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As filed with the Securities and Exchange Commission on November 3, 1997.
Registration No. 333-35077
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
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, Sixth Floor, Philadelphia, PA 19102
(Address of principal executive offices)
Jay J. Eisner
President and Chief Operating Officer
Resource Asset Investment Trust
1521 Locust Street, Sixth Floor
Philadelphia, PA 19102
(Name and address of agent for service)
COPIES TO:
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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 3, 1997
PROSPECTUS
10,000,000 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 10,000,000 common shares of beneficial interest of the
Company (the "Common Shares") offered pursuant to this Prospectus (the
"Offering") are being offered by the Company. Of the Common Shares offered
hereby, 980,000 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. After that sale, RAI
will own 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 $29.7 million. 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).
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 19 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
$72.2 million to be acquired from RAI for $19.1 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 23% 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. See "Risk Factors - Real
Property Considerations."
o The Company's investments will be sensitive to many economic
factors over which the Company has no control.
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 furtherance of its business
activities and operations 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. See "Description of Shares of Beneficial
Interest - Restrictions on Ownership and Transfer."
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. See "Conflicts of Interest."
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
575,000 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."
(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
1,500,000 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."
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(4) The total Price to Public and the total Proceeds to Company include the
proceeds of the sale of 980,000 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.
The Common Shares are offered by the Underwriters, subject to receipt
and acceptance by the Underwriters, approval of certain legal matters by counsel
for the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offers and to reject orders in whole or
in part. It is expected that delivery of the Common Shares will be made in New
York, New York on or about _____________, 1997.
----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is __________, 1997.
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<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING STABILIZATION, THE PURCHASE OF COMMON SHARES TO COVER SYNDICATE SHORT
POSITIONS, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY............................. 9 Value of Company's Property
FORMATION AND STRUCTURE........................ 18 Interests Dependent on Conditions
RISK FACTORS................................... 19 Beyond Company's Control............. 24
Investment Activity Risks.................... 19 Property Interests are Illiquid
Financing Considerations................... 19 and Value May Decrease............... 25
Value of Company's Financings Uninsured and Underinsured Losses
Dependent on Conditions May Affect Value of, or Returns
Beyond Company's Control............... 19 From, Property Interests............. 25
Longer Term, Subordinate and Investments in Joint Ventures,
Non-Conforming Financing Is Partnerships or Other Interests
Illiquid and Value May Decrease........ 19 May Result in Less Control by
Lengthy Financing Commitment Company.............................. 25
Periods May Reduce Company's Compliance with Americans with
Returns................................ 20 Disabilities Act and Other
Investment in Subordinate Governmental Rules and Regulations
Financing May Involve Increased Will Decrease Returns on Property
Risk of Loss........................... 20 Interests............................ 26
Investment in Non-Conforming Property Taxes Decrease Returns
Loans May Involve Increased on Property Interests................ 26
Risk of Loss........................... 21 Real Properties with Environmental
Interest Rate Changes May Problems May Create Liability for
Adversely Affect Company's the Company............................ 26
Investments............................ 21 Other Investment Activity Risks.......... 27
Lack of Geographic Diversification Appropriate Investments May Not Be
Exposes Company's Investments Available and Full Investment of
to Higher Risk of Loss Due to Net Proceeds May Be Delayed.......... 27
Regional Economic Factors.............. 22 Newly-Formed Entity.................... 27
Competition for Financing May Importance of Key Personnel............ 27
Inhibit Company's Ability to Leverage Can Reduce Income
Achieve Objectives..................... 22 Available for Distribution and
Participations May Reduce Interest Cause Losses......................... 28
Rates Without Resulting in Legal and Tax Risks...................... 28
Additional Returns..................... 22 Failure to Maintain REIT Status
Loans Secured by Interests in Would Result in Company Being
Entities Owning Real Properties Taxed as a Regular Corporation....... 28
May Involve Increased Risk "Phantom Income" May Require
of Loss................................ 23 Company to Borrow or Sell Assets
Usury Statutes May Impose to Meet REIT Distribution
Interest Ceilings and Substantial Requirements......................... 29
Penalties for Violations............... 24 Gain on Disposition of Assets
Discounted Loans May Have High Deemed Held for Sale in Ordinary
Rates of Default....................... 24 Course Subject to 100% Tax........... 30
Construction Financing May Increase
Repayment Risk......................... 24
Real Property Considerations............... 24
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Loss of Investment Company Act Management............................... 56
Exemption Would Affect Company Trustees and Executive Officers.......... 56
Adversely............................ 30 Option Plan.............................. 60
Employment Agreements.................... 60
Investment in Common Stock by Indemnification of Trustees and
Certain Benefit Plans May Executive Officers..................... 61
Give Rise to Prohibited DISTRIBUTION POLICY.......................... 61
Transaction under ERISA CAPITALIZATION............................... 62
and the Code......................... 31 MANAGEMENT'S DISCUSSION AND
Board of Trustees May Change ANALYSIS OF FINANCIAL CONDITION............ 63
Policies Without Shareholder DESCRIPTION OF SHARES OF BENEFICIAL
Consent.............................. 31 INTEREST................................... 64
Limitation of Liability of General..................................
Officers and Trustees................ 31 Common Shares............................ 64
Conflicts of Interest in the Preferred Shares......................... 66
Business of the Company.............. 31 Restrictions on Ownership and
Failure to Develop Active Market Transfer............................... 66
for Common Shares May Result Dividend Reinvestment Plan............... 69
in Decreased Market Price............ 32 Reports to Shareholders.................. 69
Ownership Limitation May Restrict Transfer Agent and Registrar............. 69
Business Combination CERTAIN PROVISIONS OF MARYLAND
Opportunities........................ 32 LAW AND OF THE COMPANY'S
Preferred Shares May Prevent DECLARATION OF TRUST AND
Change in Control.................... 32 BYLAWS..................................... 69
Maryland Anti-Takeover Statutes Board of Trustees........................ 69
May Restrict Business Business Combinations.................... 70
Combination Opportunities............ 32 Control Share Acquisitions............... 70
Future Offerings of Capital Stock Amendment of Declaration of
May Result in Dilution of the Trust and Bylaws....................... 71
Book Value Per Common Share.......... 33 Meetings of Shareholders................. 72
CONFLICTS OF INTEREST........................ 33 Advance Notice of Trustees'
USE OF PROCEEDS.............................. 35 Nominations and New Business........... 72
INVESTMENT OBJECTIVES AND Dissolution of the Company............... 72
POLICIES................................... 37 Indemnification; Limitation of Trustees'
General.................................. 37 and Officers' Liability................ 72
Types of Financing....................... 38 Indemnification Agreements............... 73
Loan Origination Sources................. 39 Possible Anti-Takeover Effect of
Certain Financial Guidelines............. 39 Certain Provisions of Maryland
Location of Properties Relating Law and of Declaration of
to Financings.......................... 40 Trust and Bylaws....................... 73
Types of Properties Relating Maryland Asset Requirements.............. 74
to Financings.......................... 41 COMMON SHARES AVAILABLE FOR
Acquisition of Loans at Discount......... 41 FUTURE SALE................................ 74
Lending Procedures....................... 42 OPERATING PARTNERSHIP
Acquisition of Property Interests........ 43 AGREEMENT.................................. 75
Leverage................................. 44 General.................................. 75
Portfolio Turnover....................... 45 General Partner Not to Withdraw.......... 76
Other Policies........................... 45 Capital Contribution..................... 76
Initial Investments...................... 45 Redemption Rights........................ 77
THE COMPANY.................................. 56 Operations............................... 77
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Distributions............................ 78 Default Interest and Limitations
Allocations.............................. 78 on Prepayments......................... 104
Term..................................... 78 Forfeitures in Drug and RICO
Tax Matters.............................. 78 Proceedings............................ 105
FEDERAL INCOME TAX Environmental Matters.................... 105
CONSIDERATIONS............................. 78 General................................ 105
Taxation of RAIT......................... 79 CERCLA................................. 105
Requirements for Qualification........... 81 Certain Other Federal and State
Income Tests........................... 82 Laws................................. 106
Asset Tests............................ 86 Superlien Laws......................... 107
Distribution Requirements.............. 88 Additional Considerations.............. 107
Recordkeeping Requirements............. 89 Environmental Site Assessments......... 107
Failure to Qualify....................... 89 Applicability of Usury Laws.............. 107
Taxation of Taxable U.S. Shareholders Americans With Disabilities Act.......... 108
Generally.............................. 90 UNDERWRITING................................. 108
Taxation of Shareholders on the LEGAL MATTERS................................ 111
Disposition of Common Shares........... 91 EXPERTS...................................... 111
Capital Gains and Losses................. 92 ADDITIONAL INFORMATION....................... 112
Information Reporting Requirements GLOSSARY..................................... 113
and Backup Withholding................. 92 FINANCIAL STATEMENT.......................... F-1
Taxation of Tax-Exempt Shareholders...... 92
Taxation of Non-U.S. Shareholders........ 93
State and Local Taxes.................... 95
Sale of RAIT's Property.................. 95
BENEFIT PLAN CONSIDERATIONS.................. 95
Employee Benefit Plans,
Tax-Qualified Retirement Plans
and IRAs............................... 96
Status of the Company under ERISA's
Plan Asset Rules....................... 97
CERTAIN LEGAL ASPECTS OF
REAL PROPERTY LOANS AND
INVESTMENTS................................ 98
General.................................. 99
Types of Mortgage Instruments............ 99
Leases and Rents......................... 100
Condemnation and Insurance............... 100
Foreclosure.............................. 101
General................................ 101
Judicial Foreclosure................... 101
Non-Judicial Foreclosure/Power
of Sale.............................. 101
Equitable Limitations on
Enforceability of Certain
Provisions........................... 102
Post-Sale Redemption................... 102
Anti-Deficiency Legislation............ 102
Bankruptcy Laws.......................... 103
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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 provide financing that qualifies as interests in
mortgages on real property within the meaning of Section 856(c)(6) of the Code
("Financings") 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 Financings 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 Financings 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. From payments it receives on the
wraparound loan, the wraparound lender pays principal and interest to holders of
the senior lien loans.
The Company will seek to include in its loans provisions allowing it to
participate in any appreciation of 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
endeavor to adapt the financing terms to the needs of its borrowers, utilizing a
variety of financing techniques such as staged payments, event specific loan
advances, different rates of interest payment and interest accrual, deferred (or
"balloon") principal payments and similar techniques. In acquiring existing
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 Financing unless
material steps have been taken by prior lienholders (or others) to resolve the
past problems.
As appropriate, either as part of the Company's investment strategy or
for tax planning purposes, the Company may acquire direct or indirect interests
in real property including interests 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 Considerations - 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
$72.2 million to be acquired from RAI for $19.1 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 and 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 23% 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 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 between them in connection with the price 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 $29.7 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
is being acquired at a discount to the outstanding balance due from the borrower
on the loan. The aggregate outstanding balance was $72.2 million at September
30, 1997. The Company's investment, on a cost basis, in the Initial Investments
is 73% 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's senior management has many years of experience in the
mortgage lending, real estate and real estate finance industries. Its Chairman
and Chief Executive Officer, Betsy Z. Cohen, is the founder and current Chairman
and Chief Executive Officer of JeffBanks, Inc. ("JeffBanks"), a bank holding
company with approximately $1.2 billion in assets as of September 30, 1997. The
President, Jay J. Eisner, until he joined the Company, was the chief financial
officer of several real estate investment, financing and development firms. The
Executive Vice President, Jay R. Cohen, until he joined the Company, was the
executive vice president of a mortgage REIT. The Chief Financial Officer, Ellen
J. DiStefano, until she joined the Company, was the chief financial officer of a
real estate development and management firm (which is an affiliate of RAI). See
"The Company - Trustees and Executive Officers" and "Investment Objectives and
Policies - Loan Origination Sources."
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 (although two of such loans 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 $526,000) 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 also may 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 each of the Company and RAI seeks 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 (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 originates a proposal to provide wraparound or other junior lien or
subordinated Financing with respect to multifamily, office or other commercial
properties to a borrower (other than to a borrower with an existing loan from
RAI), RAI must first offer the opportunity to the Company; and (iii) if RAI
desires to sell any loan it has acquired that conforms to the Company's
investment objectives and policies with respect to acquired loans, it must first
offer to sell it to the Company.
The Offering
Shares offered to the public(1)(2)............................. 10,000,000
Shares to be outstanding after offering(1)(2).................. 10,000,100
Proposed Nasdaq symbol......................................... RAIT
(1) Assumes that the Underwriters' option to purchase up to an additional
1,500,000 shares to cover over-allotments is not exercised. Includes
980,000 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 575,000 shares issuable
pursuant to warrants granted to the Representative (see
"Underwriting").
(2) Does not include 1,200,000 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 $32.2 million, which is equal to
approximately 23% of the expected net proceeds of this Offering (20% 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, $29.7 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 loan participation
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 loan participation
interests or that borrowers may seek to refinance some portion of the loans and,
accordingly, that the Company will obtain the return of some portion or all of
the funds utilized to acquire the senior loan participation interests. For
certain information concerning the senior interests to be acquired see
"Investment Objectives and Policies - Initial Investments." There can be no
assurance, however, that any such borrowings or refinancings will occur.
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 18 months after the Offering has
been completed, although there can be no assurance that the process will not
take longer. Pending such investment, the balance of the net proceeds will be
invested in readily marketable, interest-bearing securities which, following the
expiration of the one year investment period provided by the Code, will be
limited to those securities allowing the Company to continue to qualify as a
REIT. See "Federal Income Tax Considerations Requirements for Qualification -
Asset Tests."
Distribution Policy
The Company intends to distribute to its shareholders at least 95% of
its net taxable income each year (subject to certain adjustments) so as to
qualify for the tax benefits accorded to REITs under the Code. It is anticipated
that distributions will generally be taxable as ordinary income, 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 owns initially 100% of each of the General Partner, Initial
Limited Partner and, indirectly, the Operating Partnership, they should not
be treated as entities separate from RAIT for federal income tax purposes.
See "Federal Income Tax Considerations - Requirements for Qualification."
(4) RAI will sell certain of the Initial Investments to the Operating
Partnership, and may sell additional investments to the Operating
Partnership, for cash. See "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 typically (including eight of the
Initial Investments) 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 21% 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 as 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 Financing or Property
Interests, may not be reflected in increased rates of return on the Financing or
Property Interests funded or acquired through such debt, thereby adversely
affecting the Company's return on such investments. Accordingly, interest rate
changes may materially affect the total return on the Company's investment
portfolio, which in turn will affect 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 - Investment Company Act Risks." 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 the original loan terms but
is current under the payment and other terms of forbearance agreements regarding
postponement of default remedies. 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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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."
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 23% of the Offering proceeds), 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."
Newly-Formed Entity. 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. 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.
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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 Benefits 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 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 (26% 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. Goodinan, Joel R. Meznik, 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. 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 originates a proposal to provide wraparound or other junior lien or
subordinated Financing with respect to multifamily, office or other commercial
properties to a borrower (other than to a borrower with an existing loan from
RAI), RAI must first offer the opportunity to the Company; and (iii) if RAI
desires to sell any loan it has acquired that conforms to the Company's
investment objectives and policies with respect to acquired loans, it must first
offer to sell it to the Company.
Subject only to the limitations referred to above, to the extent that
an investment opportunity is presented to one entity which may be deemed
appropriate for either entity, the entity to which the opportunity is presented
may invest 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 $32.2 million, which is equal to
approximately 23% of the expected net proceeds of this Offering (20% 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, $29.7 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 loan participation
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 loan participation
interests or that borrowers may seek to refinance some portion of the loans and,
accordingly, that the Company will obtain the return of some portion or all of
the funds utilized to acquire the senior loan participation interests. For
certain information concerning the senior participations to be acquired
(including interest rate and maturity date) see "Investment Objectives and
Policies - Initial Investments." There can be no assurance, however, that any
such borrowings or refinancings will occur.
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 18 months after the
Offering has been completed, although there can be no assurance that the process
will not be longer. Pending such investment, the balance of the net proceeds
will be invested in readily marketable, interest-bearing securities which,
following the expiration of the one year investment period provided by the Code,
will be limited to those securities allowing the Company to continue to qualify
as a REIT. See "Federal Income Tax Considerations - Requirements for
Qualification - Asset Tests."
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INVESTMENT OBJECTIVES AND POLICIES
General
The Company's principal business activity will be to provide financing
that qualifies as interests in mortgages on real property within the meaning of
Section 856(c)(6) of the Code 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
services providers has enhanced the opportunity for unregulated financial
services providers, such as the Company, to compete in this niche.
The Company believes that its tax and corporate structure as a REIT
will provide it with an advantage over certain other financial institutions and
commercial mortgage originators. As a REIT, the Company generally will be able
to pass through earnings as dividends to shareholders without payment of
corporate level federal income tax. Thus, the Company expects to be able to pay
higher dividends than traditional commercial mortgage lending institutions,
which are subject to corporate level federal income tax. In addition, management
believes that the Company, as an unregulated company, provides a more attractive
method of investing in loans than regulated financial institutions, and more
flexibility in pursuing investment opportunities, because the Company will not
be subject to the costs and restrictions associated with federal and state
regulations imposed upon insured financial institutions.
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Types of Financing
The Company will emphasize wraparound mortgage loans and, to a lesser
extent, other forms of junior lien and subordinated financing. The Company is
not, however, limited as to the types of financing it may provide, and it may
also acquire or provide first lien financing. In originating new Financing, the
Company will endeavor to adapt the terms of its financing to the needs of its
borrowers, utilizing a variety of financing techniques such as staged payments,
event specific loan advances, different rates of interest payment and interest
accrual, deferred (or "balloon") principal payments and similar techniques. The
Company will also from time to time provide subordinated financing through a
direct purchase of a Property Interest. See "Investment Objectives and Policies
- - Acquisition of 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 experience in
the mortgage lending, real estate and real estate finance industries with
developers, commercial real estate brokers, mortgage bankers, real estate
investors and other direct borrowers or referral sources. See "The Company
Trustees and Executive Officers." For sources of loans for acquisition (in
addition to RAI), the Company will focus on senior management's existing
knowledge of and relationships with institutional holders (primarily banks and
insurance companies) who may wish to dispose of underperforming loans in their
existing portfolios that meet the Company's Financing criteria. The Company's
focus on smaller 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 9% 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 $29.7 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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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
9% 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 $29.7 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 September 30, 1997, RAI would
have realized a gain on sale of approximately $6.2 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 18.5% and 55.7% from the Company's share of the outstanding loan
receivable balances, and at ratios of between 65% 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 loan participation interests
that the Company intends to purchase, and which are included in the Initial
Investments; and $11.3 million of senior financing with respect to the
underlying properties that the Company does not intend to purchase and to which
the Company's loans are subordinate), as set forth in the table below. Each of
the Discounted Loans is in default with respect to its terms as originally
underwritten, but is subject to a forbearance agreement pursuant to which the
holder of the loan (the Company, upon acquisition) has agreed not to foreclose
provided that the borrower pays (subject to a stated minimum) all revenues from
the underlying property (after operating expenses) to the Company. 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 (except for loan 108 in which it will receive a
share proportionate to its participation interest). In addition, these loans
permit the Company to capture (upon a sale or refinancing of the property) any
increase in the value of the underlying property to a maximum amount equal to
the then outstanding balance of the loan as originally underwritten and accrued
interest. For the Discounted Loan in which the Company purchased a
participation, 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 September 30, 1997, was $78.5 million of which $72.2
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 September 30, 1997:
<TABLE>
<CAPTION>
Maturity of Cost of Investment
Loan/Expiration to Company
of Forbearance Type of Outstanding Including Amount of
Loan Number(1) Agreement(2) Property Location Loan Receivable(3) Senior Debt(4) Senior Debt(5)
- ----------- ---------------- -------- -------- ------------------ ------------------ -------------- --
Discounted Loans:
<S> <C> <C> <C> <C> <C> <C>
101 10/31/03 Multifamily Philadelphia, PA $ 1,555,120 $ 786,000 $ 600,000
102 10/31/03 Multifamily Philadelphia, PA 1,481,638 1,140,000 896,000
103 12/31/04 Office Arlington, VA 5,761,455 2,555,000 879,581
104 08/31/01 Multifamily Philadelphia, PA 5,389,823 3,075,000 1,102,299
105 09/02/99 Multifamily Philadelphia, PA 1,579,540 735,000 600,000
106 12/02/99 Multifamily Philadelphia, PA 3,036,879 2,008,000 1,258,555
107 03/28/01 Multifamily Philadelphia, PA 711,924 580,000 448,884
108 01/01/02 Office Philadelphia, PA 52,660,393 22,000,000 8,000,000
----------- ----------- -----------
Total Discounted Loans 72,176,772 32,879,000 13,785,319
----------- ----------- -----------
Non-Discounted Loans:
109 10/31/99 Multifamily Philadelphia, PA 1,638,263 1,638,263 887,565
110 12/29/00 Multifamily Philadelphia, PA 4,724,376 4,724,376 3,184,720
----------- ----------- -----------
Total Non-Discounted Loans 6,362,639 6,362,639 4,072,285
----------- ----------- -----------
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 $86,969,411 $47,521,639 $17,857,604
=========== =========== ===========
</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
Loan Number(1) Property(6) Appraised Value(7) by the Company(8) Investment(9) Debt Service(10) Service(11)
- ----------- ------------------ ------------------ ----------------- -------------- ---------------- -----------
Initial Purchased Loans:
Discounted Loans
<S> <C> <C> <C> <C> <C>
101 $ 900,000 87% 0% $ 786,000 $ 6,700 n/a
102 1,200,000 95% 0% 1,140,000 9,600 n/a
103 2,800,000 91% 31.4% 1,675,419 16,800 2.98
104 3,200,000 96% 34.4% 1,972,701 14,800 2.29
105 800,000 92% 0% 735,000 6,800 n/a
106 2,200,000 91% 57.2% 749,184 8,200 1.73
107 600,000 97% 0% 580,000 5,700 n/a
108 34,000,000 65% 23.5% 14,000,000 134,000 3.19
----------- -- ---- ----------- --------
Total Discounted Loans 45,700,000 72% 24.6% 21,638,304 202,600
----------- -- ---- ----------- --------
Non-Discounted Loans
109 2,700,000 61% 32.9% 750,698 11,260 3.02
110 5,725,000 83% 55.6% 1,539,656 23,095 1.84
----------- -- ---- ----------- --------
Total Non-Discounted Loans 8,425,000 76% 48.3% 2,290,354 34,355
----------- -- ---- ----------- --------
Total Initial Purchased Loans 54,125,000 73% 28.3% 23,928,658 236,955
----------- -- ---- ----------- --------
Initial Direct Loans:
111 8,400,000 88% 0% 7,380,000 61,063 n/a
112 2,200,000 41% 0% 900,000 7,950 n/a
----------- -- ----------- --------
Total Initial Direct Loans 10,600,000 78% 0% 8,280,000 69,013
----------- -- -- ----------- --------
Total Initial Investments $64,725,000 73% 23.7% $32,208,658 $305,969 3.51
=========== == ==== =========== ======== ====
</TABLE>
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<PAGE>
(1) Loans 111 and 112 were funded by RAI on September 30, 1997.
