underwriters.
Very truly yours,
RESOURCE ASSET INVESTMENT TRUST
__________________________________
By:
Its:
RAIT PARTNERSHIP, L.P.
By: RAIT General, Inc.
Its: General Partner
__________________________________
By:
Its:
37
<PAGE>
Accepted and agreed to as
of the date first above written:
FRIEDMAN, BILLINGS, RAMSEY &
CO., INC.
____________________________________
By:
Its:
For themselves and as Representative
of the other Underwriters named on
Schedule I hereto.
38
<PAGE>
Schedule I
Underwriter Number of InitialShares to be
Purchased
Friedman, Billings, Ramsey & Co., Inc.
Total X,XXX,XXX
<PAGE>
Schedule II
Subsidiaries of the Company
RAIT General, Inc.
RAIT Limited, Inc.
RAIT Partnership, L.P.
<PAGE>
Schedule III
Other Transaction Documents
<PAGE>
Schedule IV
Persons For Whom Shares Have Been Reserved
<PAGE>
Schedule V
RAI Subsidiaries
<PAGE>
November 21, 1997
Resource Asset Investment Trust
1521 Locust Street
Philadelphia, PA 19102
Gentlemen/Ladies:
We have acted as counsel to Resource Asset Investment Trust (the
"Company") in connection with the preparation and filing by the Company of a
registration statement, as amended to date (the "Registration Statement"), on
Form S-11 under the Securities Act of 1933, as amended (the "Act"), with respect
to the offering by the Company of its common shares of beneficial interest (the
"Common Shares"). In connection therewith, you have requested our opinion as to
certain matters referred to below.
In our capacity as such counsel, we have familiarized ourselves with
the actions taken by the Company in connection with the registration of the
Common Shares. We have examined the originals or certified copies of such
records, agreements, certificates of public officials and others, and such other
documents, including the Registration Statement, as we have deemed relevant and
necessary as a basis for the opinions hereinafter expressed. In such
examination, we have assumed the genuineness of all signatures on original
documents and the authenticity of all documents submitted to us as originals,
the conformity to original documents of all copies submitted to us as conformed
or photostatic copies, and the authenticity of the originals of such latter
documents. We are attorneys admitted to practice in the Commonwealth of
Pennsylvania and, accordingly, we express no opinion with respect to matters
governed by the laws of any jurisdiction other than the Commonwealth of
Pennsylvania, the general corporation laws and partnership laws of the State of
Delaware and the federal laws of the United States of America. As to matters
governed by the laws of the State of Maryland, we have relied upon the opinion
of Arnold & Porter, a copy of which has been delivered to you.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is a real estate investment trust which has been duly
formed and is validly subsisting under the laws of the State of Maryland.
<PAGE>
Resource Asset Investment Trust
November 21, 1997
Page 2
2. The Company's subsidiaries, RAIT General, Inc. and RAIT Limited,
Inc., are corporations which have been duly formed and are validly subsisting
under the laws of the State of Delaware.
3. RAIT Partnership, L.P. is a limited partnership which has
been duly formed and is validly subsisting under the laws of the
State of Delaware.
4. When issued and paid for, the Common Shares will be duly authorized,
validly issued, fully paid and non-assessable.
We hereby consent to the references to this opinion and to Ledgewood
Law Firm, P.C. in the Prospectus included as part of the Registration Statement
under the caption "Legal Matters," and to the inclusion of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
/s/ Ledgewood Law Firm, P.C.
LEDGEWOOD LAW FIRM, P.C.
<PAGE>
Exhibit 5.2
ARNOLD & PORTER NEW YORK
555 TWELFTH STREET, N.W. DENVER
WASHINGTON, D.C. 20004-1202 LOS ANGELES
(202) 942-5000 LONDON
FACSIMILE: (202) 942-5999
November 21, 1997
Resource Asset Investment Trust
1521 Locust Street, Sixth Floor
Philadelphia, Pennsylvania 19102
Attn: Jay J. Eisner
Re: Registration Statement on Form S-11
Filed November 21, 1997
Registration No. 333-35077
-----------------------------------
Ladies and Gentlemen:
We have acted as special Maryland counsel to Resource Asset
Investment Trust, a Maryland real estate investment trust (the
"Company"), in connection with certain matters of Maryland law arising
out of the registration of up to 8,625,000 common shares of beneficial
interest, par value $.01 per share (the "Common Shares"), covered by
the above-referenced Registration Statement, and all amendments thereto
(the "Registration Statement"). Unless otherwise defined herein,
capitalized terms used herein, shall have the meanings assigned to them
in the Registration Statement.