(2) Loans 101, 102 and 105 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 103, 104 and 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 September 30,
1997.
(4) Consists of the purchase price to be paid by the Company plus the
outstanding balance, as of September 30, 1997, of senior indebtedness
relating to the underlying property. Does not include costs and expenses
relating to the acquisition or origination of the loan, and related
professional fees, estimated at $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 September 30, 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 2,550,249 2,325,558
104 2,160,756 1,614,174
105 733,073 456,356
106 2,006,205 1,299,780
107 577,526 474,064
108 17,436,922 12,424,680
109 1,466,724 1,362,884
110 4,141,148 3,757,701
111 7,380,000 7,380,000
112 900,000 900,000
----------- -----------
Total $41,272,856 $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
September 30, 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 loan participation 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 loan participation
interests, RAI had subordinated its interests in the loans to the interests
of the participant. After acquisition of the senior loan participation
interests, the Company will hold the entire lender's interest in each such
loan.
(9) The Company's net investment is calculated as the difference between the
amount set forth in the column "Cost of Investment to Company Including
Senior Debt," less the amount set forth in the column "Amount of Senior
Debt," except for loans 101, 102, 105 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 September 30, 1997 with respect to the underlying
property less operating expenses, including real estate and other taxes
pertaining to the underlying property and its operation and less interest
on senior debt (to the extent not being acquired by the Company), but
before depreciation, amortization and capital expenditures; and (ii)
"monthly debt service" is the stated amount of interest and principal
payable monthly under the terms of the loan. Monthly revenues from
operations are set forth where, pursuant to forbearance agreements or the
terms of the loan documents, the holder of the loan has the right to
receive all net cash flow from the underlying properties as payment of debt
service on the loans while monthly debt service is set forth where the
stated monthly debt service under the terms of the loan is less than
monthly revenues from operations.
(11) Consists of monthly revenues from operations before interest on the senior
indebtedness divided by the monthly payment of principal and interest
required under the senior indebtedness.
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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 until,
upon extension, 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 September 30, 1997, resulted in an interest
rate of 8.5%) until, upon extension, 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
$4,165,000, bearing interest at an annual rate of 0.5% over the Maryland
National Bank prime rate (which, as of September 30, 1997, resulted in an
interest rate of 9.0%) until, upon extension, 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 $879,581. 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 September 30, 1997, resulted in
an interest rate of 7.5%) until, upon extension, 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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$1,102,299. 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 12.2% until September
2, 1999 when all principal, accrued interest and other amounts become due and
payable. In addition, the loan documents provide that the holder of the loan
(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 until December 2, 1999 when all principal, accrued interest and other
amounts become due and payable. The loan is subject to senior indebtedness held
by an unaffiliated third party in the form of a first mortgage loan on a
multi-family residential property located in Philadelphia, Pennsylvania, in the
amount of $1,258,555. 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%
until March 28, 2001 when all principal, accrued interest and other amounts
become due and payable. The loan documents provide that the holder of the loan
(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 $22 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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the original aggregate principal amount of $40,906,000, secured by a first
mortgage on an office property located in Philadelphia, Pennsylvania, bearing
interest at an annual rate of 8% until January 1, 2002 (or January 1, 2009 if
the borrower exercises an option to extend) when all principal, accrued interest
and other amounts become due and payable. The loan documents provide that (i)
the holder of the loan (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 $887,565. 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 31, 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 $3,184,720. 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, 6th Floor, Philadelphia, Pennsylvania 19102. The Company's telephone
number is (215) 546-5119.
Management
The Company will be self-administered and self-managed with respect to
its investments in Financings and Property Interests. While the Company will
supervise the management of the properties underlying its Financings and
Property Interests, 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 80 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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<PAGE>
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 0 $ 0
Chairman and Chief
Executive Officer(1)
Jay J. Eisner 150,000 (1) 75,000 0 0
President, Chief
Operating Officer and
Secretary(1)
Jay R. Cohen 200,000 (1) 50,000 0 4,200(2)
Executive Vice
President
Ellen J. DiStefano 125,000 (1) 35,000 0 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 1,200,000. 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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<PAGE>
(generally, relocation 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 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 option was granted.
Except as to compensation, options, 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, 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 October 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; no shares outstanding,
as adjusted................................................... $ 0 $ 0
Common Shares, par value $.01; 200,000,000 shares authorized; 100 shares
outstanding; 10,000,100 shares
outstanding, as adjusted(1)(2)................................ 1 100,001
------- ------------
Additional paid-in capital............................................. 999 138,686,999
------- ------------
Total.................................................... $1,000 $138,787,000
====== ============
</TABLE>
(1) Includes 980,000 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 1,500,000 Common Shares, and excludes 575,000 shares
issuable pursuant to warrants granted to the Representative and 1,200,000
shares reserved for issuance to executive officers of the Company in
connection with future grants of employee options.
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<PAGE>
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 $32.2 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, 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, since 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 23% of the assets to be
purchased with the net proceeds of this Offering 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, which, together
with funds derived from operations representing a return of principal, is
anticipated to be sufficient to satisfy liquidity requirements. Liquidity may be
adversely affected by costs of operating the Company and administering its
portfolio investments. To the extent that working capital reserves and cash from
operations are insufficient to satisfy the Company's cash requirements, the
Company will be required to obtain financing from third parties or raise
additional capital. There can be no assurance that any such financing or capital
will be available when needed.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
General
The Declaration of Trust provides that the Company may issue up to
200,000,000 Common Shares, $.01 par value per share, and 25,000,000 Preferred
Shares, $.01 par value per share. Upon completion of this Offering, 10,000,100
Common Shares will be issued and outstanding (11,500,100 Common shares if the
Underwriters exercise their over-allotment option) and no Preferred Shares will
be issued and outstanding. An additional 1,775,000 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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<PAGE>
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.
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 who acquires or attempts or intends to acquire actual or
constructive ownership of the Company's shares that will or may violate any of
the foregoing restrictions on transferability and ownership is required to give
notice immediately to the Company and provide the Company with such other
information as the Company may request in order to determine the effect of the
transfer on the Company's status as a REIT. The foregoing restrictions on
transferability and ownership will not apply if the Board of Trustees determines
that it is no longer in the best interest of the Company to attempt to qualify,
or to continue to qualify, as a REIT. Except as otherwise described above, the
Ownership Limitation can only be changed by an amendment to the Declaration of
Trust requiring the affirmative vote of two-thirds of the outstanding shares.
Pursuant to the Declaration of Trust, if any purported transfer of
Common or Preferred Shares or any other event would (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 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 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
10,000,100 Common Shares (11,500,100 Common Shares if the Underwriters exercise
their over-allotment option). Of the outstanding shares, 8,986,000 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, 1,014,000
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 stock 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 stock options will be
1,775,000 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
10,000,100 Common Shares (11,500,100 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 Financing acquired by the Company, the Company may not record
its mortgage until a default occurs (as a result of provisions in the
instruments held by senior lienors or otherwise), at which time there may be
intervening or prior liens, or injunctions or stays delaying or precluding such
recordation or the exercise of any rights under such mortgages. See "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.................................... 10,000,000
==========
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 (i)
980,000 Common Shares for sale to RAI, and (ii) 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 the
persons referred to in (ii), above, 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
1,500,000 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 500,000
Common Shares (575,000 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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<PAGE>
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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<PAGE>
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
<PAGE>
Resource Asset Investment Trust
CONSOLIDATED BALANCE SHEET
August 25, 1997
ASSETS
Cash $ 1,000
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Shareholder's equity
Preferred shares - par value $0.01; authorized, 25,000,000 shares $ -
Common shares - par value $0.01; authorized, 200,000,000 shares;
issued and outstanding, 100 shares 1
Additional paid-in-capital 999
-------
$ 1,000
=======
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
Resource Asset Investment Trust
NOTES TO CONSOLIDATED BALANCE SHEET
August 25, 1997
NOTE A - FORMATION AND STRUCTURE OF THE COMPANY
Resource Asset Investment Trust (RAIT or the Company), together with its
subsidiaries--RAIT Partnership, L.P. (the Operating Partnership); RAIT
General, Inc. (the General Partner), the General Partner of the Operating
Partnership; and RAIT Limited, Inc. (the Initial Limited Partner), the
Initial Limited Partner of the Operating Partnership--were each formed in
August 1997. The Company, the General Partner and the Initial Limited
Partner were incorporated in Maryland, and the Operating Partnership was
organized as a Delaware limited partnership.
The General Partner and the Initial Limited Partner will capitalize the
Operating Partnership. The General Partner initially owns a 1% general
partnership interest, and the Initial Limited Partner initially owns a 99%
limited partnership interest in the Operating Partnership.
RAIT was initially capitalized through the sale of 100 common shares of
beneficial interest (Common Shares) for $1,000.
RAIT's principal business activity will be to provide mortgage or other debt
financing (Financing) in situations that do not conform to the underwriting
standards of institutional lenders or sources that provide financing through
securitization. The Company intends to purchase or originate Financing
relating to multifamily residential, office and other commercial properties.
The Company will emphasize wraparound loans and, to a lesser extent, other
forms of junior lien and subordinated financing with principal amounts
generally between $1 million and $8 million. The Company also anticipates
the acquisition of real properties, or interests therein. The Operating
Partnership will undertake the business of the Company, including the
origination and acquisition of Financing and the acquisition of property
interests.
The Company's sole activity through August 25, 1997 consisted of the
organization and start-up of the Company. Accordingly, no consolidated
statement of operations is presented.
NOTE B - FEDERAL INCOME TAXES
The Company intends to qualify and will elect to be taxed as a Real Estate
Investment Trust (REIT) under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended, commencing with its taxable year ending
December 31, 1997. If the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income tax on its taxable
income that is distributed to its shareholders. A REIT is subject to a
number of organizational and operational requirements, including a
requirement that it currently distribute at least 95% of its annual taxable
income.
F-4
<PAGE>
Resource Asset Investment Trust
NOTES TO CONSOLIDATED BALANCE SHEET - CONTINUED
August 25, 1997
NOTE C - TRANSACTIONS WITH AFFILIATES
Resource America, Inc. (RAI), which is the sponsor of the Company, will own
9.8% of the outstanding Common Shares upon consummation of an offering of
Common Shares proposed to be made by the Company (assuming that the
underwriters for such offering do not exercise their over-allotment option).
See Note E. RAI 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
property management or management supervisory services to properties
underlying the Company's investments or included in the Company's property
interests. 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
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
F-5
<PAGE>
Resource Asset Investment Trust
NOTES TO CONSOLIDATED BALANCE SHEET - CONTINUED
August 25, 1997
persons (including the Chief Executive Officer of the Company) 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 (or, at the
election of the Company, units in the Operating Partnership that may be
redeemed for cash or, at the election of the General Partner, Common Shares
on a one-for-one basis). The maximum aggregate number of Common Shares that
may be issued pursuant to options granted under the Option Plan is
1,200,000. 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.
Before completion of the offering of the Company's Common Shares (the
Closing Date), the Company will grant to certain officers of the Company
options to acquire Common Shares at an exercise price per share equal to the
initial offering price of the Common Shares. The options are 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.
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 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........................................................ 9
Formation and Structure................................................... 18
Risk Factors.............................................................. 19
Conflicts of Interest..................................................... 33
Use of Proceeds........................................................... 35
Investment Objectives and Policies........................................ 37
The Company............................................................... 56
Distribution Policy....................................................... 61
Capitalization............................................................ 62
Management's Discussion and Analysis
of Financial Condition.................................................. 63
Description of Shares of Beneficial Interest.............................. 64
Certain Provisions of Maryland Law
and of the Company's Declaration of
Trust and Bylaws ....................................................... 69
Common Shares Available for Future Sale................................... 74
Operating Partnership Agreement........................................... 75
Federal Income Tax Considerations......................................... 78
Benefit Plan Considerations............................................... 95
Certain Legal Aspects of Real Property
Loans and Investments................................................... 98
Underwriting.............................................................. 108
Legal Matters............................................................. 111
Experts................................................................... 111
Additional Information.................................................... 112
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>
10,000,000 Shares
[LOGO]
RESOURCE ASSET INVESTMENT
TRUST
Common Shares
PROSPECTUS
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
____________, 1997
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS.
Item 31. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Common Shares being registered.
Amount to
be Paid
-------
SEC registration fee.......................... $ 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
3.4 By-laws of RAIT General, Inc.
3.6 By-laws of RAIT Limited, Inc.
3.8 Limited Partnership Agreement of RAIT Partnership, L.P.
4 Form of Certificate for Common Shares of the Company
5.1* Opinion of Ledgewood Law Firm, P.C.
5.2* Opinion of Arnold & Porter
8* Opinion of Ledgewood Law Firm, P.C. (as to tax
matters)
10.1 Form of Indemnification Agreement
10.2 Form of Loan Purchase and Sale Agreement between
Company and Resource America, Inc.
10.3 Employment Agreement (Betsy Z. Cohen)
10.4 Employment Agreement (Jay J. Eisner)
23.1 Consent of Ledgewood Law Firm, P.C. (contained in
Exhibits 5.1 and 8)
23.2 Consent of Arnold & Porter (contained in Exhibit 5.2)
23.3 Consent of Grant Thornton LLP
23.4 Consent of Johnson, McClellan, Sullins & Page
23.5 Consent of Joseph Dennis Pasquarella & Co.
23.6 Consents of M. Richard Cohen
23.7 Consent of Louis A. Iatarola Realty Appraisal
Group, Ltd.
99.1 Appraisal Report of M. Richard Cohen
99.2 Appraisal Report of Louis A. Iatarola Realty
Appraisal Group, Ltd.
99.3 Warrant Agreement
- ----------
* To be filed by amendment.
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:
II-3
<PAGE>
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.
4. 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.
5. 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. 1 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 31st day of October, 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.
BETSY Z. COHEN, Chairman, October 31, 1997
Chief Executive Officer
and Trustee
(Chief Executive Officer)
JAY J. EISNER, President October 31, 1997
and Chief Operating Officer
ELLEN J. DISTEFANO October 31, 1997
Chief Financial Officer
JONATHAN Z. COHEN, Trustee October 31, 1997
JEROME S. GOODMAN, Trustee October 31, 1997
JOEL R. MESZNIK, Trustee October 31, 1997
DANIEL PROMISLO, Trustee October 31, 1977
JACK L. WOLGIN, Trustee October 31, 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
3.4 By-laws of RAIT General, Inc.
3.6 By-laws of RAIT Limited, Inc.
3.8 Limited Partnership Agreement of RAIT Partnership, L.P.
4 Form of Certificate for Common Shares of the Company
5.1* Opinion of Ledgewood Law Firm, P.C.
5.2* Opinion of Arnold & Porter
8* Opinion of Ledgewood Law Firm, P.C. (as to tax
matters)
10.1 Form of Indemnification Agreement
10.2 Form of Loan Purchase and Sale Agreement between
Company and Resource America, Inc.
10.3 Employment Agreement (Betsy Z. Cohen)
10.4 Employment Agreement (Jay J. Eisner)
23.1 Consent of Ledgewood Law Firm, P.C. (contained in
Exhibits 5.1 and 8)
23.2 Consent of Arnold & Porter (contained in Exhibit 5.2)
23.3 Consent of Grant Thornton LLP
23.4 Consent of Johnson, McClellan, Sullins & Page
23.5 Consent of Joseph Dennis Pasquarella & Co.
23.6 Consents of M. Richard Cohen
23.7 Consent of Louis A. Iatarola Realty Appraisal
Group, Ltd.
99.1 Appraisal Report of M. Richard Cohen
99.2 Appraisal Report of Louis A. Iatarola Realty
Appraisal Group, Ltd.
99.3 Warrant Agreement
- ----------
* To be filed by amendment.
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
10,000,000 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 150,000 additional shares of
Common Shares to cover over-allotments, if any. The 10,000,000 Common Shares to
be purchased by the Underwriters (the "Initial Shares") and all or any part of
the 1,500,000 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 (i)
980,000 of the Initial Shares for sale to Resource America, Inc. ("RAI"), at the
initial public offering price of the Shares net of any underwriting discounts or
commissions, (ii) up to _______ of the Initial Shares for sale to directors,
officers and employees of the Resource America, Inc. and Company listed in
Schedule III hereto at the initial public offering price of the Shares net of
any underwriting discounts or commissions, and (iii) up to _______ of the
Initial Shares for sale to certain other persons listed in Schedule IV 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 575,000 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 $__ a share (the "Public
Offering Price") and to certain dealers selected by you at a price that
represents a concession not in excess of $__ a share under the Public Offering
Price, and that any Underwriter may allow, and such dealers may reallow, a
concession, not in excess of $__ a 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 575,000 Warrant Shares.
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
4
<PAGE>
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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(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
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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;
10
<PAGE>
(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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<PAGE>
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 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 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
18
<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:
(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.
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
<PAGE>
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
24
<PAGE>
(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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<PAGE>
(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 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:
(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 ___ ("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
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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
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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
Directors, Officers and Employees of the Company
For Whom Shares Have Been Reserved
<PAGE>
Schedule IV
Other Persons For Whom Shares Have Been Reserved
<PAGE>
RAIT GENERAL, INC.
------------------
ARTICLE I - OFFICES
Section 1. The principal office of the corporation in the State of Maryland
shall be at 7 St. Paul Street, Suite 1400, Baltimore, Maryland 21202 and the
resident agent in charge thereof is Resagent, Inc.
Section 2. The corporation may have such other offices within or without
the state as the board of directors may designate or as the business of the
corporation may require from time to time.
ARTICLE II - STOCKHOLDERS
Section 1. Annual Meeting: The annual meeting of the stockholders shall be
held at such place within or without the State of Maryland, and at such date and
time as shall be fixed by the board of directors, for the purpose of electing
directors and for the transaction of such other business as may come before the
meeting. If the day fixed for the annual meeting shall be a legal holiday in the
State of Maryland, such meeting shall be held on the next succeeding business
day. If the election of directors shall not be held on the day designated herein
for any annual meeting of the stockholders, or at any adjournment thereof, the
board of directors shall cause the election to be held at a special meeting of
the stockholders as soon thereafter as conveniently may be.
Section 2. Special Meetings: Special meetings of the stockholders, for any
<PAGE>
purpose or purposes, unless otherwise prescribed by statute, may be called
by the president or by the board of directors, and shall be called by the
president at the request of the holders of not less than twenty-five percent of
all outstanding shares of the corporation entitled to vote at the meeting.
Unless requested by stockholders entitled to cast a majority of all the votes
entitled to be cast at the meeting, a special meeting need not be called to
consider any matter which is substantially the same as a matter voted on at any
special meeting of the stockholders held during the preceding twelve months.
Section 3. Place of Meeting: The board of directors may designate any
place, either within or without the State of Maryland, as the place of meeting
for any annual meeting or for any special meeting called by the board of
directors. A waiver of notice signed by all stockholders entitled to vote at a
meeting may designate any place, either within or without the State of Maryland,
as the place for the holding of such meeting. If no designation is made, or if a
special meeting be otherwise called, the place of meeting shall be the principal
office of the corporation in the State of Maryland.
Section 4. Notice of Meeting: Written notice stating the place, day and
hour of the meeting and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall, unless otherwise prescribed by statute,
be delivered not less than ten nor more than fifty days before the date of the
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meeting, either-personally or by mail, by or at the direction of the president,
or the secretary, or the officer or other persons calling the meeting, to each
stockholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail,
addressed to the stockholder at his address as it appears on the stock transfer
books of the corporation, with postage thereon prepaid.
Section 5. Closing of Transfer Books or Fixing of Record Date: For the
purpose of determining stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, or stockholders entitled to
receive payment of any dividend, or in order to make a determination of
stockholders for any other proper purpose, the board of directors of the
corporation may provide that the stock transfer books shall be closed for a
stated period but not to exceed, in any case, twenty days. In lieu of closing
the stock transfer books, the board of directors may fix in advance a date as
the record date for any such determination of stockholders, such date in any
case to be not more than fifty days and, in case of a meeting of stockholders,
not less than ten days prior to the date on which the particular action,
requiring such determination of stockholders, is to be taken. If the stock
transfer books are not closed and no record date is fixed for the determination
of stockholders entitled to notice of or to vote at a meeting of stockholders,
or stockholders entitled to receive payment of a dividend, the date on which
notice of the meeting is mailed or the date on which the resolution of the board
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of directors declaring such dividend is adopted, as the case may be, shall be
the record date for such determination of stockholders. But payment or allotment
of dividends may not be made more than sixty days after the date on which the
resolution is adopted. When a determination of stockholders entitled to vote at
any meeting of stockholders has been made as provided in this section, such
determination-shall apply to any adjournment thereof regardless of its length
except where the determination has been made through the closing of the stock
transfer books and the stated period of closing has expired.
Section 6. Voting List: The corporation shall maintain a stock ledger which
contains:
(i) The name and address of each stockholder.
(ii) The number of shares of stock of each class which the
stockholder holds.
The stock ledger shall be in written form and available for visual inspection.
The original or a duplicate of the stock ledger shall be kept at the principal
office of the corporation.
Section 7. Quorum: A majority of the outstanding shares of the corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. If less than a majority of the outstanding shares
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any
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<PAGE>
business may be transacted which might have been transacted at the meeting as
originally noticed. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
Section 8. Proxies: At all meetings of stockholders, a stockholder may vote
in person or-by proxy executed in writing by the stockholder or by his duly
authorized attorney in fact. Such proxy shall be filed with the secretary of the
corporation before or at the time of the meeting. A proxy shall not be valid
after eleven months from the date of its execution, unless coupled with an
'interest, but no proxy shall be valid after ten years from the date of its
execution, unless renewed or extended at any time before its expiration.
Notwithstanding that a valid proxy is outstanding the powers of the proxy holder
are suspended, except in the case of a proxy coupled with an interest which is
designated as irrevocable, if the person executing the proxy is present at a
meeting and elects to vote in person.
Section 9. Voting of Shares: Subject to the provisions of Section 13 of
this Article II, each outstanding share entitled to vote shall be entitled to
one vote upon each matter submitted to a vote at a meeting of stockholders.
Section 10. Voting of Shares by Certain Holders: Shares standing in the
name of another corporation may be voted by such officer, agent or proxy as the
by-laws or a resolution of the board of directors of such corporation may
prescribe, and a certified copy of the by-law or resolution is presented at the
meeting.
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<PAGE>
Shares held by an administrator, executor, guardian or conservator may be
voted by him, either in person or by proxy, without a transfer of shares into
his name.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the corporation, nor
shares held by another corporation if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
Section 11. Voting Trusts: One or more stockholders of this corporation
may, for any proper business purpose, create a voting trust, revocable or
irrevocable, conferring upon a trustee or trustees the right to vote or
otherwise represent their shares, for a period of not to exceed ten years, by
entering into a written voting trust agreement specifying the terms and
conditions of the voting trust, by depositing an executed copy of the agreement
with the corporation at its registered office, and by transferring their shares
to such trustee or trustees for the purposes of the agreement. Trust
certificates shall be issued by the trustees for the shares so transferred. The
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<PAGE>
said copy of the voting trust agreement so deposited with the corporation shall
be subject to the absolute right of examination by any stockholder of the
corporation, in person or by agent or by any holder of a beneficial interest in
the voting trust, either in person or by agent, at any reasonable time.
The holder of a trust certificate shall be considered to be a stockholder
of the shares represented by his trust certificate with respect to his right to
inspect corporate books and records.
Section 12. Informal Action by Stockholders: Any action required or
permitted to be taken at a meeting of the stockholders may be taken without a
meeting if (a) a consent in writing, setting forth the action so taken, shall be
signed by all of the stockholders entitled to vote with respect to the subject
matter thereof, and (b) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote.
Section 13. Cumulative Voting: There shall be no right to cumulative
voting.
Section 14. Removal of Directors: At a meeting called expressly for that
purpose, directors may be removed in the manner provided in this section. The
entire board of directors may be removed, with or without cause, by a vote of
the holders of a majority of the shares then entitled to vote at an election of
directors.
If less than the entire board is to be removed, no one of the directors may
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<PAGE>
be removed if the votes cast against his removal would be sufficient to elect
him if then cumulatively voted at an election of the entire board of directors.
ARTICLE III - DIRECTORS
Section 1. Management by Board of Directors; Election of Directors; Number;
Term of Office: The business and affairs of this corporation shall be managed by
its board of directors, which shall be not less than one director nor more than
nine directors as determined by resolution of the board of directors except that
(i) whenever all the shares of the corporation are owned beneficially and of
record by either one or two stockholders, the number of directors may be less
than three but not less than the number of stockholders and (ii) whenever there
are three or more stockholders, there must be at least three directors. The
directors need not be residents of this state or stockholders in the
corporation. They shall be elected by the stockholders at the annual meeting of
stockholders of the corporation, and each director shall be elected for the term
of one year, and until his successor shall be elected and shall qualify.
Section 2. Increase or Decrease in Number. The number of directors may be
increased or decreased from time to time, but no such decrease shall in any way
affect the terms of directors then in office.
Section 3. Regular Meetings: A regular meeting of the board
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<PAGE>
of directors shall be held without other notice than this by-law immediately
after, and at the same place as, the annual meeting of stockholders. The board
of directors may provide, by resolution, the time and place, either within or
without this state, for the holding of additional regular meetings without other
notice than such resolution.
Section 4. Special Meetings: Special meetings of the board of directors
may be called by or at the request of the president or any two directors. The
person or persons authorized to call special meetings of the board of directors
may fix any place, either within or without this state, as the place for holding
any special meeting of the board of directors called by them.
Section 5. Notice: Notice of any special meeting shall be given at least
five days previously thereto by written notice delivered personally or mailed to
each director at his business address, or by telegram. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail, so
addressed, with postage thereon prepaid. If notice be given by telegram, such
notice shall be deemed to be delivered when the telegram is delivered to the
telegraph company. Any director may waive notice of any meeting. The attendance
of a director at a meeting shall constitute a waiver of notice of such meeting
except where a director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
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<PAGE>
regular or special meeting of the board of directors need be specified in the
notice or waiver of notice of such meeting.
Section 6. Quorum: A majority of the number of directors fixed by Section
1. of this Article III shall constitute a quorum for the transaction of business
at any meeting of the board of directors, but if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time without further notice.
Section 7. Manner of Acting: The act of the majority of the
directors present at a meeting at which a quorum is present shall
be the act of the board of directors.
Section 8. Informal or Irregular Action by Directors or Committees: (a)
Action taken by the required majority of the directors or members of a committee
without a meeting is nevertheless board or committee action if written consent
to the action in question is signed by all the directors or members of the
committee, as the case may be, and filed with the minutes of the proceedings of
the board or committee, whether done before or after the action so taken.
(b) Any one or more directors or members of a committee may participate in
a meeting of the board or committee by means of a conference telephone or
similar communications device which allows all persons participating in the
meeting to hear each other, and such participation in a meeting shall be deemed
presence in person at such meeting.
Section 9. Executive and Other Committees: (a) The board of
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directors, by resolution adopted by a majority of the number of directors then
in office may designate from among its members and executive committee and one
or more other committees, each consisting of two or more directors, and each of
which, to the extent provided in the resolution or in the charter or these
bylaws shall have and may exercise all of the authority of the board of
directors except the power to:
(i) Declare dividends or distributions on stock;
(ii) Issue stock other than as provided in
subsection (b) of this section.
(iii) Recommend to the stockholders any action
which requires stockholder approval.
(iv) Amend the by-laws; or
(v) Approve any merger or share exchange which
does not require stockholder approval.
(b) If the board of directors has given general authorization for the
issuance of stock, a committee of the board, in accordance with a general
formula or method specified by the board by resolution or by adoption of a stock
option or other plan, may fix the terms of stock subject to classification or
reclassification and the terms on which any stock may be issued,
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including all terms and conditions required or permitted to be established or
authorized by the board of directors under ss.ss.2-203 and 2-208 of the Maryland
General Corporation Law.
Section 10. Compensation: By resolution of the board of directors, each
director may be paid his expenses, if any, of attendance at each meeting of the
board of directors, and may be paid a stated salary as director or a fixed sum
for attendance at each meeting of the board of directors or both. No such
payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
Section 11. Presumption of Assent: A director of the corporation who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless he
shall announce his dissent at the meeting and his dissent is entered in the
minutes and he shall forward such dissent by registered mail to the secretary of
the corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
ARTICLE IV - OFFICERS
Section 1. Number: The officers of the corporation shall be a president, a
secretary, and a treasurer, each of whom shall be elected by the board of
directors. Such other officers and assistant officers as may be deemed necessary
may be elected or appointed by the board of directors. Any two or more offices
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<PAGE>
may be held by the same person, except that no officer may act in more than one
capacity where action of two or more officers is required and no person may hold
the office of president and vice president concurrently.
Section 2. Election and Term of Office: The officers of the corporation to
be elected by the board of directors shall be elected annually by the board of
directors at the first meeting of the board of directors held after each annual
meeting of the stockholders. If the election of officers shall not be held at
such meeting, such election shall be held as soon thereafter as conveniently may
be. Each officer shall hold office until his successor shall have been duly
elected and shall have qualified or until he shall resign or shall have been
removed in the manner hereinafter provided.
Section 3. Removal: Any officer or agent may be removed by the board of
directors whenever in its judgment, the best interests of the corporation will
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or agent shall not of itself create contract rights.
Section 4. Vacancies: A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
Section 5. President: The president shall be a director of the corporation
and shall be the principal executive officer of the corporation, and subject to
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the control of the board of directors, shall in general supervise and control
all of the business and affairs of the corporation. The president shall have
authority to institute or defend legal proceedings when the directors are
deadlocked. He shall, when present, preside at all meetings of the stockholders
and of the board of directors. He may sign, with the secretary or any other
proper officer of the corporation thereunto authorized by the board of
directors, certificates for shares of the corporation, any deeds, mortgages,
bonds, contracts, or other instruments which the board of directors has
authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the board of directors or by these
by-laws to some other officer or agent of the corporation, or shall be required
by law to be otherwise signed or executed; and in general shall perform all
duties incident to the office of president and such other duties as may be
prescribed by the board of directors from time to time.
Section 6. The Secretary: The secretary shall: (a) keep the minutes of the
proceedings of the stockholders and of the board of directors in one or more
books provided for that purpose; (b) see that all notices are duly given in
accordance with the provisions of these by-laws or as required by law; (c) be
custodian of the corporate records and of the seal of the corporation and see
that the seal of the corporation is affixed to all documents the execution of
which on behalf of the corporation under its seal is duly authorized; (d) keep a
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register of the post office address of each stockholder which shall be furnished
to the secretary by such stockholder; (e) sign with the president, certificates
for shares of the corporation, the issuance of which shall have been authorized
by resolution of the board of directors; (f) have general charge of the stock
transfer books of the corporation; (g) in general perform all duties incident to
the office of secretary and such other duties as from time to time may be
assigned to him by the president or by the board of directors.
Section 7. The Treasurer: The treasurer shall: (a) have charge and custody
of and be responsible for all funds and securities of the corporation; (b)
receive and give receipts for moneys due and payable to the corporation from any
source whatsoever, and deposit all such moneys in the name of the corporation in
such banks, trust companies or other depositories as shall be selected in
accordance with the provisions of Article VI of these By-Laws; and (c) in
general perform all of the duties incident to the office of treasurer and such
other duties as from time to time may be assigned to him by the president or by
the board of directors. If required by the board of directors, the treasurer
shall give a bond for the faithful discharge of his duties in such sum with such
surety or sureties as the board of directors shall determine.
Section 8. Salaries: The salaries of the officers shall be fixed from time
to time by the board of directors and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a director of the
corporation.
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ARTICLE V - INDEMNIFICATION OF DIRECTORS, OFFICERS
AND OTHER PERSONS
Section 1. Indemnification. The corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, trustee, officer, employee or
agent of another corporation, partnership, joint venture, trust, other
enterprise or employee benefit plan, against reasonable expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
unless his act or omission was the result of active and deliberate dishonesty,
or if he actually received an improper personal benefit in money, property or
services, or with respect to any criminal action or proceeding, had reasonable
cause to believe his act or omission was unlawful. The termination of any
action, suit or proceeding by judgment, order or settlement shall not create a
presumption that the person did not meet the required standards of conduct set
forth in this Section 1. The termination of any action, suit or proceeding by
conviction, or a plea of nolo contendere or its equivalent, or by entry of an
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order of probation prior to judgment, shall create a rebuttable presumption
that the person did not meet such standard of conduct. Notwithstanding the
foregoing, it is the express policy of the corporation that indemnification of
any person under this Section 1. shall be to the fullest extent allowed by, but
subject to the limitations and conditions set forth in, Section 2-418 of the
Maryland General Corporation Law (or any successor provisions thereto) and,
accordingly, if such law provides other, further or expanded indemnification
rights, this Section 1. shall be deemed to incorporate the same.
Section 2. Reliance on Certain Information. In performing his duties, a
director shall be entitled to rely on any information, opinion, report or
statement, including any financial statement and other financial data, in each
case prepared or presented by any of the following:
(i) One or more officers or employees of the
corporation whom the director reasonably
believes to be reliable and competent in the
matters presented.
(ii) A lawyer, certified public accountant or
other person as to matters which the
director reasonably believes to be within
the person's professional or expert
competence.
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(iii) A committee of the board of directors upon
which he does not serve, as to matters
within its designated authority, which the
director reasonably believes to merit
confidence; provided however that a director
shall not be considered to be acting in good
faith if he has any knowledge concerning the
matter in question that would cause his
reliance to be unwarranted.
Section 3. Payments By Corporation. The indemnification provided for in
this Article V shall be paid by the corporation only as authorized in the
specific proceeding upon a determination that indemnification of the person is
proper under the circumstances because he has met the applicable standard of
conduct and that expenses are reasonable. Such determination is to be made by
the board of directors by majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or in any other manner
authorized by law which the board of directors shall direct.
Section 4. Payment of Expenses. Reasonable expenses incurred by a person
who is a party to a proceeding may be paid or reimbursed by the corporation in
advance of the final disposition of such proceeding upon receipt of (i) a
written affirmation by the person of the person's good faith belief that the
standard of conduct necessary for indemnification by the corporation has been
met, and (ii) an undertaking by or on behalf of such person to repay such amount
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if it shall ultimately be determined that the standard of conduct has not been
met.
Section 5. Nonexclusivity. The indemnification provided by this Article
shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under Maryland law, the Articles of
Incorporation, any by-law, agreement, resolution of shareholders or directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
Section 6. Insurance. The corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan against any liability asserted against him and incurred by
him in any such capacity, or arising out of his status as such, whether or not
the corporation would have the power to indemnify him against such liability
under the specified statutory authority or the provisions of this Article V.
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ARTICLE VI - CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts: The board of directors may authorize any officer
or officers, agent or agents, to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances.
Section 2. Loans: No loans shall be contracted on behalf of
the corporation and no evidences of indebtedness shall be issued
in its name unless authorized by a resolution of the board of
directors. Such authority may be general or confined to specific
instances.
Section 3. Checks, Drafts, etc.: All checks, drafts, or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the corporation, shall be signed by such officer or officers, agent or
agents of the corporation and in such manner as shall from time to time be
determined by resolution of the board of directors.
Section 4. Deposits: All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies or other depositories as the board of directors may
select.
ARTICLE VII - CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares: Certificates representing shares of the
corporation shall be in such form as shall be determined by the board of
directors. Such certificates shall be signed by the president, a vice-president,
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or the chairman of the board and countersigned by the secretary, an assistant
secretary, the treasurer, or an assistant treasurer and sealed with the
corporate seal or a facsimile thereof. The signatures of such officers upon a
certificate may be manual or facsimile signatures. Each certificate for shares
shall be consecutively numbered or otherwise identified. The name and address of
the person to whom the shares represented thereby are issued, with the number of
shares and date of issue, shall be entered on the stock transfer books of the
corporation. All certificates surrendered to the corporation for transfer shall
be cancelled and no new certificate shall be issued until the former
certificates for a like number of shares shall have been surrendered and
cancelled, except that in case of a lost, destroyed or mutilated certificate a
new one may be issued therefor upon such terms and indemnity to the corporation
as the board of directors may prescribe.
Section 2. Transfer of Shares: Transfer of shares of the corporation shall
be made only on the stock transfer books of the corporation by the holder of
record thereof or by his legal representative, who shall furnish proper evidence
of authority to transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the secretary of the corporation, and on
surrender for cancellation of the certificate for such shares. The person in
whose name shares stand on the books of the corporation shall be deemed by the
corporation to be the owner thereof for all purposes.
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ARTICLE VIII - FISCAL YEAR
Section 1. The fiscal year of the corporation shall begin on the first day
of January in each year.
ARTICLE IX - DIVIDENDS
Section 1. The board of directors may, from time to time, declare and the
corporation may pay dividends on its outstanding shares in the manner, and upon
the terms and conditions provided by law and its Articles of Incorporation.
ARTICLE X - CORPORATE SEAL
Section 1. The board of directors shall provide a corporate seal which
shall be circular in form and shall have inscribed thereon the name of the
corporation, the year of its incorporation and the words, "Corporate Seal,
Maryland."
ARTICLE XI - WAIVER OF NOTICE
Section 1. Whenever any notice is required to be given to any stockholder
or director of the corporation under the provisions of these By-Laws or under
the provisions of the by-laws or under the provisions of the Articles of
Incorporation or under the provisions of the general corporation law of the
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State of Maryland, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of such notice.
ARTICLE XII - AMENDMENTS
Section 1. The board of directors shall have the power to make, alter and
repeal by-laws, but by-laws made by the board may be altered or repealed, and
new by-laws made, by the stockholders.
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RAIT LIMITED, INC.
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ARTICLE I - OFFICES
Section 1. The principal office of the corporation in the State of Maryland
shall be at 7 St. Paul Street, Suite 1400, Baltimore, Maryland 21202 and the
resident agent in charge thereof is Resagent, Inc.
Section 2. The corporation may have such other offices within or without
the state as the board of directors may designate or as the business of the
corporation may require from time to time.
ARTICLE II - STOCKHOLDERS
Section 1. Annual Meeting: The annual meeting of the stockholders shall be
held at such place within or without the State of Maryland, and at such date and
time as shall be fixed by the board of directors, for the purpose of electing
directors and for the transaction of such other business as may come before the
meeting. If the day fixed for the annual meeting shall be a legal holiday in the
State of Maryland, such meeting shall be held on the next succeeding business
day. If the election of directors shall not be held on the day designated herein
for any annual meeting of the stockholders, or at any adjournment thereof, the
board of directors shall cause the election to be held at a special meeting of
the stockholders as soon thereafter as conveniently may be.
Section 2. Special Meetings: Special meetings of the
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stockholders, for any purpose or purposes, unless otherwise prescribed by
statute, may be called by the president or by the board of directors, and shall
be called by the president at the request of the holders of not less than
twenty-five percent of all outstanding shares of the corporation entitled to
vote at the meeting. Unless requested by stockholders entitled to cast a
majority of all the votes entitled to be cast at the meeting, a special meeting
need not be called to consider any matter which is substantially the same as a
matter voted on at any special meeting of the stockholders held during the
preceding twelve months.
Section 3. Place of Meeting: The board of directors may designate any
place, either within or without the State of Maryland, as the place of meeting
for any annual meeting or for any special meeting called by the board of
directors. A waiver of notice signed by all stockholders entitled to vote at a
meeting may designate any place, either within or without the State of Maryland,
as the place for the holding of such meeting. If no designation is made, or if a
special meeting be otherwise called, the place of meeting shall be the principal
office of the corporation in the State of Maryland.
Section 4. Notice of Meeting: Written notice stating the place, day and
hour of the meeting and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall, unless otherwise prescribed by statute,
be delivered not less than ten nor more than fifty days before the date of the
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meeting, either-personally or by mail, by or at the direction of the president,
or the secretary, or the officer or other persons calling the meeting, to each
stockholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail,
addressed to the stockholder at his address as it appears on the stock transfer
books of the corporation, with postage thereon prepaid.
Section 5. Closing of Transfer Books or Fixing of Record Date: For the
purpose of determining stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, or stockholders entitled to
receive payment of any dividend, or in order to make a determination of
stockholders for any other proper purpose, the board of directors of the
corporation may provide that the stock transfer books shall be closed for a
stated period but not to exceed, in any case, twenty days. In lieu of closing
the stock transfer books, the board of directors may fix in advance a date as
the record date for any such determination of stockholders, such date in any
case to be not more than fifty days and, in case of a meeting of stockholders,
not less than ten days prior to the date on which the particular action,
requiring such determination of stockholders, is to be taken. If the stock
transfer books are not closed and no record date is fixed for the determination
of stockholders entitled to notice of or to vote at a meeting of stockholders,
or stockholders entitled to receive payment of a dividend, the date on which
notice of the meeting is mailed or
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the date on which the resolution of the board of directors declaring such
dividend is adopted, as the case may be, shall be the record date for such
determination of stockholders. But payment or allotment of dividends may not be
made more than sixty days after the date on which the resolution is adopted.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this section, such determination-shall
apply to any adjournment thereof regardless of its length except where the
determination has been made through the closing of the stock transfer books and
the stated period of closing has expired.