In connection with rendering the opinions set forth in this
letter, we have examined such corporate records of the Company and made
such investigation of matters of fact and law and examined such other
documents as we deem necessary for rendering the opinions hereinafter
expressed.
The opinions set forth herein are subject to the following
qualifications, which are in addition to any other qualifications
contained herein:
A. We have assumed without verification the genuineness of all
signatures on all documents, the authority of the parties (other than
the Company) executing such documents, the authenticity of all
documents submitted to us as
<PAGE>
ARNOLD & PORTER
Resource Asset Investment Trust
November 21, 1997
Page 2
originals, and the conformity to original documents of all documents
submitted to us as copies.
B. The opinions set forth herein are based on existing laws,
ordinances, rules, regulations, court and administrative decisions as
they presently have been interpreted and we can give no assurances that
our opinions would not be different after any change in any of the
foregoing occurring after the date hereof.
C. We have assumed without verification the accuracy and
completeness of all corporate records made available to us by the
Company.
D. The foregoing opinion is limited to the laws of the State
of Maryland and we do not express any opinion herein concerning any
other law. We express no opinion as to compliance with the securities
(or "blue sky") laws or the real estate syndication laws of the State
of Maryland. As to matters governed by the laws specified in the
foregoing sentence, we have relied exclusively on the latest standard
compilations of such statutes and laws as reproduced in commonly
accepted unofficial publications available to us.
Based on the foregoing, upon the assumptions that there will
be no material changes in the documents we have examined and the
matters investigated referred to above, we are of the opinion that the
Common Shares have been duly authorized and, when and if delivered
against payment therefor in accordance with the resolutions of the
Board of Trustees of the Company authorizing their issuance, will be
validly issued, fully paid and nonassessable.
This letter does not address any matters other than those
expressly addressed herein. This letter is given for your sole benefit
and use. No one else is entitled to rely hereupon. This letter speaks
only as of the date hereof. We undertake no responsibility to update or
supplement it after such date.
We hereby consent to your filing of this opinion as an exhibit
to the Registration Statement, and to reference to our firm under the
caption "Legal Opinion" contained in the Prospectus included therein.
In giving such consent, we do
<PAGE>
ARNOLD & PORTER
Resource Asset Investment Trust
November 21, 1997
Page 3
not thereby admit that we are in the category of persons whose consent
is required under Section 7 of the Securities Act.
Very truly yours,
ARNOLD & PORTER
By /s/ Steven Kaplan
----------------------------
<PAGE>
November 21, 1997
Resource Asset Investment Trust
1521 Locust Street - 6th Floor
Philadelphia, PA 19102
Re: Resource Asset Investment Trust Qualification as
Real Estate Investment Trust
Ladies and Gentlemen:
We have acted as counsel to Resource Asset Investment Trust, a Maryland
real estate investment trust (the "Company"), in connection with the preparation
of a Form S-11 registration statement (the "Registration Statement"), filed with
the Securities and Exchange Commission on September 3, 1997 (No. 333-35077), as
amended through the date hereof, with respect to the offering and sale (the
"Offering") of up to 8,625,000 shares of beneficial interest, par value $0.01
per share of the Company (the "Common Shares"), and the Company's contribution
of the net proceeds of the Offering to its wholly-owned subsidiaries, RAIT
General, Inc., a Delaware corporation (the "General Partner"), and RAIT Limited,
Inc., a Delaware corporation (the "Limited Partner"), and the contribution of
such proceeds by the General Partner and the Limited Partner to RAIT Limited
Partnership, L.P., a Delaware limited partnership (the "Partnership"), in
exchange for a 1% general partnership interest and a 99% limited partnership
interest, respectively, in the Partnership. You have requested our opinion
regarding certain U.S. federal income tax matters in connection with the
Offering.
The Partnership has contracted to acquire certain mortgage loans and
other interests in real estate. The Partnership will invest the balance of the
proceeds contributed by the General Partner and the Limited Partner in
short-term interest-bearing securities until the Partnership identifies
additional real estate-related assets for acquisition.