Section 6. Voting List: The corporation shall maintain a
stock ledger which contains:
(i) The name and address of each stockholder.
(ii) The number of shares of stock of each class which
the stockholder holds.
The stock ledger shall be in written form and available for visual inspection.
The original or a duplicate of the stock ledger shall be kept at the principal
office of the corporation.
Section 7. Quorum: A majority of the outstanding shares of the corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. If less than a majority of the outstanding shares
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or
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represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. The stockholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
Section 8. Proxies: At all meetings of stockholders, a stockholder may vote
in person or-by proxy executed in writing by the stockholder or by his duly
authorized attorney in fact. Such proxy shall be filed with the secretary of the
corporation before or at the time of the meeting. A proxy shall not be valid
after eleven months from the date of its execution, unless coupled with an
'interest, but no proxy shall be valid after ten years from the date of its
execution, unless renewed or extended at any time before its expiration.
Notwithstanding that a valid proxy is outstanding the powers of the proxy holder
are suspended, except in the case of a proxy coupled with an interest which is
designated as irrevocable, if the person executing the proxy is present at a
meeting and elects to vote in person.
Section 9. Voting of Shares: Subject to the provisions of Section 13 of
this Article II, each outstanding share entitled to vote shall be entitled to
one vote upon each matter submitted to a vote at a meeting of stockholders.
Section 10. Voting of Shares by Certain Holders: Shares standing in the
name of another corporation may be voted by such officer, agent or proxy as the
by-laws or a resolution of the board of directors of such corporation may
prescribe, and a
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certified copy of the by-law or resolution is presented at the meeting.
Shares held by an administrator, executor, guardian or conservator may be
voted by him, either in person or by proxy, without a transfer of shares into
his name.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the corporation, nor
shares held by another corporation if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
Section 11. Voting Trusts: One or more stockholders of this corporation
may, for any proper business purpose, create a voting trust, revocable or
irrevocable, conferring upon a trustee or trustees the right to vote or
otherwise represent their shares, for a period of not to exceed ten years, by
entering into a written voting trust agreement specifying the terms and
conditions of the voting trust, by depositing an executed copy of the agreement
with the corporation at its registered office, and by transferring their shares
to such trustee or trustees for the purposes of the agreement. Trust
certificates shall be issued by
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the trustees for the shares so transferred. The said copy of the voting trust
agreement so deposited with the corporation shall be subject to the absolute
right of examination by any stockholder of the corporation, in person or by
agent or by any holder of a beneficial interest in the voting trust, either in
person or by agent, at any reasonable time.
The holder of a trust certificate shall be considered to be a stockholder
of the shares represented by his trust certificate with respect to his right to
inspect corporate books and records.
Section 12. Informal Action by Stockholders: Any action required or
permitted to be taken at a meeting of the stockholders may be taken without a
meeting if (a) a consent in writing, setting forth the action so taken, shall be
signed by all of the stockholders entitled to vote with respect to the subject
matter thereof, and (b) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote.
Section 13. Cumulative Voting: There shall be no right to
cumulative voting.
Section 14. Removal of Directors: At a meeting called expressly for that
purpose, directors may be removed in the manner provided in this section. The
entire board of directors may be removed, with or without cause, by a vote of
the holders of a majority of the shares then entitled to vote at an election of
directors.
If less than the entire board is to be removed, no one of
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the directors may be removed if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election of the entire
board of directors.
ARTICLE III - DIRECTORS
Section 1. Management by Board of Directors; Election of Directors; Number;
Term of Office: The business and affairs of this corporation shall be managed by
its board of directors, which shall be not less than one director nor more than
nine directors as determined by resolution of the board of directors except that
(i) whenever all the shares of the corporation are owned beneficially and of
record by either one or two stockholders, the number of directors may be less
than three but not less than the number of stockholders and (ii) whenever there
are three or more stockholders, there must be at least three directors. The
directors need not be residents of this state or stockholders in the
corporation. They shall be elected by the stockholders at the annual meeting of
stockholders of the corporation, and each director shall be elected for the term
of one year, and until his successor shall be elected and shall qualify.
Section 2. Increase or Decrease in Number. The number of directors may be
increased or decreased from time to time, but no such decrease shall in any way
affect the terms of directors then in office.
Section 3. Regular Meetings: A regular meeting of the board
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of directors shall be held without other notice than this by-law immediately
after, and at the same place as, the annual meeting of stockholders. The board
of directors may provide, by resolution, the time and place, either within or
without this state, for the holding of additional regular meetings without other
notice than such resolution.
Section 4. Special Meetings: Special meetings of the board of directors
may be called by or at the request of the president or any two directors. The
person or persons authorized to call special meetings of the board of directors
may fix any place, either within or without this state, as the place for holding
any special meeting of the board of directors called by them.
Section 5. Notice: Notice of any special meeting shall be given at least
five days previously thereto by written notice delivered personally or mailed to
each director at his business address, or by telegram. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail, so
addressed, with postage thereon prepaid. If notice be given by telegram, such
notice shall be deemed to be delivered when the telegram is delivered to the
telegraph company. Any director may waive notice of any meeting. The attendance
of a director at a meeting shall constitute a waiver of notice of such meeting
except where a director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special
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meeting of the board of directors need be specified in the notice or waiver of
notice of such meeting.
Section 6. Quorum: A majority of the number of directors fixed by Section
1. of this Article III shall constitute a quorum for the transaction of business
at any meeting of the board of directors, but if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time without further notice.
Section 7. Manner of Acting: The act of the majority of the
directors present at a meeting at which a quorum is present shall
be the act of the board of directors.
Section 8. Informal or Irregular Action by Directors or Committees: (a)
Action taken by the required majority of the directors or members of a committee
without a meeting is nevertheless board or committee action if written consent
to the action in question is signed by all the directors or members of the
committee, as the case may be, and filed with the minutes of the proceedings of
the board or committee, whether done before or after the action so taken.
(b) Any one or more directors or members of a committee may participate in
a meeting of the board or committee by means of a conference telephone or
similar communications device which allows all persons participating in the
meeting to hear each other, and such participation in a meeting shall be deemed
presence in person at such meeting.
Section 9. Executive and Other Committees: (a) The board of
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directors, by resolution adopted by a majority of the number of directors then
in office may designate from among its members and executive committee and one
or more other committees, each consisting of two or more directors, and each of
which, to the extent provided in the resolution or in the charter or these
bylaws shall have and may exercise all of the authority of the board of
directors except the power to:
(i) Declare dividends or distributions on stock;
(ii) Issue stock other than as provided in
subsection (b) of this section.
(iii) Recommend to the stockholders any action
which requires stockholder approval.
(iv) Amend the by-laws; or
(v) Approve any merger or share exchange which
does not require stockholder approval.
(b) If the board of directors has given general authorization for the
issuance of stock, a committee of the board, in accordance with a general
formula or method specified by the board by resolution or by adoption of a stock
option or other plan, may fix the terms of stock subject to classification or
reclassification and the terms on which any stock may be issued,
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including all terms and conditions required or permitted to be established or
authorized by the board of directors under ss.ss.2-203 and 2-208 of the Maryland
General Corporation Law.
Section 10. Compensation: By resolution of the board of directors, each
director may be paid his expenses, if any, of attendance at each meeting of the
board of directors, and may be paid a stated salary as director or a fixed sum
for attendance at each meeting of the board of directors or both. No such
payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
Section 11. Presumption of Assent: A director of the corporation who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless he
shall announce his dissent at the meeting and his dissent is entered in the
minutes and he shall forward such dissent by registered mail to the secretary of
the corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
ARTICLE IV - OFFICERS
Section 1. Number: The officers of the corporation shall be a president, a
secretary, and a treasurer, each of whom shall be elected by the board of
directors. Such other officers and assistant officers as may be deemed necessary
may be elected or appointed by the board of directors. Any two or more offices
may
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be held by the same person, except that no officer may act in more than one
capacity where action of two or more officers is required and no person may hold
the office of president and vice president concurrently.
Section 2. Election and Term of Office: The officers of the corporation to
be elected by the board of directors shall be elected annually by the board of
directors at the first meeting of the board of directors held after each annual
meeting of the stockholders. If the election of officers shall not be held at
such meeting, such election shall be held as soon thereafter as conveniently may
be. Each officer shall hold office until his successor shall have been duly
elected and shall have qualified or until he shall resign or shall have been
removed in the manner hereinafter provided.
Section 3. Removal: Any officer or agent may be removed by the board of
directors whenever in its judgment, the best interests of the corporation will
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or agent shall not of itself create contract rights.
Section 4. Vacancies: A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
Section 5. President: The president shall be a director of the corporation
and shall be the principal executive officer of
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the corporation, and subject to the control of the board of directors, shall in
general supervise and control all of the business and affairs of the
corporation. The president shall have authority to institute or defend legal
proceedings when the directors are deadlocked. He shall, when present, preside
at all meetings of the stockholders and of the board of directors. He may sign,
with the secretary or any other proper officer of the corporation thereunto
authorized by the board of directors, certificates for shares of the
corporation, any deeds, mortgages, bonds, contracts, or other instruments which
the board of directors has authorized to be executed, except in cases where the
signing and execution thereof shall be expressly delegated by the board of
directors or by these by-laws to some other officer or agent of the corporation,
or shall be required by law to be otherwise signed or executed; and in general
shall perform all duties incident to the office of president and such other
duties as may be prescribed by the board of directors from time to time.
Section 6. The Secretary: The secretary shall: (a) keep the minutes of the
proceedings of the stockholders and of the board of directors in one or more
books provided for that purpose; (b) see that all notices are duly given in
accordance with the provisions of these by-laws or as required by law; (c) be
custodian of the corporate records and of the seal of the corporation and see
that the seal of the corporation is affixed to all documents the execution of
which on behalf of the corporation under its seal is duly authorized; (d) keep a
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register of the post office address of each stockholder which shall be furnished
to the secretary by such stockholder; (e) sign with the president, certificates
for shares of the corporation, the issuance of which shall have been authorized
by resolution of the board of directors; (f) have general charge of the stock
transfer books of the corporation; (g) in general perform all duties incident to
the office of secretary and such other duties as from time to time may be
assigned to him by the president or by the board of directors.
Section 7. The Treasurer: The treasurer shall: (a) have charge and custody
of and be responsible for all funds and securities of the corporation; (b)
receive and give receipts for moneys due and payable to the corporation from any
source whatsoever, and deposit all such moneys in the name of the corporation in
such banks, trust companies or other depositories as shall be selected in
accordance with the provisions of Article VI of these By-Laws; and (c) in
general perform all of the duties incident to the office of treasurer and such
other duties as from time to time may be assigned to him by the president or by
the board of directors. If required by the board of directors, the treasurer
shall give a bond for the faithful discharge of his duties in such sum with such
surety or sureties as the board of directors shall determine.
Section 8. Salaries: The salaries of the officers shall be fixed from time
to time by the board of directors and no officer shall be prevented from
receiving such salary by reason of the
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fact that he is also a director of the corporation.
ARTICLE V - INDEMNIFICATION OF DIRECTORS, OFFICERS
AND OTHER PERSONS
Section 1. Indemnification. The corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, trustee, officer, employee or
agent of another corporation, partnership, joint venture, trust, other
enterprise or employee benefit plan, against reasonable expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
unless his act or omission was the result of active and deliberate dishonesty,
or if he actually received an improper personal benefit in money, property or
services, or with respect to any criminal action or proceeding, had reasonable
cause to believe his act or omission was unlawful. The termination of any
action, suit or proceeding by judgment, order or settlement shall not create a
presumption that the person did not meet the required standards of conduct set
forth in this Section 1. The termination of any action, suit or proceeding by
conviction, or a plea of nolo contendere or its equivalent, or by
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entry of an order of probation prior to judgment, shall create a rebuttable
presumption that the person did not meet such standard of conduct.
Notwithstanding the foregoing, it is the express policy of the corporation that
indemnification of any person under this Section 1. shall be to the fullest
extent allowed by, but subject to the limitations and conditions set forth in,
Section 2-418 of the Maryland General Corporation Law (or any successor
provisions thereto) and, accordingly, if such law provides other, further or
expanded indemnification rights, this Section 1. shall be deemed to incorporate
the same.
Section 2. Reliance on Certain Information. In performing his
duties, a director shall be entitled to rely on any information, opinion, report
or statement, including any financial statement and other financial data, in
each case prepared or presented by any of the following:
(i) One or more officers or employees of the
corporation whom the director reasonably
believes to be reliable and competent in the
matters presented.
(ii) A lawyer, certified public accountant or
other person as to matters which the
director reasonably believes to be within
the person's professional or expert
competence.
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(iii) A committee of the board of directors upon
which he does not serve, as to matters
within its designated authority, which the
director reasonably believes to merit
confidence; provided however that a director
shall not be considered to be acting in good
faith if he has any knowledge concerning the
matter in question that would cause his
reliance to be unwarranted.
Section 3. Payments By Corporation. The indemnification provided for in
this Article V shall be paid by the corporation only as authorized in the
specific proceeding upon a determination that indemnification of the person is
proper under the circumstances because he has met the applicable standard of
conduct and that expenses are reasonable. Such determination is to be made by
the board of directors by majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or in any other manner
authorized by law which the board of directors shall direct.
Section 4. Payment of Expenses. Reasonable expenses incurred by a
person who is a party to a proceeding may be paid or reimbursed by the
corporation in advance of the final disposition of such proceeding upon receipt
of (i) a written affirmation by the person of the person's good faith belief
that the standard of conduct necessary for indemnification by the corporation
has been met, and (ii) an undertaking by or on behalf
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of such person to repay such amount if it shall ultimately be determined that
the standard of conduct has not been met.
Section 5. Nonexclusivity. The indemnification provided by this Article
shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under Maryland law, the Articles of
Incorporation, any by-law, agreement, resolution of shareholders or directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
Section 6. Insurance. The corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan against any liability asserted against him and incurred by
him in any such capacity, or arising out of his status as such, whether or not
the corporation would have the power to indemnify him against such liability
under the specified statutory authority or the provisions of this Article V.
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ARTICLE VI - CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts: The board of directors may authorize any officer
or officers, agent or agents, to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances.
Section 2. Loans: No loans shall be contracted on behalf of the corporation
and no evidences of indebtedness shall be issued in its name unless authorized
by a resolution of the board of directors. Such authority may be general or
confined to specific instances.
Section 3. Checks, Drafts, etc.: All checks, drafts, or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the corporation, shall be signed by such officer or officers, agent or
agents of the corporation and in such manner as shall from time to time be
determined by resolution of the board of directors.
Section 4. Deposits: All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies or other depositories as the board of directors may
select.
ARTICLE VII - CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares: Certificates representing shares of the
corporation shall be in such form as shall be determined by the board of
directors. Such certificates
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shall be signed by the president, a vice-president, or the chairman of the board
and countersigned by the secretary, an assistant secretary, the treasurer, or an
assistant treasurer and sealed with the corporate seal or a facsimile thereof.
The signatures of such officers upon a certificate may be manual or facsimile
signatures. Each certificate for shares shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the shares
represented thereby are issued, with the number of shares and date of issue,
shall be entered on the stock transfer books of the corporation. All
certificates surrendered to the corporation for transfer shall be cancelled and
no new certificate shall be issued until the former certificates for a like
number of shares shall have been surrendered and cancelled, except that in case
of a lost, destroyed or mutilated certificate a new one may be issued therefor
upon such terms and indemnity to the corporation as the board of directors may
prescribe.
Section 2. Transfer of Shares: Transfer of shares of the corporation shall
be made only on the stock transfer books of the corporation by the holder of
record thereof or by his legal representative, who shall furnish proper evidence
of authority to transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the secretary of the corporation, and on
surrender for cancellation of the certificate for such shares. The person in
whose name shares stand on the books of the corporation shall be deemed by the
corporation to be
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the owner thereof for all purposes.
ARTICLE VIII - FISCAL YEAR
Section 1. The fiscal year of the corporation shall begin on the first day
of January in each year.
ARTICLE IX - DIVIDENDS
Section 1. The board of directors may, from time to time, declare and the
corporation may pay dividends on its outstanding shares in the manner, and upon
the terms and conditions provided by law and its Articles of Incorporation.
ARTICLE X - CORPORATE SEAL
Section 1. The board of directors shall provide a corporate seal which
shall be circular in form and shall have inscribed thereon the name of the
corporation, the year of its incorporation and the words, "Corporate Seal,
Maryland."
ARTICLE XI - WAIVER OF NOTICE
Section 1. Whenever any notice is required to be given to any stockholder
or director of the corporation under the provisions of these By-Laws or under
the provisions of the by-laws or under the provisions of the Articles of
Incorporation or under the provisions of the general corporation law of the
State
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of Maryland, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of such notice.
ARTICLE XII - AMENDMENTS
Section 1. The board of directors shall have the power to make, alter and
repeal by-laws, but by-laws made by the board may be altered or repealed, and
new by-laws made, by the stockholders.
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RAIT PARTNERSHIP, L.P.
LIMITED PARTNERSHIP AGREEMENT
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TABLE OF CONTENTS
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ARTICLE I - CONTINUATION......................................................................................- 1 -
Section 1.1 Continuation............................................................................- 1 -
Section 1.2 Name....................................................................................- 1 -
Section 1.3 Place of Business; Registered Agent.....................................................- 1 -
ARTICLE II - INTERPRETIVE PROVISIONS..........................................................................- 2 -
Section 2.1 Certain Definitions.....................................................................- 2 -
Section 2.2 Rules of Construction....................................................................- 8 -
ARTICLE III - BUSINESS PURPOSE................................................................................- 9 -
Section 3.1 Business................................................................................- 9 -
Section 3.2 Authorized Activities...................................................................- 9 -
ARTICLE IV - CAPITAL CONTRIBUTIONS............................................................................- 9 -
Section 4.1 Capital Contributions ..................................................................- 9 -
Section 4.2 Additional Partnership Interests.......................................................- 10 -
Section 4.3 No Third Party Beneficiaries...........................................................- 10 -
Section 4.4 Return of Capital Account; Interest....................................................- 11 -
Section 4.5 Preemptive Rights......................................................................- 11 -
Section 4.6 REIT Share Purchases...................................................................- 11 -
Section 4.7 Limited Liability......................................................................- 11 -
ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS....................................................................- 11 -
Section 5.1 General................................................................................- 11 -
Section 5.2 Distributions of Net Cash Flow.........................................................- 12 -
Section 5.3 Distributions of Capital Proceeds......................................................- 12 -
Section 5.4 Amounts Withheld.......................................................................- 12 -
ARTICLE VI - PARTNERSHIP MANAGEMENT..........................................................................- 12 -
Section 6.1 Management and Control of Partnership Business.........................................- 12 -
Section 6.2 No Management by Limited Partners; Limitation of Liability.............................- 12 -
Section 6.3 Limitations on Partners................................................................- 13 -
Section 6.4 Business with Affiliates...............................................................- 13 -
Section 6.5 Compensation; Reimbursement of Expenses................................................- 13 -
Section 6.6 Liability for Acts and Omissions.......................................................- 13 -
ARTICLE VII - ADMINISTRATIVE, FINANCIAL AND TAX MATTERS......................................................- 14 -
Section 7.1 Books and Records......................................................................- 14 -
Section 7.2 Annual Audit and Accounting............................................................- 14 -
Section 7.3 Partnership Funds......................................................................- 14 -
Section 7.4 Reports and Notices....................................................................- 14 -
Section 7.5 Tax Matters............................................................................- 15 -
Section 7.6 Withholding............................................................................- 15 -
ARTICLE VIII - TRANSFER OF INTERESTS; ADMISSION OF PARTNERS..................................................- 16 -
Section 8.1 Transfer by General Partner............................................................- 16 -
Section 8.2 Obligations of a Prior General Partner.................................................- 16 -
Section 8.3 Additional or Successor General Partner................................................- 16 -
Section 8.4 Restrictions on Transfer and Withdrawal by Limited Partner.............................- 16 -
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Section 8.5 Substituted Limited Partner............................................................- 17 -
Section 8.6 Timing and Effect of Transfers.........................................................- 18 -
Section 8.7 Additional Limited Partners............................................................- 18 -
Section 8.8 Amendment of Agreement and Certificate.................................................- 18 -
ARTICLE IX - REDEMPTION......................................................................................- 18 -
Section 9.1 Right of Redemption....................................................................- 19 -
Section 9.2 Timing of Redemption...................................................................- 19 -
Section 9.3 Redemption Price.......................................................................- 19 -
Section 9.4 Assumption of Redemption Obligation....................................................- 19 -
Section 9.5 Further Assurances.....................................................................- 19 -
Section 9.6 Effect of Redemption...................................................................- 21 -
ARTICLE X - DISSOLUTION AND LIQUIDATION......................................................................- 20 -
Section 10.1 Term and Dissolution...................................................................- 20 -
Section 10.2 Liquidation of Partnership Assets.....................................................- 20 -
Section 10.3 Effect of Treasury Regulations........................................................- 21 -
Section 10.4 Time for Winding Up...................................................................- 21 -
ARTICLE XI - AMENDMENTS AND MEETINGS.........................................................................- 21 -
Section 11.1 Amendment Procedure...................................................................- 21 -
Section 11.2 Meetings and Voting...................................................................- 22 -
ARTICLE XII - MISCELLANEOUS PROVISIONS.......................................................................- 23 -
Section 12.1 Title to Property.....................................................................- 23 -
Section 12.2 Other Activities of Limited Partners..................................................- 23 -
Section 12.3 Power of Attorney.....................................................................- 23 -
Section 12.4 Further Assurances....................................................................- 24 -
Section 12.5 Titles and Captions...................................................................- 24 -
Section 12.6 Applicable Law........................................................................- 24 -
Section 12.7 Binding Agreement.....................................................................- 24 -
Section 12.8 Waiver of Partition...................................................................- 24 -
Section 12.9 Counterparts and Effectiveness........................................................- 24 -
Section 12.10 Survival of Representations..........................................................- 25 -
Section 12.11 Entire Agreement.....................................................................- 25 -
EXHIBITS
Exhibit 1 - Schedule of Partners
Exhibit 2 - Redemption Notice
Exhibit 3 - Allocation Provisions
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RAIT LIMITED PARTNERSHIP, L.P.
LIMITED PARTNERSHIP AGREEMENT
THIS LIMITED PARTNERSHIP AGREEMENT (the "Agreement") is made this
day _________ of ___________, 1997, by and among RAIT GENERAL, INC., a Maryland
corporation, as General Partner, and RAIT LIMITED, INC., a Maryland corporation,
as Initial Limited Partner,together with any Persons who or which become
Partners in the Partnership in accordance with the terms hereof.
RECITALS:
A. Pursuant to a Certificate of Limited Partnership (the "Certificate")
filed on August __, 1997 with the Delaware Secretary of State, Resource Asset
Investment Limited Partnership (the "Partnership") was formed for the purpose,
inter alia, of providing mortgage and other financing to borrowers owning real
estate and acquiring, owning, developing, operating and, if and when
appropriate, selling, certain real estate and interests, both direct and
indirect, in real estate; and
B. The parties have reached certain understandings with respect to
their relative sharing of the benefits and burdens to be derived from the
business operations of the Partnership, and desire to enter into this Agreement
in order to (i) set forth herein such understandings and agreements; and (ii)
set forth their rights, obligations and understandings with respect to the
Partnership and its business.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto, intending to be legally bound hereby, agree as
follows:
ARTICLE I - CONTINUATION
Section 1.1 Continuation. The Partners hereby continue the Partnership
as a limited partnership under the Act. The General Partner shall take all
action required by law to perfect and maintain the Partnership as a limited
partnership under the Act and under the laws of all other jurisdictions in which
the Partnership may elect to conduct business, including but not limited to, the
filing of any required amendment to the Certificate with the Delaware Secretary
of State, and qualification of the Partnership as a foreign limited partnership
in the jurisdictions in which such filing shall be required, as determined by
the General Partner. The General Partner shall also promptly register the
Partnership under applicable assumed or fictitious name statutes or similar
laws.
Section 1.2 Name. The name of the Partnership is RAIT Partnership,
L.P.
Section 1.3 Place of Business; Registered Agent. The principal office
of the Partnership is located at 1521 Locust Street, Philadelphia, PA 19102,
which office may be changed to such other place as the General Partner may from
time to time designate. The registered agent for the Partnership in the State of
Delaware is Andrew Lubin, whose address is 2317 Pennsylvania Avenue, Wilmington,
DE.
Section 1.4 Term. The Partnership shall terminate on December 31, 2050
unless sooner terminated as provided in this Agreement or by operation of law.
<PAGE>
ARTICLE II - INTERPRETIVE PROVISIONS
Section 2.1 Certain Definitions. The following terms have the
definitions hereinafter indicated whenever used in this Agreement with initial
capital letters. In addition, certain terms are defined in Exhibit 3 hereto.
Act: The Delaware Revised Uniform Limited Partnership Act, as
it may be amended from time to time.
Additional Limited Partner: A person admitted to the
Partnership as an Additional Limited Partner in accordance with Section 8.7
hereof and who is shown as such on the books and records of the Partnership.
Affiliate: With respect to any referenced Person, (i) such
Person or a member of his immediate family, (ii) any Person who directly or
indirectly owns, controls or holds the power to vote ten percent (10%) or more
of the outstanding voting securities of the Person in question; (iii) any Person
ten percent (10%) or more of whose outstanding securities are directly or
indirectly owned, controlled by, or held with power to vote by the Person in
question; (iv) any Person directly or indirectly controlling, controlled by, or
under direct common control with the Person in question; (v) if the Person in
question is a corporation, any executive officer or director of such Person or
of any corporation directly or indirectly controlling such Person; and (vi) if
the Person in question is a partnership, any general partner of such partnership
or any limited partner owning or controlling ten percent (10%) or more of either
the capital or profits interest in such partnership. As used herein, "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract, or otherwise.
Agreement: This Limited Partnership Agreement and all Exhibits
attached hereto, as the same may he amended or restated and in effect from time
to time.
Assignee: Any Person to whom one or more Partnership Units
have been Transferred as permitted under this Agreement, but who has not become
a Substituted Limited Partner in accordance with the provisions hereof and who
shall have the rights set forth in Section 8.5(B).
Bankrupt(cy): Either (i) a referenced Person's making an
assignment for the benefit of creditors; (ii) the filing by a referenced Person
of a voluntary petition in bankruptcy; (iii) a referenced Person's being
adjudged insolvent or having entered against him an order for relief in any
bankruptcy or insolvency proceeding; (iv) the filing by a referenced Person of
an answer seeking any reorganization, composition, readjustment, liquidation,
dissolution or similar relief under any law or regulation; (v) the filing by a
referenced Person of an answer or other pleading admitting or failing to contest
the material allegations of a petition filed against him in any proceeding of
reorganization, composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation; or (vi) a referenced Person's
seeking, consenting to or acquiescing in the appointment of a trustee, receiver
or liquidator for all or substantially all of his property (or court appointment
of such trustee, receiver or liquidator).
Capital Account: The account maintained by the Partnership for
each Partner described in Exhibit 3 hereto.
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Capital Contribution: With respect to each Partner, the total
amount of cash or cash equivalents, or the Gross Asset Value of Contributed
Property which such Partner contributes or is deemed to contribute to the
Partnership pursuant to the terms of this Agreement, including the Capital
Contribution made by a predecessor holder(s) of the Interest of such Partner.
Capital Proceeds: The net proceeds received by the Partnership
from, or attributable to, (i) any financing obtained by the Partnership after
payment of the then-outstanding principal balance and accrued but unpaid
interest on liabilities of the Partnership then payable pursuant to the terms
thereof from the proceeds of such financing; (ii) the sale or condemnation
(other than a temporary taking) of all or substantially all of any Property
Interest or the Partnership's interest therein after payment of the
then-outstanding principal balance and accrued but unpaid interest on
liabilities of the Partnership then payable pursuant to the terms thereof; (iii)
the receipt of any proceeds from a policy of title or fire and extended coverage
insurance; and (iv) any reserves previously set aside from Capital Proceeds or
Capital Contributions which are deemed available for distribution by the General
Partner.
Cash Payment: The payment to a Redeeming Party of a cash
amount determined by multiplying (i) the number of Partnership Units tendered
for redemption by such Redeeming Party pursuant to a validly proffered
Redemption Notice by (ii) the Unit Value on the date the Redemption Notice is
received by the General Partner.
Certificate: The Partnership's Certificate of Limited
Partnership filed in the office of the Delaware Secretary of State, as amended
from time to time, as required by the terms of this Agreement and the Act.
Code: The Internal Revenue Code of 1986, as amended from time
to time.
Consent: Either the written consent of a Person or the
affirmative vote of such Person at a meeting duly called and held pursuant to
this Agreement, as the case may be, to do the act or thing for which the consent
is required or solicited, or the act of granting such consent, as the context
may require. Except as expressly provided otherwise in this Agreement, reference
to a requirement for the "Consent" of a Partner shall require the commercially
reasonable judgment of such Partner in light of the facts and circumstances,
rather than the unfettered discretionary decision of such Partner.
Contributed Property: Each property or other asset (excluding
cash) contributed or deemed contributed to the Partnership (whether as a result
of a Code Section 708 termination or otherwise).
Contribution Agreement(s): The Contribution Agreement by and
among the Partnership, the General Partner and a Property Interest Owner,
pursuant to which, among other things, such Property Interest Owner agrees to
contribute its Property Interest and other assets owned by such Property
Interest Owner to the Partnership in consideration for Partnership Units.
Conversion Multiple: The factor applied for converting
Partnership Units to REIT Shares, which shall initially be 1.0; provided,
however, in the event that the General Partner (i) declares or pays a dividend
on its outstanding REIT Shares in REIT Shares or makes a distribution to all
holders of its outstanding REIT Shares in REIT Shares, (ii) subdivides its
outstanding REIT Shares, or (iii) combines its outstanding REIT Shares into a
smaller number of REIT Shares, the Conversion Multiple shall be adjusted by
multiplying the Conversion Multiple by a fraction, the numerator of which shall
be
Page 3
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the number of REIT Shares issued and outstanding on the record date (assuming
for such purposes that such dividend, distribution, subdivision or combination
has occurred as of such time), and the denominator of which shall be the actual
number of REIT Shares (determined without the above assumption) issued and
outstanding on the Record Date for such dividend, distribution, subdivision or
combination. Any adjustment to the Conversion Multiple shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
Depreciation: As defined in Exhibit 3 to this Agreement.
Fiscal Year: The calendar year or such other twelve (12)-month
period designated by the General Partner.
General Partner: RAIT General, Inc., its respective successors
who or which become Successor General Partner(s) in accordance with the terms of
this Agreement. For the first taxable year following the IPO, the General
Partner intends to qualify as a qualified REIT subsidiary as defined under Code
Section 856.
General Partner Interest: A Partnership Interest held by the
General Partner that is a general partnership interest. A General Partner
Interest may be expressed as a number of Partnership Units.
Gross Asset Value: With respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(A) The initial Gross Asset Value of any asset contributed by
a Partner to the Partnership shall be the relative equity value of such asset,
as agreed to by the contributing Partner and the Partnership and set forth in
the Contribution Agreement.
(B) The Gross Asset Values of all Partnership Assets shall be
adjusted to equal their respective gross fair market values, as determined by
the General Partner, as of the following times: (1) the acquisition of an
additional interest in the Partnership by any new or existing Partner in
exchange for more than a de minimis Capital Contribution; (2) the distribution
by the Partnership to a Partner of more than a de minimis amount of Partnership
Assets as consideration for an interest in the Partnership; and (3) the
liquidation of the Partnership within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to
clauses (1) and (2) above shall be made only if the General Partner reasonably
determines that such adjustments are necessary or appropriate to reflect the
relative economic interests of the Partners in the Partnership.
(C) The Gross Asset Value of any Partnership Asset distributed
to any Partner shall be the gross fair market value of such asset on the date of
distribution; and
(D) The Gross Asset Values of Partnership Assets shall be
increased (or decreased) to reflect any adjustments to the adjusted basis of
such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to
the extent that such adjustments are taken into account in determining Capital
Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and Section (C) of
Exhibit 3 hereto; provided, however, that Gross Asset Values shall not be
adjusted pursuant to this clause (D) to the extent the General Partner
determines that an adjustment pursuant to clause (B) above is necessary or
appropriate in connection with a transaction that would otherwise result in an
adjustment pursuant to this clause (D).
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If the Gross Asset Value of an asset has been determined or
adjusted pursuant to clauses (A), (B), or (D) above, such Gross Asset Value
shall thereafter be adjusted by the Depreciation taken into account with respect
to such asset for purposes of computing Partnership profits and losses.
Gross Receipts: With respect to any Fiscal Year or other
accounting period designated by the General Partner, the sum of all cash
receipts of the Partnership, including without limitation, all cash receipts
earned from interest and other sums paid with respect to Loans, the rental of
commercial space within the Property Interests and from other business
operations of the Partnership but excluding tenant security deposits until
applied to rent or other charges, but excluding Capital Proceeds and Capital
Contributions.
Involuntary Withdrawal: As to any (i) individual, such
individual's death, incapacity or adjudication of incompetence; (ii)
corporation, its dissolution or revocation of its charter (unless such
revocation is promptly corrected upon notice thereof); (iii) partnership, the
dissolution and commencement of winding up of its affairs; (iv) trust, the
termination of the trust (but not the substitution of trustees); (v) estate, the
distribution by the fiduciary of the estate's complete interest in the
Partnership; and (vi) Partner, the Bankruptcy of such Partner.
IPO: IPO means the first sale of REIT Shares by RAIT pursuant
to RAIT's first effective registration statement for such REIT Shares filed
under the Securities Act of 1933, as amended.
IRS: The Internal Revenue Service, an agency of the United
States government.
Limited Partner(s): The Initial Limited Partner and any Person
subsequently admitted to the Partnership as a Limited Partner.
Management Company: Brandywine Construction & Management,
Inc., a Pennsylvania corporation and an Affiliate of the Initial Limited
Partner, or any successor management and leasing company selected by the General
Partner from time to time.
Loans: Mortgages or other debt financings owned by the
Partnership.
Net Capital Contributions: As to any Partner on any day, the
Partner's Capital Contributions adjusted as follows:
A. Increased by the amount of any Partnership liabilities
which, in connection with distributions pursuant to the terms hereof, are
assumed by such Partner or are secured by any Partnership Asset distributed to
such Partner, and
B. Reduced by the amount of cash and the Gross Asset Value of
any Partnership Asset distributed to such Partner pursuant to Section 5.3(A)(2)
hereof and the amount of any liabilities of such Partner assumed by the
Partnership or which are secured by any property contributed by such Partner to
the Partnership.
In the event any interest in the Partnership is transferred in
accordance with the terms of this Agreement, the transferee shall succeed to the
adjusted Capital Contribution of the transferor to the extent it relates to the
transferred interest in the Partnership.
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Net Cash Flow: Gross Receipts and any other funds deemed
available for distribution by the General Partner, including any amounts
previously set aside as reserves or escrows, less Operating and Capital
Expenses.
Notice: A writing containing the information required by this
Agreement to be communicated to a Person and personally delivered to such Person
or sent by recognized air courier capable of giving receipt therefor, freight
prepaid, to such Person at the last known address of such Person as shown on the
books of the Partnership, the date of personal delivery or of the air courier's
receipt, as the case may be, being deemed the date of such Notice; provided,
however, that any written communication containing such information actually
received by a Person shall constitute Notice for all purposes of this Agreement.
Facsimile transmission promptly confirmed by original communication delivered as
herein provided shall be an acceptable means of notice, with the date of receipt
of the facsimile being deemed the date of Notice. Any Partner may change its
address or the address to which copies of Notices should be sent by Notice to
the other Partners.
Operating and Capital Expenses: All expenditures payable by
the Partnership including, without limitation (i) any and all operating
expenses, management expenses, taxes and insurance; (ii) principal and interest
due on Partnership obligations; (iii) capital expenditures; (iv) reimbursement
to Partners for advances, if any, pursuant to this Agreement; and (v) reserves
deemed reasonably necessary by the General Partner.
Partners: The General Partner and the Limited Partners as a
collective group. The term "Partner" shall mean a General Partner or a Limited
Partner. Such terms shall be deemed to include such other Persons who become
Partners pursuant to the terms of this Agreement.
Partnership: The Delaware limited partnership referred to
herein as RAIT Partnership, L.P. as such partnership may from time to time be
constituted.
Partnership Assets: At any particular time, any assets or
property (tangible or intangible, choate or inchoate, fixed or contingent) held
or owned by the Partnership.
Partnership Interest or Interest: As to any Partner, such
Partner's ownership interest in the Partnership, representing a Capital
Contribution by either a Limited Partner or a General Partner and including such
Partner's right to distributions under this Agreement, and any other rights or
benefits which such Partner has in the Partnership, together with any and all
obligations of such Person to comply with the terms and provisions of this
Agreement. A Partnership Interest may be expressed as a number of Partnership
Units.
Partnership Unit: A fractional, undivided share of the
Partnership Interests of all Partners issued pursuant to Section 4.1 hereof. As
of the date of this Agreement, the aggregate number of Partnership Units
outstanding is ___________, with each such Partnership Unit representing
approximately a % Percentage Interest.
Percentage Interest: As to any Partner, the percentage in the
Partnership as initially shown opposite the name of such Partner on Exhibit 1
attached hereto, as determined by dividing the Partnership Units then owned by
such Partner by the total number of Partnership Units then outstanding, as the
same may be automatically adjusted from time to time to reflect the issuance and
redemption of
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Partnership Units in accordance with this Agreement, without requiring the
amendment of Exhibit 1 to reflect any such issuance or redemption.
Person: An individual, or a trust, estate, partnership,
association, company or corporation, as such terms are defined in Code Section
7701.
Property Interest: Any real estate property owned by any
Property Interest Owner and contributed to the Partnership pursuant to the
Contribution Agreement for such Property Interest.
Property Interest Owner(s): Any Person which owns a Property
Interest that is being contributed to the Partnership.
RAIT: Resource Asset Investment Trust, a Maryland real estate
investment trust that is the owner of all of the capital stock of the General
Partner and the Initial Limited Partner. RAIT intends to qualify for its first
taxable year following the IPO, and thereafter, as a real estate investment
trust as defined under Code Section 856.
Record Date: The date established by the General Partner for
distribution of Net Cash Flow pursuant to Section 5.2 hereof, which record date
shall be the same as the record date established by the General Partner for a
distribution to its shareholders of some or all of its portion of such
distribution.
Redeeming Party: A Limited Partner or Assignee (other than the
General Partner) who tenders Partnership Units for redemption pursuant to a
Redemption Notice.
Redemption Date: The date for redemption of Partnership Units
as set forth in Section 9.2.
Redemption Effective Date: The first date on which a Redeeming
Party may elect to redeem Partnership Units, which date shall be thirty-six (36)
months following the date of this Agreement.
Redemption Notice: A Notice to the General Partner by a
Redeeming Party, substantially in the form attached as Exhibit 2, pursuant to
which the Redeeming Party requests the redemption of Partnership Units in
accordance with Article IX.
Redemption Obligation: The obligation of the Partnership to
redeem the Partnership Units as set forth in Section 9.1(A).
Redemption Restriction: A restriction on the ability of the
Partnership to redeem the Partnership Units as set forth in Section 9.1(A).
REIT Declaration: The Declaration of Trust of RAIT as filed
with the Maryland State Department of Assessments and Taxation on ______, 1997,
as the same may be amended, or amended and restated, and in effect from time to
time.
REIT Share: A share of common stock representing an ownership
interest in RAIT.
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REIT Share Rights: Rights to acquire additional REIT Shares
issued to all holders of REIT Shares, whether in the form of rights, options,
warrants or convertible or exchangeable securities, to the extent the same have
been issued without additional consideration after the initial acquisition of
such REIT Shares.
Share Payment: The payment to a Redeeming Party of a number of
REIT Shares determined by multiplying (i) the number of Partnership Units
tendered for redemption by such Redeeming Party pursuant to a validly proffered
Redemption Notice by (ii) the Conversion Multiple. In the event the General
Partner grants any REIT Share Rights prior to such conversion, any Share Payment
shall include for the Redeeming Party his ratable share of such REIT Share
Rights.
Subsidiary: With respect to any Person, any corporation or
other entity of which a majority of (i) the voting power of the voting equity
securities, or (ii) the outstanding equity interests is owned, directly or
indirectly, by such Person.
Substituted Limited Partner: That Person or those Persons
admitted to the Partnership as substitute Limited Partner(s) in accordance with
the provisions of this Agreement. A Substituted Limited Partner, upon his
admission as such, shall succeed to the rights, privileges and liabilities of
his predecessor in interest as a Limited Partner.
Successor General Partner: Any Person who is admitted to the
Partnership as substitute General Partner pursuant to this Agreement. A
Successor General Partner, upon its admission as such, shall succeed to the
rights, privileges and liabilities of its predecessor in interest as a General
Partner in accordance with the provisions of the Act.
Tax Matters Partner: The General Partner, or such other
Partner who becomes Tax Matters Partner pursuant to the terms of this Agreement.
Transfer: With respect to any Partnership Unit(s), a
transaction in which a Partner purports to assign his Partnership Interest to
another Person and includes any sale, assignment, gift, pledge, mortgage,
exchange, hypothecation, encumbrance or other disposition by law or otherwise;
provided, however, the redemption of any Partnership Interest pursuant to
Article IX hereof shall not constitute a "transfer" for purposes hereof. Any
purported Transfer not made in accordance with the terms of this Agreement shall
have no legal effect and shall be null and void ab initio.
Unit Value: With respect to any Partnership Unit, the average
of the daily market price for a REIT Share for the ten (10) consecutive trading
days immediately preceding the date of receipt of a Redemption Notice by the
General Partner. If the REIT Shares are traded on a securities exchange or the
NASDAQ National Market System, the market price for each such trading day shall
be the closing price on such day or, if no sales take place on such day, the
average of the closing bid and asked prices on such day. If the REIT Shares are
not traded on a securities exchange or the NASDAQ National Market System, the
market price for each such trading day shall be determined by the General
Partner using any reasonable method of valuation. If a Share Payment would
include any REIT Share Rights, the value of such REIT Share Rights shall be
determined by the General Partner using any reasonable method of valuation,
taking into account the Unit Value determined hereunder and the factors used to
make such determination and the value of such REIT Share Rights shall be
included in the Unit Value.
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Section 2.2 Rules of Construction. The following rules of
construction shall apply to this Agreement:
(A) All section headings in this Agreement are for the
convenience of reference only and are not intended to qualify the meaning of any
section.