In giving this opinion letter, we have examined the following:
1. the Company's Declaration of Trust, as duly filed with the Secretary
of State of the State of Maryland on August 14, 1997;
<PAGE>
Resource Asset Investment Trust
November 21, 1997
Page 2
2. the Company's Restated and Amended Declaration of Trust, a form of
which is filed as an exhibit to the Registration Statement;
3. the Company's Bylaws;
4. the Registration Statement, including the prospectus contained as
part of the Registration Statement (the "Prospectus");
5. the Articles of Incorporation of the General Partner and the Limited
Partner;
6. the Limited Partnership Agreement of the Partnership (the
"Partnership Agreement") between the General Partner and the Limited Partner, in
the form filed as an exhibit to the Registration Statement; and
7. such other documents as we have deemed necessary or appropriate for
purposes of this opinion.
In connection with the opinions rendered below, we have assumed, with
your consent, that;
1. each of the documents referred to above has been duly authorized,
executed, and delivered; is authentic, if an original, or is accurate, if a
copy, and has not been amended;
2. during its short taxable year ending December 31, 1997 and future
taxable years, the Company will operate in a manner that will make the
representations contained in a certificate, dated , 1997 and executed by a duly
appointed officer of the Company (the "Officer's Certificate"), true for such
years;
3. the Company will not make any amendments to its organizational
documents, the General Partner's or the Limited Partner's organizational
documents, or the Partnership Agreement after the date of this opinion that
would affect its qualification as a real estate investment trust (a "REIT") for
any taxable year; and
4. no action will be taken by the Company, the General Partner, the
Limited Partner, or the Partnership after the date hereof that would have the
effect of altering the facts upon which the opinions set forth below are based.
In connection with the opinions rendered below, we also have relied
upon the correctness of the representations contained in the Officer's
Certificate. No facts have come to our attention,
<PAGE>
Resource Asset Investment Trust
November 21, 1997
Page 3
however, that would cause us to question the accuracy and completeness of the
facts contained in the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, or the Prospectus in a
material way. In addition, to the extent that any of the representations
provided to us in the Officer's Certificate are with respect to matters set
forth in the Internal Revenue Code of 1986, as amended (the "Code"), or the
Treasury regulations thereunder (the "Regulations"), we have reviewed with the
individuals making such representations the relevant portion of the Code and the
applicable Regulations.
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussion in
the Prospectus under the caption "Federal Income Tax Considerations" (which is
incorporated herein by reference), we are of the opinion that:
(a) commencing with the Company's short taxable year beginning on
the date of its formation and ending December 31, 1997, the
Company will qualify to be taxed as a REIT pursuant to
sections 856 through 860 of the Code, and the Company'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; and
(b) the descriptions of the law and the legal conclusions
contained in the Prospectus under the caption "Federal Income
Tax Considerations" are correct in all material respects, and
the discussion thereunder fairly summarizes the federal income
tax considerations that are likely to be material to a holder
of the Common Shares.
We will not review on a continuing basis the Company's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Officer's Certificate. Accordingly, no assurance can be given that the
actual results of the Company's operations for any given taxable year will
satisfy the requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the Code and
the Regulations, published administrative interpretations thereof, and published
court decisions. The Internal Revenue Service has not issued Regulations or
administrative interpretations with respect to various provisions of the Code
relating to REIT qualification. No assurance can be given that the law will not
change in a way that will prevent the Company from qualifying as a REIT.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the reference to Ledgewood Law Firm,
P.C. under the caption "Federal Income Tax considerations" in the Prospectus. In
giving this consent, we do not admit that we are in the category of persons
whose consent is required by Section 7 of the Securities Act of 1933, as
<PAGE>
Resource Asset Investment Trust
November 21, 1997
Page 4
amended, or the rules and regulations promulgated thereunder by the Securities
and Exchange Commission.
The foregoing opinions are limited to the U.S. federal income tax
matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to update
the opinions expressed herein after the date of this letter. This opinion letter
is solely for the information and use of the addressee, and it may not be
distributed, relied upon for any purpose by any other person, quoted in whole or
in part or otherwise reproduced in any document, or filed with any governmental
agency without our express written consent.
Very truly yours,
/s/ Ledgewood Law Firm, P.C.
-----------------------------
LEDGEWOOD, LAW FIRM, P.C.
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 25, 1997 accompanying the
financial statements of Resource Asset Investment Trust contained in Amendment
No. 2 to the Registration Statement and Prospectus (File No. 333-35077). 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."
/s/ GRANT THORNTON LLP
- ----------------------
GRANT THORNTON LLP
Philadelphia, Pennsylvania
NOVEMBER 20, 1997