(B) All personal pronouns used in this Agreement, whether used
in the masculine, feminine or neuter gender, shall include all other genders,
the singular shall include the plural, and vice versa, as the context may
require.
(C) Each provision of this Agreement shall be considered
severable from the rest, and if any provision of this Agreement or its
application to any Person or circumstances shall be held invalid and contrary to
any existing or future law or unenforceable to any extent, the remainder of this
Agreement and the application of any other provision to any Person or
circumstances shall not be affected thereby and shall be interpreted and
enforced to the greatest extent permitted by law so as to give effect to the
original intent of the parties hereto.
(D) Unless otherwise specifically and expressly limited in the
context, any reference herein to a decision, determination, act, action,
exercise of a right, power or privilege, or other procedure by the General
Partner shall mean and refer to the decision, determination, act, action,
exercise or other procedure by the General Partner in its sole and absolute
discretion. Notwithstanding the foregoing, such discretion shall reflect the
commercially reasonable judgment of the General Partner in light of the facts
and circumstances, rather than the unfettered discretionary decision of the
General Partner.
ARTICLE III - BUSINESS PURPOSE
Section 3.1 Business. The business of the Partnership shall be (i) to
provide mortgage or other financing to borrowers owning real estate; (ii) to
acquire, own, develop, operate and, if and when appropriate, sell, real estate
and interests, both direct and indirect, in real estate; (iii) to conduct any
business that may be lawfully conducted by a limited partnership pursuant to the
Act, provided, however, that following the IPO such business shall be limited so
as to permit the General Partner to elect and maintain its status as a real
estate investment trust (unless the General Partner elects to no longer qualify
as a real estate investment trust); (iv) to enter into any partnership, joint
venture or other relationship to engage in any of the foregoing or the ownership
of interests in any entity engaged in any of the foregoing; (v) to make loans or
other financial accommodations; (vi) to do any of the foregoing with respect to
any Affiliate or Subsidiary; and (vii) to do anything necessary or incidental to
the foregoing.
Section 3.2 Authorized Activities. In carrying out the purposes of the
Partnership, but subject to all other provisions of this Agreement, the
Partnership is authorized to engage in any kind of lawful activity, and perform
and carry out contracts of any kind, necessary or advisable in connection with
the accomplishment of the purposes and business of the Partnership described
herein and for the protection and benefit of the Partnership; provided that the
General Partner shall use its best efforts to prevent the Partnership from
taking, or refraining from taking, any action which, in the judgment of the
General Partner, in its sole and absolute discretion, (i) could adversely affect
the ability of the General Partner to qualify and continue to qualify as a real
estate investment trust under the Code; (ii) to enable the General Partner or
the Initial Limited Partner to qualify and continue to qualify as qualified REIT
subsidiaries; (iii) could subject RAIT, the General Partner or the Initial
Limited Partner to additional taxes under Code Section 857 or 4981; (iv) ensure
that the Partnership will not be classified as a "publicly
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traded partnership" for purposes of Code Section 7704; or (v) could violate any
law or regulation of any governmental body or agency having jurisdiction over
RAIT, the General Partner, the Initial Limited Partner or their securities.
ARTICLE IV - CAPITAL CONTRIBUTIONS
Section 4.1 Capital Contributions.
(A) Simultaneously with the execution of this Agreement, the
General Partner and the Limited Partner shall contribute the consideration set
forth on Exhibit 1 which shall be derived from corresponding contributions made
to their capital by RAIT. Exhibit 1 sets forth the initial number of Partnership
Units owned by each Partner and the Percentage Interest of each Partner, which
Percentage Interest shall be adjusted from time to time by the General Partner
to reflect the issuance of additional Partnership Units, the redemption of
Partnership Units, additional Capital Contributions and similar events having an
effect on a Partner's Percentage Interest. Except as set forth in Section 4.2
(regarding issuance of additional Partnership Units) or Section 7.6 (regarding
withholding obligations), no Partner shall be required under any circumstances
to contribute to the capital of the Partnership any amount beyond that sum
required pursuant to this Article IV.
(B) Anything in the foregoing Section 4.1(A) or elsewhere in
this Agreement notwithstanding, the Partnership Units held by the General
Partner shall, at all times, be deemed to be general partnership units and shall
constitute the General Partner Interest.
Section 4.2 Additional Partnership Units.
(A) The General Partner shall be authorized to issue
additional limited partnership interests in the form of Partnership Units for
any Partnership purpose, at any time or from time to time, to any Partner or
other Person (other than the General Partner, except in accordance with Section
4.2(B) below).
(B) The Partnership also may from time to time issue to the
General Partner additional Partnership Units or other Partnership Interests in
such classes and having such designations, preferences and relative rights
(including preferences and rights senior to the existing Limited Partners'
Partnership Interests) as shall be determined by the General Partner in
accordance with the Act and governing law. Such units may be issued for less
than fair market value if RAIT has concluded that such issuance is in the best
interest of RAIT and the Partnership. The General Partner and the Initial
Limited Partner must contribute the net proceeds or any future offerings of RAIT
shares as additional capital to the Partnership in exchange for additional
units. Except as provided in Article IX of this Agreement, any such issuance of
Partnership Units or Partnership Interests to the General Partner shall be
conditioned upon (i) the undertaking by RAIT of a related issuance of REIT
Shares (with such shares having designations, rights and preferences such that
the economic rights of the holders of such REIT Shares are substantially similar
to the rights of the additional Partnership Interests issued to the General
Partner) and the General Partner's making a Capital Contribution in an amount
equal to the net proceeds raised in the issuance of such REIT Shares, derived
from a corresponding contribution to its capital by RAIT, or (ii) the issuance
by RAIT of REIT Shares under any stock option or bonus plan and the General
Partner's making a Capital Contribution in an amount equal to the exercise price
of the option exercised by any employee pursuant to such stock option or other
bonus plan, derived from a corresponding contribution to its capital by RAIT.
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(C) Except in accordance with Article IX of this Agreement,
RAIT shall not issue any (i) additional REIT Shares, (ii) rights, options or
warrants containing the right to subscribe for or purchase REIT Shares, or (iii)
securities convertible or exchangeable into REIT Shares (collectively,
"Additional REIT Securities") other than to all holders of REIT Shares, pro
rata, unless (x) the Partnership issues to the General Partner (i) Partnership
Interests, (ii) rights, options or warrants containing the right to subscribe
for or purchase Partnership Interests or (iii) securities convertible or
exchangeable into Partnership Interests such that the General Partner receives
an economic interest in the Partnership substantially similar to the economic
interest in RAIT represented by the Additional REIT Securities; and (y) the
General Partner contributes the net proceeds from the issuance of the Additional
REIT Securities and from the exercise of any rights contained in any Additional
REIT Securities to the Partnership, derived from a corresponding contribution to
its capital by RAIT.
Section 4.3 No Third Party Beneficiaries. The foregoing provisions of
this Article IV are not intended to be for the benefit of any creditor of the
Partnership or other Person to whom any debts, liabilities or obligations are
owed by (or who otherwise has any claim against) the Partnership or any of the
Partners (except for RAIT (but only to the extent of its right to require the
Partnership to comply with Sections 4.1, 4.2 and 4.6), and no such creditor or
other Person shall obtain any right under any such foregoing provision against
the Partnership or any of the Partners by reason of any debt, liability or
obligation (or otherwise).
Section 4.4 Return of Capital Account; Interest. Except as otherwise
specifically provided in this Agreement, (i) no Partner shall have any right to
withdraw or reduce its Capital Contributions or Capital Account, or to demand
and receive property other than cash from the Partnership in return for its
Capital Contributions or Capital Account; (ii) no Partner shall have any
priority over any other Partners as to the return of its Capital Contributions
or Capital Account; (iii) any return of Capital Contributions or Capital
Accounts to the Partners shall be solely from the Partnership Assets, and no
Partner shall be personally liable for any such return; and (iv) no interest
shall be paid by the Partnership on Capital Contributions or on balances in
Partners' Capital Accounts.
Section 4.5 Preemptive Rights. No Person shall have any preemptive or
similar rights with respect to the issuance or sale of additional Partnership
Units.
Section 4.6 REIT Share Purchases. If RAIT or the General Partner
acquires additional REIT Shares pursuant to the REIT Declaration, the
Partnership shall purchase from RAIT or the General Partner, as the case may be,
that number of Partnership Units determined by applying the Conversion Multiple
to the number of REIT Shares purchased by RAIT or the General Partner at the
same price and on the same terms that RAIT or the General Partner purchased such
REIT Shares.
Section 4.7 Limited Liability. Except as expressly provided in this
Agreement, no Limited Partner (in its capacity as a Limited Partner) shall be
personally liable for losses, costs, expenses, liabilities or obligations of the
Partnership in excess of its Capital Contribution required under this Article
IV. The foregoing shall not affect any liability a Limited Partner may incur if
such Limited Partner undertakes additional obligations to the Partnership, the
Partners or to third parties in a capacity other than as a Limited Partner.
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ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS
Section 5.1 General. The profits of the Partnership shall be shared,
and the losses of the Partnership shall be borne, by the Partners as provided in
Exhibit 3 hereto.
Section 5.2 Distributions of Net Cash Flow.
(A) Distributions of Net Cash Flow shall be made to the
Partners of record on the Record Date established by the General Partner for the
distribution, without regard to the length of time the record holder has been
such. Distributions shall be made within 45 days of the end of each calendar
quarter (or, at the election of the General Partner on a more frequent basis) in
such amounts as may be determined by the General Partner in its sole discretion.
(B) Net Cash Flow will be distributed to the Partners, pro
rata in accordance with their respective Percentage Interests, and the General
Partner will use its best efforts to cause the Partnership to make distributions
of Net Cash Flow which are sufficient to enable RAIT to (i) maintain its status
as a real estate investment trust under Code Section 856, (ii) avoid the
imposition of any tax under Code Section 856, and (iii) avoid the imposition of
any excise tax under Code Section 4981.
(C) The General Partner shall take such reasonable efforts, as
determined by it in its sole and absolute discretion, to distribute Net Cash
Flow to the Partners so as to preclude any distribution or portion thereof from
being treated as part of a sale of property to the Partnership by a Partner
under Section 707 of the Code or the Treasury Regulations thereunder; provided
that the General Partner and the Partnership shall not have liability to a
Limited Partner under any circumstances as a result of any distribution to a
Partner being so treated.
Section 5.3 Distributions of Capital Proceeds. Capital Proceeds will be
distributed to the Partners pro rata in accordance with their respective
Percentage Interests.
Section 5.4 Amounts Withheld. All amounts withheld pursuant to the Code
or any provision of state or local tax law and Section 7.6 of this Agreement
with respect to any allocation, payment or distribution to the General Partner,
Limited Partners or Assignees shall be treated as amounts distributed to such
General Partner, Limited Partner or Assignees pursuant to Section 5.3 of this
Agreement.
ARTICLE VI - PARTNERSHIP MANAGEMENT
Section 6.1 Management and Control of Partnership Business.
(A) Except as otherwise expressly provided or limited by the
provisions of this Agreement, the General Partner shall have full, exclusive and
complete discretion to manage the business and affairs of the Partnership, to
make all decisions affecting the business and affairs of the Partnership, and to
take all such action as it deems necessary or appropriate to accomplish the
purposes of the Partnership as set forth herein. If there shall be more than one
(1) General Partner, the vote or determination of the General Partner owning the
largest Percentage Interest shall control. Except as set forth in this
Agreement, the Limited Partners shall not have any authority, right or power to
bind the Partnership, or to manage, or to participate in the management of the
business and affairs of the Partnership in any manner whatsoever. Such
management shall in every respect be the full and complete responsibility of the
General Partner alone as herein provided.
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(B) In carrying out the purposes of the Partnership, the
General Partner shall be authorized to take all actions it deems necessary and
appropriate to carry on the business of the Partnership. Each of the Limited
Partners, by execution hereof, agrees that the General Partner is authorized to
execute, deliver and perform any agreement and/or transaction on behalf of the
Partnership.
(C) The General Partner in its capacity as such shall not
directly or indirectly enter into or conduct any business other than in
connection with the business of the Partnership and the ownership of its
Partnership Interests therein. The General Partner and its Affiliates may
acquire Limited Partner Interests as provided in Section 4.2(B). Any Limited
Partner Interest acquired by the General Partner shall be added to the General
Partner Interest. Upon acquisition of any Limited Partner Interest, any
Affiliate of the General Partner shall have all the rights of a Limited Partner.
Section 6.2 No Management by Limited Partners; Limitation of
Liability.
(A) The Limited Partners, in their capacity as limited
partners, shall not take part in the day-to-day management, operation or control
of the business and affairs of the Partnership or have any right, power or
authority to act for or on behalf of or to bind the Partnership or transact any
business in the name of the Partnership. The Limited Partners shall have no
rights other than those specifically provided herein or granted by law where
consistent with a valid provision hereof, and any of the approvals rendered or
withheld by the Limited Partners pursuant to this Agreement shall be deemed as
consultation or advice to the General Partner in connection with the business of
the Partnership and in accordance with the Act, and shall not be deemed as
participation by the Limited Partners in the business of the Partnership and are
not intended to create any inference that the Limited Partners should be
classified as general partners under the Act.
(B) The Limited Partners shall have no liability under this
Agreement except to the extent expressly provided herein (including with respect
to withholding under Section 7.6) or under the Act.
(C) The General Partner shall not take any action which would
subject a Limited Partner (in its capacity as Limited Partner) to liability as a
general partner.
Section 6.3 Limitations on Partners. No Partner or Affiliate of a
Partner shall have any authority to perform (i) any act in violation of any
applicable law or any regulation under such law; or (ii) any act without Consent
or ratification which is required to be Consented to or ratified pursuant to
this Agreement. No action shall be taken by a Partner if it would cause the
Partnership to be treated as an association taxable as a corporation for federal
income tax purposes.
Section 6.4 Business with Affiliates.
(A) The General Partner, in its discretion, may cause the
Partnership to transact business with RAIT, a Partner or their Affiliates or
Subsidiaries for goods or services reasonably required in the conduct of the
Partnership's business.
(B) In furtherance of Section 6.4(A), the Partnership may lend
or contribute to its Subsidiaries on terms and conditions established by the
General Partner. In the case of any amount borrowed by the general partner from
a financial institution or other lender to be made available to the
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Partnership, the loan by the General Partner to the Partnership will be on
substantially the same terms and conditions as are applicable to the General
Partner's borrowing of such funds.
(C) The Partners acknowledge that the Management Company may
conduct the day-to-day management, operation and leasing of the Property
Interests, or with respect to properties underlying loans owned by the
Partnership, subject to the terms of the property management agreements
("Management Agreements") that may be entered into between the Partnership and
the Management Company with respect to individual Property Interests, or (with
respect to properties underlying Loans) approved by the General Partner on
behalf of the Partnership.
Section 6.5 General Partner Loans to Partnership. In the event that the
Operating Partnership requires additional funds for the operation of its
business at any time or from time to time in excess of funds available to the
Operating Partnership from its own borrowings or capital contributions by the
Partners, 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.
Section 6.6 Compensation; Reimbursement of Expenses. In consideration
for the General Partner's services to the Partnership in its capacity as General
Partner, and for RAIT's agreements hereunder the Partnership shall pay on behalf
of or reimburse to RAIT or the General Partner (i) all expenses of RAIT, the
General Partner or the Initial Limited Partner incurred in connection with the
management of the business and affairs of the Partnership, including all
executive compensation of employees of the Partnership; and (ii) all general,
operating or administrative and other expenses incurred by RAIT and the General
Partner. Except as otherwise set forth in this Agreement, RAIT and the General
Partner shall be fully and entirely reimbursed by the Partnership for any and
all direct and indirect costs and expenses incurred in connection with (a) the
organization and continuation of the Partnership, the General Partner, the
Initial Limited Partner and RAIT, (b) the preparation and filing of any periodic
reports by RAIT, the Partnership, the General Partner or the Initial Limited
Partner, (c) compliance by RAIT, the Partnership, the General Partner and the
Initial Limited Partner with laws, rules and regulations promulgated by any
regulatory body and (d) all other general, operating or administrative costs of
RAIT, the General Partner or the Initial Limited Partner incurred in the
ordinary course of their business on behalf of the Partnership. In addition,
RAIT shall be reimbursed for all expenses incurred by RAIT in connection with
(i) the initial offering and registration of REIT Shares by RAIT, and (ii) any
other issuance of additional Partnership Interests or REIT Shares. With respect
to any such reimbursement, RAIT or the General Partner, as the case may be,
shall present the Partnership with such invoices or allocations as are necessary
to substantiate such costs and expenses.
Section 6.7 Liability for Acts and Omissions.
(A) Neither RAIT, the General Partner, nor its officers,
directors, employees and agents (together, the "Indemnified Parties"), shall be
liable, responsible or accountable in damages or otherwise to the Partnership or
any of the Partners for any act or omission performed or omitted in good faith
on behalf of the Partnership which the Indemnified Party reasonably believed to
be within the scope of the authority granted by this Agreement and in the best
interests of the Partnership, provided such act or omission is in good faith and
with such care as an ordinarily prudent person in a like position would use
under similar circumstances. The Indemnified Parties shall nevertheless be
liable, responsible or accountable for actual fraud, gross negligence or
intentional misconduct.
(B) The Partnership shall indemnify and make advances for
expenses to the Indemnified Parties to the fullest extent permitted under
Section 17-108 of the Act (to the extent of available assets, but without the
requirement that any Partner make additional Capital Contributions for this
purpose) against any loss or damage incurred by the General Partner by reason of
any act or omission performed or omitted by it or any Indemnified Party which is
consistent with the first sentence of Section 6.6(A) above.
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(C) RAIT and the General Partner shall indemnify and hold
harmless the Partnership and the Partners against any damage or loss incurred by
the Partnership or Partners by reason of its fraud, gross negligence or
intentional misconduct with respect to the Partnership or the Property
Interests.
ARTICLE VII - ADMINISTRATIVE, FINANCIAL AND TAX MATTERS
Section 7.1 Books and Records. The General Partner shall maintain at
the principal office of the Partnership full and accurate books of the
Partnership showing all receipts and expenditures, assets and liabilities,
profits and losses, names and current addresses of Partners, and all other
records necessary for recording the Partnership's business and affairs. All
Partners and their duly authorized representatives shall have the right to
inspect and copy any or all of the Partnership's books and records, including
books and records necessary to enable a Partner to defend any tax audit or
related proceeding, during reasonable hours upon three (3) business days Notice
to the General Partner. The Limited Partners shall have, upon written demand and
at such Limited Partner's expense, the right to receive true and complete
information regarding Partnership matters to the extent required under (and
subject to the limitations of) Delaware law.
Section 7.2 Annual Audit and Accounting. The books and records of the
Partnership shall be kept for financial and tax reporting purposes on the
accrual basis of accounting in accordance with generally accepted accounting
principles ("GAAP"). The accounts of the Partnership shall be reviewed or
compiled annually by a nationally recognized accounting firm of independent
public accountants selected by the General Partner (the "Independent
Accountants").
Section 7.3 Partnership Funds. The General Partner shall have
responsibility for the safekeeping and use of all funds and assets of the
Partnership, whether or not in its direct or indirect possession or control. All
funds of the Partnership not otherwise invested shall be deposited in one or
more accounts maintained in such banking institutions as the General Partner
shall determine, and withdrawals shall be made only in the regular course of
Partnership business on such signatures as the General Partner may, from time to
time, determine.
Section 7.4 Reports and Notices. The General Partner shall provide all
Partners with the following reports no later than the dates indicated or as soon
thereafter as circumstances permit:
(A) By March 31 of each year, IRS Form 1065 and Schedule K-1,
or similar forms as may be required by the IRS, stating each Partner's allocable
share of income, gain, loss, deduction or credit for the prior Fiscal Year;
(B) Within ninety (90) days after the end of each of the first
three (3) fiscal quarters, as of the last day of the fiscal quarter, a report
containing unaudited financial statements of the Partnership, or of RAIT if such
statements are prepared solely on a consolidated basis with RAIT, and such other
information as may be legally required or determined to be appropriate by RAIT;
and
(C) Within one hundred twenty (120) days after the end of each
Fiscal Year, as of the close of the Fiscal Year, an annual report containing the
financial statements of the Partnership, or of RAIT if such statements are
prepared solely on a consolidated basis with RAIT, presented in accordance with
GAAP by the Independent Accountants.
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Section 7.5 Tax Matters.
(A) The General Partner shall be designated the Tax Matters
Partner of the Partnership for federal income tax matters pursuant to Code
Section 6223(c)(3). The Tax Matters Partner is authorized and required to
represent the Partnership (at the expense of the Partnership) in connection with
all examinations of the affairs of the Partnership by any federal, state or
local tax authorities, including any resulting administrative and judicial
proceedings, and to expend funds of the Partnership for professional services
and costs associated therewith. The Tax Matters Partner shall deliver to the
Limited Partners within ten (10) business days of the receipt thereof a copy of
any notice or other communication with respect to the Partnership received from
the IRS (or other governmental tax authority), or any court, in each case with
respect to any administrative or judicial proceeding involving the Partnership.
The Partners agree to cooperate with each other in connection with the conduct
of all proceedings pursuant to this Section 7.5(A).
(B) The Tax Matters Partner shall receive no compensation for
its services in such capacity. If the Partnership incurs any costs related to
any tax audit, declaration of any tax deficiency or any administrative
proceeding or litigation involving any Partnership tax matter, such amount shall
be an expense of the Partnership and the Tax Matters Partner shall be entitled
to full reimbursement therefor.
(C) The General Partner shall cause to be prepared all
federal, state and local income tax returns required of the Partnership at the
Partnership's expense.
(D) Except as set forth herein, the General Partner shall
determine whether to make (and, if necessary, revoke) any tax election available
to the Partnership under the Code or any state tax law; provided, however, upon
the request of any Partner, the General Partner shall make the election under
Code Section 754 and the Treasury Regulations promulgated thereunder. The
Partnership shall elect to deduct expenses, if any, incurred by it in organizing
the Partnership in accordance with the provisions of Code Section 709.
Section 7.6 Withholding. Each Partner hereby authorizes the Partnership
to withhold from or pay to any taxing authority on behalf of such Partner any
tax that the General Partner determines the Partnership is required to withhold
or pay with respect to any amount distributable or allocable to such Partner.
Any amount paid to any taxing authority which does not constitute a reduction in
the amount otherwise distributable to such Partner shall be treated as a loan
from the Partnership to such Partner, which loan shall bear interest at the
"prime rate" as published from time to time in The Wall Street Journal plus two
(2) percentage points, and shall be repaid within ten (10) business days after
request for repayment from the General Partner. The obligation to repay any such
loan shall be secured by such Partner's Partnership Interest and each Partner
hereby grants the Partnership a security interest in his Partnership Interest
for the purposes set forth in this Section 7.6, this Section 7.6 intending to
serve as a security agreement for purposes of the Uniform Commercial Code. Each
Partner agrees to take such reasonable actions as the General Partner may
request to perfect the security interest granted hereby. In the event any
Partner fails to repay any deemed loan pursuant to this Section 7.6, the
Partnership shall be entitled to avail itself of any rights and remedies it may
have. Furthermore, upon the expiration of ten (10) business days after demand
for payment, the General Partner shall have the right to make the payment to the
Partnership on behalf of the defaulting Partner and thereupon be subrogated to
the rights of the Partnership with respect to such defaulting Partner.
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ARTICLE VIII - TRANSFER OF INTERESTS; ADMISSION OF PARTNERS
Section 8.1 Transfer by General Partner. The General Partner may not
voluntarily withdraw or Transfer all or any portion of its General Partner
Interest.
Section 8.2 Obligations of a Prior General Partner. Upon an Involuntary
Withdrawal of the General Partner and the subsequent Transfer of the General
Partner Interest, such General Partner shall (i) remain liable for all
obligations and liabilities (other than Partnership liabilities payable solely
from Partnership Assets) incurred by it as General Partner before the effective
date of such event, and (ii) pay all costs associated with the admission of its
Successor General Partner. However, such General Partner who withdraws shall be
free of and held harmless by the Partnership against any obligation or liability
incurred on account of the activities of the Partnership from and after the
effective date of such event, except as provided in this Agreement.
Section 8.3 Additional or Successor General Partner. A successor to all
of a General Partner's Interest who is proposed to be admitted to the
Partnership as a Successor General Partner shall be admitted as the General
Partner, effective upon the Transfer, with the Consent of the General Partner,
or if there is no remaining General Partner, with the Consent of a majority in
interest of the remaining Partners (measured by the relative number of
Partnership Units owned by each). Any such additional or successor general
partner shall carry on the business of the Partnership without dissolution. In
addition, the following conditions must be satisfied:
(A) The Person shall have accepted and agreed to be bound by
all the terms and provisions of this Agreement, by executing a counterpart
thereof and such other documents or instruments as may be required or
appropriate in order to effect the admission of such Person as a General
Partner; and
(B) An amendment to this Agreement evidencing the admission of
such Person as a General Partner shall have been executed by all General
Partners and an amendment to the Certificate shall have been filed for
recordation as required by the Act.
Section 8.4 Restrictions on Transfer and Withdrawal by Limited
Partner.
(A) Subject to the provisions of Section 8.4(D), no Limited
Partner may Transfer all or any portion of his Partnership Interest without
first obtaining the Consent of the General Partner, which Consent may be granted
or withheld in the sole and absolute discretion of the General Partner. Any such
purported transfer undertaken without such Consent shall be considered to be
null and void ab initio and shall not be given effect.
(B) No Limited Partner may withdraw from the Partnership other
than as a result of a permitted Transfer of all of his Partnership Units
pursuant to this Article VIII or pursuant to a redemption of all of his
Partnership Units pursuant to Article IX of this Agreement. Upon the permitted
Transfer or redemption of all of a Limited Partner's Partnership Units, such
Limited Partner shall cease to be a Limited Partner.
(C) Upon the Involuntary Withdrawal of any Limited Partner
(which shall under no circumstance cause the dissolution of the Partnership),
the executor, administrator, trustee, guardian, receiver or conservator of such
Limited Partner's estate shall succeed to those rights of the Limited
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Partner prior to such Involuntary Withdrawal for the purpose of settling the
affairs of the Limited Partner subject to the Involuntarily Withdrawal. Any
Transfer of Partnership Units, including Transfers by operation of law, shall be
effective only upon receiving Consent or the General Partner.
(D) A Limited Partner may Transfer, with the Consent of the
General Partner, all or a portion of his Partnership Units to (a) a parent or
parents, spouse, natural or adopted descendant or descendants, spouse of such a
descendant, or brother or sister; (b) a corporation controlled by a Person or
Persons named in (a) above; or (c) if the Limited Partner is an entity, its
beneficial owners; and the General Partner shall grant its Consent to any
Transfer pursuant to this Section 8.4(D) unless such Transfer, in the reasonable
judgment of the General Partner, would cause (or have the potential to cause)
RAIT to (i) have more than fifty percent (50%) in value of its outstanding stock
owned, directly or indirectly, by or for not more than five (5) Persons; (ii)
have its outstanding stock held by less than 100 persons (determined without
reference to rules of attribution); (iii) be deemed to be "closely held' within
the meaning of Code Section 856(h); or (iv) own, actually or constructively, 10%
or more of the ownership interests in a tenant of RAIT, in which case the
General Partner shall have the absolute right to refuse to permit such Transfer,
and any purported Transfer in violation of this Section 8.4(D) shall be null and
void ab initio.
(E) No Transfer of any Limited Partner's Partnership Units
shall be made if such Transfer would (i) in the opinion of Partnership counsel,
cause the Partnership to be terminated for federal income tax purposes or to be
treated as an association taxable as a corporation (rather than a partnership)
for federal income tax purposes; (ii) be effected through an "established
securities market" or a "secondary market (or the substantial equivalent
thereof)" within the meaning of Code Section 7704; (iii) in the opinion of
Partnership counsel, such Transfer would violate the provisions of applicable
securities laws; or (iv) violate the terms of (or result in a default or
acceleration under) any law, rule, regulation, agreement or commitment binding
on the Partnership.
Section 8.5 Substituted Limited Partner.
(A) No transferee shall become a Limited Partner in place of
his assignor unless and until the following conditions have been satisfied:
(1) The assignor and transferee file a Notice or
other evidence of Transfer and such other information reasonably required by the
General Partner, including without limitation, names, addresses and telephone
numbers of the assignor and transferee;
(2) The transferee executes, adopts and acknowledges
this Agreement, or a counterpart hereto, and such other documents as may be
reasonably requested by the General Partner, including without limitation, all
documents necessary to comply with applicable tax and/or securities rules and
regulations;
(3) The assignor or transferee pays all costs and
fees incurred or charged by the Partnership to effect the Transfer and
substitution; and
(4) The assignor or transferee obtains the written
Consent of the General Partner, which may be given or withheld in its sole and
absolute discretion.
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(B) If a transferee of a Limited Partner does not become a
Limited Partner pursuant to Section 8.5(A), such transferee shall be an Assignee
and shall not have any rights to require any information on account of the
Partnership's business, to inspect the Partnership's books, to participate in
the management or operation of the Partnership, or to vote or otherwise take
part in the affairs of the Partnership (such Partnership Units being deemed to
have been voted in the same proportion as all other Partnership Units held by
Limited Partners have been voted). Such Assignee shall be entitled, however, to
all the rights of an assignee of a limited partnership interest under the Act.
Any Assignee wishing to Transfer the Partnership Units acquired shall be subject
to the restrictions set forth in this Article VIII.
Section 8.6 Timing and Effect of Transfers. Unless the General Partner
agrees otherwise, Transfers under this Article VIII may only be made as of the
first day of a fiscal quarter of the Partnership. Upon any Transfer of a
Partnership Interest in accordance with this Article VIII or redemption of a
Partnership Interest in accordance with Article IX of this Agreement, the
Partnership shall allocate all items of profit and loss between the transferor
Partner and the transferee Partner in accordance with Code Section 706(d). The
transferor Partner shall have the right to receive all distributions as to which
the Record Date precedes the date of Transfer and the transferee Partner shall
have the right to receive all distributions thereafter.
Section 8.7 Additional Limited Partners. Other than in accordance with
the transactions specified in the Contribution Agreement, after the initial
execution of this Agreement and the admission to the Partnership of the initial
Limited Partners, any Person making a Capital Contribution to the Partnership in
accordance herewith shall be admitted as an Additional Limited Partner only (i)
with the Consent of the General Partner, and (ii) upon execution, adoption and
acknowledgment of this Agreement, or a counterpart hereto, and such other
documents as may be reasonably requested by the General Partner, including
without limitation, the power of attorney required under Section 12.3. Upon
satisfaction of the foregoing requirements, such Person shall be admitted as an
Additional Limited Partner effective on the date upon which the name of such
Person is recorded on the books of the Partnership.
Section 8.8 Amendment of Agreement and Certificate. Upon any admission
of a Person as a Partner to the Partnership, the General Partner shall take all
necessary steps to amend this Agreement to reflect such admission and, if
required by the Act, to cause to be filed an amendment to the Certificate.
ARTICLE IX - REDEMPTION
Section 9.1 Right of Redemption.
(A) Subject to any restriction on RAIT, which restriction may
be in the REIT Declaration, the laws governing RAIT or otherwise (a "Redemption
Restriction"), beginning on the Redemption Effective Date, during the four
30-day periods immediately following the filing with the Securities and Exchange
Commission by RAIT of its annual report on Form 10-K or quarterly reports on
Form 10-Q or during such periods as the Partnership may otherwise determine,
each Redeeming Party shall have the right to require the Partnership to redeem
all or a portion of the Partnership Units held by such Redeeming Party by
providing the General Partner with a Redemption Notice. A Limited Partner may
not invoke its rights under this Article IX with respect to fewer than 100
Partnership Units or an integral multiple thereof or, if such Limited Partner
holds fewer than 100 Partnership Units, all of the Partnership Units held by
such Limited Partner. Upon the General Partner's receipt of a Redemption Notice
from a Redeeming Party, the Partnership shall be obligated (subject to the
existence of any
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Redemption Restriction) to redeem the Partnership Units from such Redeeming
Party (the "Redemption Obligation").
(B) Upon receipt of a Redemption Notice from a Redeeming
Party, the General Partner shall either (i) cause the Partnership to redeem the
Partnership Units tendered in the Redemption Notice, (ii) assume the Redemption
obligation, as set forth in Section 9.4, or (iii) provide written Notice to the
Redeeming Party of any Redemption Restriction.
Section 9.2 Timing of Redemption. The Redemption Obligation (or the
obligation to provide Notice of a Redemption Restriction if one exists) shall
mature on the date which is seven (7) business days after the receipt by the
General Partner of a Redemption Notice from the Redeeming Party (the "Redemption
Date").
Section 9.3 Redemption Price. On or before the Redemption Date, the
Partnership (or the General Partner if it elects pursuant to Section 9.4) shall
deliver to the Redeeming Party, in the sole and absolute discretion of the
General Partner either (i) a Share Payment or (ii) a Cash Payment. The
Redemption Price will be in the form of a Cash Payment in the event that a Share
Payment would (i) result in any person owning, directly or indirectly, REIT
Shares in excess of the restriction on ownership by virtue of the attribution
provisions of the Code, (ii) result in capital shares of RAIT being owned by
fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in RAIT being "closely held" within the meaning of
section 856(h) of the Code, (iv) cause RAIT to own, actually or constructively,
10% or more of the ownership interests in a tenant of RAIT's or the
Partnership's real property, within the meaning of section 856(d)(2)(B) of the
Code, or (v) cause the acquisition of REIT Shares by such redeeming Limited
Partner to be "integrated" with any other distribution of REIT Shares for
purposes of complying with the Securities Act of 1933, as amended. In order to
enable the Partnership to effect a redemption by making a Share Payment pursuant
to this Section 9.3, the General Partner in its sole and absolute discretion may
direct RAIT to issue additional REIT Shares to the Partnership in exchange for
the issuance to the General Partner of Partnership Units determined by applying
the Conversion Multiple to the number of REIT Shares issued.
Section 9.4 Assumption of Redemption Obligation. Upon receipt of a
Redemption Notice, the General Partner, in its sole and absolute discretion,
shall have the right to assume the Redemption Obligation of the Partnership. In
such case, the General Partner shall be substituted for the Partnership for all
purposes of this Article IX, and, upon acquisition of the Partnership Units
tendered by the Redeeming Party pursuant to the Redemption Notice shall be
treated for all purposes of this Agreement as the owner of such Partnership
Units. In such case, the transaction shall be treated for federal income tax
purposes by the Partnership, the General Partner and the Redeeming Party as a
sale by the Redeeming Party as seller to the General Partner as purchaser.
Section 9.5 Further Assurances. Each party to this Agreement agrees to
execute any documents deemed reasonably necessary by the General Partner to
evidence the issuance of any Share Payment to a Redeeming Party.
Section 9.6 Effect of Redemption. Upon the satisfaction of the
Redemption Obligation by the Partnership or the General Partner, as the case may
be, the Redeeming Party shall have no further right to receive any Partnership
distributions in respect of the Partnership Units so redeemed.
ARTICLE X - DISSOLUTION AND LIQUIDATION
Section 10.1 Term and Dissolution. The Partnership commenced as of the
date of filing of the Certificate, and shall continue until December 31, 2050,
or until dissolution occurs prior to that date for any one of the following
reasons:
(A) An Involuntary Withdrawal of a sole remaining General
Partner unless, within ninety (90) days after such event of withdrawal, a
majority in interest of the remaining Partners
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(measured by the relative number of Partnership Units owned by each) agree in
writing to the continuation of the Partnership and to the appointment of a
Successor General Partner;
(B) Entry of a decree of judicial dissolution of the
Partnership under the Act; or
(C) The sale, exchange or other disposition of all or
substantially all of the Partnership Assets.
Section 10.2 Liquidation of Partnership Assets.
(D) In the event of dissolution pursuant to Section 10.1, the
Partnership shall continue solely for purposes of winding up the affairs of,
achieving a final termination of and satisfaction of the creditors of the
Partnership. The General Partner (or, if there is no General Partner remaining,
any Person elected by a majority in interest of the Limited Partners (the
"Liquidator")) shall be responsible for oversight of the winding up and
dissolution of the Partnership. The Liquidator shall obtain a full accounting of
the assets and liabilities of the Partnership, and such Partnership Assets shall
be liquidated (including, at the discretion of the Liquidator, in exchange, in
whole or in part, for REIT Shares) as promptly as the Liquidator is able to do
so without any undue loss in value, with the proceeds therefrom applied and
distributed in the following order:
(1) First, to the discharge of Partnership debts and
liabilities to creditors other than Partners;
(2) Second, to the discharge of Partnership debts
and liabilities to the Partners; and
(3) The balance, if any, to the Partners in
accordance with their positive Capital Accounts after giving effect to all
contributions, distributions and allocations for all periods.
(E) In accordance with Section 10.2(A), the Liquidator shall
proceed without any unnecessary delay to sell and otherwise liquidate the
Partnership Assets; provided, however, that if the Liquidator shall determine
that an immediate sale of part or all of the Partnership Assets would cause
undue loss to the Partners, the Liquidator may defer the liquidation except (i)
to the extent provided by the Act or (ii) as may be necessary to satisfy the
debts and liabilities of the Partnership to Persons other than the Partners.
(F) If, in the sole and absolute discretion of the Liquidator,
there are Partnership Assets that the Liquidator will not be able to liquidate,
or if the liquidation of such assets would result in undue loss to the Partners,
the Liquidator may distribute such Partnership Assets to the Partners in kind,
in lieu of cash, as tenants-in-common in accordance with the provisions of
Section 10.2(A). The foregoing notwithstanding, such in-kind distributions shall
only be made if in the Liquidator's good faith judgment that is in the best
interest of the Partners.
(G) Upon the complete liquidation and distribution of the
Partnership Assets, the Partners shall cease to be Partners of the Partnership,
and the Liquidator shall execute, acknowledge and cause to be filed all
certificates and notices required by law to terminate the Partnership. Upon the
dissolution of the Partnership pursuant to Section 10.1, the Liquidator shall
cause to be prepared, and shall furnish to each Partner, a statement setting
forth the assets and liabilities of the Partnership.
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Promptly following the complete liquidation and distribution of the Partnership
Assets, the Liquidator shall furnish to each Partner a statement showing the
manner in which the Partnership Assets were liquidated and distributed.
Section 10.3 Effect of Treasury Regulations.
(A) In the event the Partnership is "liquidated" within the
meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g), distributions
shall be made pursuant to this Article X to the General Partner and the Limited
Partners who have positive Capital Accounts in compliance with Treasury
Regulations Section 1.704-1(b)(2)(ii)(b)(2). If any Partner has a deficit
balance in his Capital Account (after giving effect to all contributions,
distributions and allocations), such Partner shall be obligated to contribute
such amount to the capital of the Partnership.
(B) In the event the Partnership is "liquidated" within the
meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g) but there has been
no dissolution of the Partnership under Section 10.1 hereof, then the
Partnership Assets shall not be liquidated, the Partnerships liabilities shall
not be paid or discharged and the Partnership's affairs shall not be wound up.
In the event of such a liquidation there shall be deemed to have been a
distribution of Partnership Assets in kind to the Partners in accordance with
their respective Capital Accounts followed by a recontribution of the
Partnership Assets by the Partners also in accordance with their respective
Capital Accounts.
Section 10.4 Time for Winding Up. Anything in this Article X
notwithstanding, a reasonable time shall be allowed for the orderly winding up
of the business and affairs of the Partnership and the liquidation of the
Partnership Assets in order to minimize any potential for losses as a result of
such process. During the period of winding up, this Agreement shall remain in
full force and effect and shall govern the rights and relationships of the
Partners inter se.
ARTICLE XI - AMENDMENTS AND MEETINGS
Section 11.1 Amendment Procedure.
(A) Amendments to this Agreement may be proposed by the
General Partner. A proposed amendment will be adopted and become effective only
if it receives the Consent of a majority in interest of the Limited Partners
(measured by the relative number of Partnership Units owned by each); provided,
however, no such amendment shall be adopted if it would (i) convert a Limited
Partner's Interest in the Partnership into a General Partner Interest; (ii)
increase the liability of a Limited Partner under this Agreement; (iii) except
as otherwise permitted in this Agreement, alter the Partners' rights to
distributions set forth in Article V; (iv) alter or modify any aspect of the
Partners' rights with respect to redemption of Partnership Units; (v) cause the
early termination of the Partnership (other than pursuant to the terms hereof);
or (vi) amend this Section 11.1(A), in each case without the Consent of each
Partner adversely affected thereby. In connection with any proposed amendment of
this Agreement requiring Consent, the General Partner shall either call a
meeting to solicit the vote of the Partners or seek the written vote of the
Partners to such amendment. In the case of a request for a written vote, the
General Partner shall be authorized to impose such reasonable time limitations
for response, but in no event less than ten (10) days, with the failure to
respond being deemed a vote consistent with the vote of the General Partner.
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(B) Subject to the foregoing, amendments may be made to this
Agreement by the General Partner, without the Consent of any Limited Partner, to
(i) add to the representations, duties or obligations of the General Partner or
surrender any right or power granted to the General Partner herein; (ii) cure
any ambiguity, correct or supplement any provision herein which may be
inconsistent with any other provision herein or make any other provisions with
respect to matters or questions arising hereunder which will not be inconsistent
with any other provision hereof; (iii) reflect the admission, substitution,
termination or withdrawal of Partners in accordance with this Agreement; or (iv)
satisfy any requirements, conditions or guidelines contained in any order,
directive, opinion, ruling or regulation of a federal or state agency or court
or contained in federal or state law. The General Partner shall notify the
Limited Partners whenever it exercises its authority pursuant to this Section
11.1(B).
(C) Within ten (10) days of the making of any proposal to
amend this Agreement, the General Partner shall give all Partners Notice of such
proposal (along with the text of the proposed amendment and a statement of its
purposes).
Section 11.2 Meetings and Voting.
(A) Meetings of Partners may be called by the General Partner.
The General Partner shall give all Partners Notice of the purpose of such
proposed meeting not less than three (3) days nor more than thirty (30) days
prior to the date of the meeting. Meetings shall be held at a reasonable time
and place selected by the General Partner. Whenever the vote or Consent of
Partners is permitted or required hereunder, such vote or Consent shall be
requested by the General Partner and may be given by the Partners in the same
manner as set forth for a vote with respect to an amendment to this Agreement in
Section 11.1(A).
(B) Any action required or permitted to be taken at a meeting
of the Partners may be taken without a meeting if a Consent setting forth the
action to be taken is signed by the Partners owning Percentage Interests
required to vote in favor of such action, which Consent may be evidenced in one
or more instruments. Consents need not be solicited from any other Partner if
the Consent of a sufficient number of Partners has been obtained to take the
action for which such solicitation was required.
(C) Each Limited Partner may authorize any Person(s) to act
for him by proxy on all matters on which a Limited Partner may participate.
Every proxy (i) must be signed by the Limited Partner or his attorney-in-fact;
(ii) shall expire eleven (11) months from the date thereof unless the proxy
provides otherwise; and (iii) shall be revocable at the discretion of the
Limited Partner granting such proxy.
ARTICLE XII - MISCELLANEOUS PROVISIONS
Section 12.1 Title to Property. All property owned by the Partnership,
whether real or personal, tangible or intangible, shall be deemed to be owned by
the Partnership as an entity, and no Partner, individually, shall have any
ownership of such property. The Partnership may hold any of its assets in its
own name or in the name of its nominee, which nominee may be one or more
individuals, corporations, partnerships, trusts or other entities.
Section 12.2 Other Activities of Limited Partners. Except as expressly
provided otherwise in this Agreement or in any other agreement entered into by a
Limited Partner or any Affiliate of a
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Limited Partner and the Partnership, the General Partner or any Subsidiary of
the Partnership or the General Partner, any Affiliate of the General Partner,
any Limited Partner or any Affiliate of any Limited Partner may engage in, or
possess an interest in, other business ventures of every nature and description,
independently or with others, including without limitation, real estate business
ventures, whether or not such other enterprises shall be in competition with any
activities of the Partnership, the General Partner or the Subsidiary, and
neither the Partnership, the General Partner, such Subsidiary nor the other
Partners shall have any right by virtue of this Agreement in and to such
independent ventures or to the income or profits derived therefrom.
Section 12.3 Power of Attorney.
(A) Each Limited Partner hereby irrevocably appoints and
empowers the General Partner (which term shall include the Liquidator, in the
event of a liquidation, for purposes of this Section 12.3) and each of its
authorized officers and attorneys-in-fact with full power of substitution as his
true and lawful agent and attorney-in-fact, with full power and authority in his
name, place and stead to:
(1) Make, execute, acknowledge, publish and file in
the appropriate public offices (a) any duly approved amendments to the
Certificate pursuant to the Act and to the laws of any state in which such
documents are required to be filed; (b) any certificates, instruments or
documents as may be required by, or may be appropriate under, the laws of any
state or other jurisdiction in which the Partnership is doing or intends to do
business; (c) any other instrument which may be required to be filed by the
Partnership under the laws of any state or by any governmental agency, or which
the General Partner deems advisable to file; (d) any documents which may be
required to effect the continuation of the Partnership, the admission,
withdrawal or substitution of any Partner pursuant to Article VIII of this
Agreement, the dissolution and termination of the Partnership pursuant to
Article X of this Agreement, or the surrender of any rights or the assumption of
any additional responsibilities by the General Partner; (e) any document which
may be required to effect an amendment to this Agreement to correct any mistake,
omission or inconsistency, or to cure any ambiguity herein, to the extent such
amendment is permitted by Section 11.1(B) of this Agreement; and (f) all
instruments (including this Agreement and amendments and restatements hereof)
relating to the determination of the rights, preferences and privileges of any
class or series of Partnership Units issued pursuant to Section 4.2(B) of this
Agreement; and
(2) Sign, execute, swear to and acknowledge all
voting ballots, consents, approvals, waivers, certificates and other instruments
appropriate or necessary, in the sole discretion of the General Partner, to
make, evidence, give, confirm or ratify any vote, consent, approval, agreement
or other action which is made or given by the Partners hereunder or is
consistent with the terms of this Agreement and/or appropriate or necessary, in
the sole discretion of the General Partner, to effectuate the terms or intent of
this Agreement.
(B) Nothing herein contained shall be construed as authorizing
the General Partner to amend this Agreement except in accordance with Article XI
of this Agreement or as may be otherwise expressly provided for in this
Agreement.
(C) The foregoing grant of authority (i) is a special power of
attorney, coupled with an interest, and shall survive the Involuntary Withdrawal
of any Partner and shall extend to such Partner's heirs, successors, assigns and
personal representatives; (ii) may be exercised by the General Partner for each
and every Partner acting as attorney-in-fact for each and every Partner; and
(iii) shall survive the
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Transfer by a Limited Partner of all or any portion of its Partnership Interest
and shall be fully binding upon such transferee; except that the power of
attorney shall survive such assignment with respect to the assignor Limited
Partner for the sole purpose or enabling the General Partner to execute,
acknowledge and file any instrument necessary to effect the admission of the
transferee as a Substitute Limited Partner. Each Partner hereby agrees to be
bound by any representations made by the General Partner, acting in good faith
pursuant to such power of attorney. Each Partner shall execute and deliver to
the General Partner, within fifteen (15) days after receipt of the General
Partner's request therefor, such further designations, powers of attorney and
other instruments as the General Partner deems necessary to effectuate this
Agreement and the purposes of the Partnership.
Section 12.4 Further Assurances. The parties agree to execute and
deliver all such documents, provide all such information and take or refrain
from taking any action as may be necessary or desirable to achieve the purposes
of this Agreement and the Partnership.
Section 12.5 Titles and Captions. All article or section titles or
captions in this Agreement are solely for convenience and shall not be deemed to
be part of this Agreement or otherwise define, limit or extend the scope or
intent of any provision hereof.
Section 12.6 Applicable Law. This Agreement, and the application or
interpretation thereof, shall be governed exclusively by its terms and by the
laws of the State of Delaware, without regard to its principles of conflicts of
laws.
Section 12.7 Binding Agreement. This Agreement shall be binding upon
the parties hereto, their heirs, executors, personal representatives, successors
and assigns.
Section 12.8 Waiver of Partition. Each of the parties hereto
irrevocably waives during the term of the Partnership any right that it may have
to maintain any action for partition with respect to any property of the
Partnership.
Section 12.9 Counterparts and Effectiveness. This Agreement may be
executed in several counterparts, which shall be treated as originals for all
purposes, and all so executed shall constitute one agreement, binding on all of
the parties hereto, notwithstanding that all the parties are not signatory to
the original or the same counterpart. Any such counterpart shall be admissible
into evidence as an original hereof against the Person who executed it. The
execution of this Agreement and delivery thereof by facsimile shall be
sufficient for all purposes, and shall be binding upon any party who so
executes.
Section 12.10 Survival of Representations. All representations and
warranties herein shall survive the dissolution and final liquidation of the
Partnership.
Section 12.11 Entire Agreement. This Agreement (and all Exhibits
hereto) contains the entire understanding among the parties hereto and
supersedes all prior written or oral agreements among them respecting the within
subject matter, unless otherwise provided herein. There are no representations,
agreements, arrangements or understandings, oral or written, among the Partners
hereto relating to the subject matter of this Agreement which are not fully
expressed herein and in said Exhibits.
[SIGNATURES CONTAINED ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, this Agreement has been executed as of the day and
year first above written.
General Partner:
RAIT GENERAL, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
Limited Partner:
RAIT LIMITED, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
For purposes of acknowledging and agreeing to be bound by and to benefit from
the provisions of Section 4.2, Section 6.6 of Article IX of this Agreement only,
Resource Asset Investment Trust
By:_____________________________
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<PAGE>
RAIT PARTNERSHIP, L.P.
EXHIBIT 1 TO
LIMITED PARTNERSHIP AGREEMENT
Schedule of Partners
Applicable
Name and Address Number of Units Percentage Interest
General Partner:
RAIT GENERAL, INC. ____________ ____________%
____________________________
____________________________
Limited Partner:
RAIT LIMITED, INC. ____________% ____________%
____________________________
____________________________
<PAGE>
RAIT PARTNERSHIP, L.P.
EXHIBIT 2 TO
LIMITED PARTNERSHIP AGREEMENT
Redemption Notice
The undersigned hereby irrevocably (i) redeems ________ Partnership
Units in RAIT Partnership, L.P., a Delaware limited partnership (the
"Partnership"), in accordance with the terms and conditions of the Limited
Partnership Agreement of the Partnership (the "Partnership Agreement") and the
provisions regarding the redemption of Partnership Units contained in Article IX
thereof; (ii) surrenders such Partnership Units and all right, title and
interest therein and to the Limited Partnership Interest represented thereby;
(iii) directs that the Share Payment or the REIT Shares (as determined by the
General Partner) deliverable upon exercise of the redemption rights provided by
Article IX of the Partnership Agreement be delivered to the address specified
below, and if REIT Shares are to be delivered, such REIT Shares be registered or
placed in the name(s) and at the addresses) specified below; and (iv) agrees to
be bound by the terms and conditions of any registration rights agreement
applicable to such REIT Shares.
Dated:__________________ ___________________________________________
(Signature of Limited Partner)
_________
___________________________________________
(Street Address)
___________________________________________
(City) (State) (Zip Code)
_________
Signature Guaranteed by:
___________________________________________
_________
Issue REIT Shares to:
__________________________________
(name(s))
__________________________________
Taxpayer Identification Number
<PAGE>
RAIT PARTNERSHIP, L.P.
EXHIBIT 3 TO
LIMITED PARTNERSHIP AGREEMENT
Allocation Provisions
1. Definitions. The following terms shall have the meaning ascribed to
them for purposes of this Exhibit 3.
Adjusted Capital Account Deficit: With respect to any Partner,
the deficit balance, if any, in such Partner's Capital Account as of the end of
the relevant Fiscal Year, after giving effect to the following adjustments:
(A) Credit to such Capital Account any amounts which such
Partner is obligated to restore or is deemed to be obligated to restore pursuant
to the penultimate sentences of Regulations Section 1.704-2(g)(1) and
1.704-2(i)(5); and
(B) Debit to such Capital Account the items described in
Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
The foregoing definition of Adjusted Capital Account Deficit
is intended to comply with the provisions of Regulations Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
Capital Account: For each Partner, the separate account
established with regard to such Partner on the books of the Partnership, which
account shall be credited for (i) the amount of such Partner's Capital
Contributions and (ii) the amount of Profits allocated to such Partner under
this Exhibit 3, and which shall be debited for (i) the Gross Asset Value of any
asset distributed to such Partner and (ii) the amount of Losses allocated to
such Partner under this Exhibit 3. The foregoing definition is intended to
comply with Regulations Section 1.704-1(b)(2)(iv). Any transferee of a Partner's
Interest transferred in accordance with this Agreement shall succeed to that
transferor's Capital Account.
Depreciation: For each Fiscal Year or other period, an amount
equal to the depreciation, amortization or other cost recovery deduction
allowable with respect to an asset for such year or other period, except that if
the Gross Asset Value of an asset differs from its adjusted basis for federal
income tax purposes at the beginning of such year or other period, Depreciation
shall be an amount which bears the same ratio to such beginning Gross Asset
Value as the federal income tax depreciation, amortization, or other cost
recovery deduction for such year or other period bears to the beginning adjusted
tax basis; provided, however, that if the federal income tax depreciation,
amortization or other cost recovery deduction for such year or other period is
zero, Depreciation for such year or other period shall be determined with
reference to such beginning Gross Asset Value using any reasonable method
approved by the General Partner.
Nonrecourse Deductions: The meaning set forth in Regulations
Sections 1.704-2(b)(1) and (c). The amount of Nonrecourse Deductions for a
Fiscal Year equals the excess, if any, of the net increase, if any, in the
amount of Partnership Minimum Gain during that Fiscal Year over the aggregate
amount of any distributions during that Fiscal Year of proceeds of a Nonrecourse
Liability that are allocable to an increase in Partnership Minimum Gain,
determined according to the provisions of Regulations Section 1.704-2(c).
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Nonrecourse Liability: The meaning set forth in Regulations
Section 1.752-1(a)(2).
Partner Minimum Gain: An amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Regulations Section 1.704-2(i).
Partner Nonrecourse Debt: The meaning set forth in Regulations
Section 1.704-2(b)(4).
Partner Nonrecourse Deductions: The meaning set forth in
Regulations Section 1.704-2(i). The amount of Partner Nonrecourse Deductions
with respect to a Partner Nonrecourse Debt for a fiscal year equals the excess,
if any, of the net increase, if any, in the amount of Partner Minimum Gain
attributable to such Partner Nonrecourse Debt during that fiscal year over the
aggregate amount of any distributions during that fiscal year to the Partner
that bears the economic risk of loss for such Partner Nonrecourse Debt to the
extent such distributions are from the proceeds of such Partner Nonrecourse Debt
and are allocable to an increase in Partner Minimum Gain attributable to such
Partner Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i)(2).
Partnership Minimum Gain: The meaning set forth in Regulations
Sections 1.704-2(b)(2) and (d).
Profits and Losses: For each Fiscal Year or other period, an
amount equal to the Partnership's taxable income or loss for such year or
period, determined in accordance with Code Section 703(a) (for this purpose, all
items of income, gain, loss, or deduction required to be stated separately
pursuant to Code Section 703(a)(1) shall be included in taxable income or loss),
with the following adjustments:
(A) Any income of the Partnership that is exempt from federal
income tax and not otherwise taken into account in computing Profits or Losses
pursuant to this definition shall be added to such taxable income or loss;
(B) Any expenditures of the Partnership described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken
into account in computing Profits or Losses pursuant to this definition shall be
subtracted from such taxable income or loss;
(C) In the event the Gross Asset Value of any Partnership
Asset is adjusted pursuant to Clause (B) or (C) of the definition of Gross Asset
Value in Section 2.1 of the Agreement, the amount of such adjustment shall be
taken into account as gain or loss from the disposition of such asset for
purposes of computing Profits or Losses;
(D) Gain or loss resulting from any disposition of Partnership
Assets with respect to which gain or loss is recognized for federal income
purposes shall be computed by reference to the Gross Asset Value of the property
disposed of, notwithstanding that the adjusted tax basis of such property
differs from its Gross Asset Value;
(E) In lieu of the depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable income or loss,
there shall be taken into account Depreciation for such Fiscal Year or other
period, computed in accordance with the definition of Depreciation; and
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<PAGE>
(F) Notwithstanding any other provisions of this definition,
any items which are specially allocated pursuant to Section 2(C) hereof shall
not be taken into account in computing Profits or Losses.
Regulations: The Income Tax Regulations promulgated under the
Code, as such regulations may be amended from time to time, including
corresponding provisions of succeeding regulations.
2. Allocation of Profit and Loss. The income, profits, gains, losses,
deductions and credits of the Partnership shall be determined in accordance with
the capital accounting rules and principles established by Code Sections 702 and
704 and the Regulations thereunder and, to the extent not inconsistent
therewith, in accordance with generally accepted tax accounting principles, and
shall be allocated each Fiscal Year as follows and in the following order of
priority:
(A) Profits. After giving effect to the special allocations
set forth in Section 2(C) hereof, Profits in each Fiscal Year shall be allocated
in the following order:
(1) First, one hundred percent (100%) to the General
Partner to the extent of the excess, if any, of (i) the cumulative Losses
allocated the General Partner pursuant to Section 2(B)(2) hereof for all prior
Fiscal Years, over (ii) the cumulative Profits allocated to the General Partner
pursuant to this Section 2(A)(1) for all prior Fiscal Years;
(2) Second, one hundred percent (100%) to the
Partners, in proportion to and to the extent of the excess, if any, of (i) the
cumulative Losses allocated to each Partner pursuant to Section 2(B)(1)(c)
hereof for all prior Fiscal Years, over (ii) the cumulative Profits allocated to
each Partner pursuant to this Section 2(A)(2) for all prior Fiscal Years;
(3) Third, one hundred percent (100%) to the
Partners, in proportion to and to the extent of the excess, if any, of (i) the
cumulative Losses allocated to each Partner pursuant to Section 2(B)(1)(b)
hereof for all prior Fiscal Years, over (ii) the cumulative Profits allocated to
each Partner pursuant to this Section 2(A)(3) for all prior Fiscal Years;
(4) Thereafter, the balance to the Partners, pro
rata in accordance with their respective Percentage Interests.
(B) Losses. After giving effect to the special allocations set
forth in Section 2(C) hereof, Losses in each Fiscal Year shall be allocated in
the following order:
(1) Losses for any Fiscal Year shall be allocated in
the following order of priority:
(a) First, one hundred percent (100%) to the
Partners in proportion to and to the extent of the excess, if any, of (y) the
cumulative Profits allocated to each such Partner pursuant to Section 2(A)(5)
hereof for all prior Fiscal Years, over (z) the cumulative Losses allocated to
such Partner pursuant to this Section 2(B)(1)(a) for all prior Fiscal Years;
(b) Second, one hundred percent (100%) to
the Partners in proportion to and to the extent of their positive Capital
Accounts until all Capital Accounts have been reduced to zero; and
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<PAGE>
(c) Thereafter, the balance to the Partners,
pro rata in accordance with their respective Percentage Interests.
(2) The Losses allocated pursuant to Section 2(B)(1)
hereof shall not exceed the maximum amount of Losses that can be so allocated
without causing any Limited Partner to have an Adjusted Capital Account Deficit
at the end of any Fiscal Year. In the event some but not all of the Limited
Partners would have Adjusted Capital Account Deficits as a consequence of an
allocation of Losses pursuant to Section 2(B)(1) hereof but for this Section
2(B)(2), the limitation set forth in this (B)(2) shall be applied on a Limited
Partner by Limited Partner basis so as to allocate the maximum permissible
Losses to each Limited Partner under Regulations Section 1.704-1(b)(2)(ii)(d).
All Losses in excess of the limitations set forth in this Section 2(B)(2) shall
be allocated to the General Partner.
(C) Special Allocations. The following special allocations
shall be made in the following order:
(1) Minimum Gain Chargeback. Notwithstanding any
other provision of the foregoing Sections 2(A) and (B), if there is a net
decrease in Partnership Minimum Gain during any Fiscal Year, then, to the extent
required by Regulations Section 1.704-2(f), each Partner shall be specially
allocated items of Partnership income and gain for such year (and, if necessary,
subsequent years) in an amount equal to such Partner's share of the net decrease
in Partnership Minimum Gain, determined in accordance with Regulations Section
1.704-2(g)(2). The items to be so allocated shall be determined in accordance
with Regulations Sections 1.704-2(f)(6) and 1.704-2(j). This Section 2(C)(1) is
intended to comply with the minimum gain chargeback requirement in Regulations
Section 1.704-2(f) and shall be interpreted consistently therewith.
(2) Partner Minimum Gain Chargeback. Notwithstanding
any other provision of Sections 2(A)-(F) hereof except Section 2(C)(1), if there
is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse
Debt during any Fiscal Year, then, to the extent required by Regulations Section
1.704-2(i)(4), each Partner who has a share of the Partner Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance with
Regulations Section 1.704-2(i)(5), shall be specially allocated items of
Partnership income and gain for such year (and, if necessary, subsequent years)
in an amount equal to such Partner's share of the net decrease in Partner
Minimum Gain attributable to such Partner Nonrecourse Debt, determined in
accordance with Regulations Section 1.704-2(i)(4). The items to be so allocated
shall be determined in accordance with Regulations Sections 1.704-2(i)(4) and
1.704-2(j). This Section 2(C)(2) is intended to comply with the minimum gain
chargeback requirement in Regulations Section 1.704-2(i)(4) and shall be
interpreted consistently therewith.
(3) Qualified Income Offset. In the event any
Limited Partner unexpectedly receives any adjustments, allocations, or
distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) or
(6), items of Partnership income and gain (consisting of a pro rata portion of
each item of Partnership income, including gross income, and gain for such year)
shall be specially allocated to such Partner in an amount and manner sufficient
to eliminate, to the extent required by the Regulations, the Adjusted Capital
Account Deficit of such Partner as quickly as possible, provided that an
allocation pursuant to this Section 2(C)(3) shall be made if and only to the
extent that such Partner would have an Adjusted Capital Account Deficit after
all other allocations provided for in Sections 2(A)-(F) hereof have been
tentatively made as if this Section 2(C)(3) were not in the Agreement.
(4) Gross Income Allocation. In the event any
Limited Partner has a deficit Capital Account at the end of any Fiscal Year that
is in excess of the sum of (i) the amount such Partner
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<PAGE>
is obligated to restore, and (ii) the amount such Partner is deemed to be
obligated to restore pursuant to the penultimate sentences of Regulations
Sections 1.704-2(g)(1) and 1.704-2(i)(5), such Partner shall be specially
allocated items of Partnership income and gain (consisting of a pro rata portion
of each item of Partnership income, including gross income, and gain for such
year) in the amount of such excess as quickly as possible, provided that an
allocation pursuant to this Section 2(C)(4) shall be made if and only to the
extent that such Partner would have a deficit Capital Account in excess of such
sum after all other allocations provided for in Sections 2(A)-(F) hereof have
been tentatively made as if Section 2(C)(3) and this Section 2(C)(4) were not in
the Agreement.
(5) Nonrecourse Deductions. Nonrecourse Deductions
for any Fiscal Year or other period shall be specially allocated to the Partners
in proportion to their Percentages of Partnership Interest.
(6) Partner Nonrecourse Deductions. Any Partner
Nonrecourse Deductions for any Fiscal Year or other period shall be specially
allocated to the Partner who bears the economic risk of loss with respect to the
Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are
attributable in accordance with Regulations Section 1.704-2(i)(1).
(7) Section 754 Adjustment. To the extent an
adjustment to the adjusted tax basis of any Partnership Asset pursuant to Code
Section 734(b) or Code Section 743(b) is required, pursuant to Regulations
Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be treated
as an item of gain (if the adjustment increases the basis of the asset) or loss
(if the adjustment decreases such basis), and such gain or loss shall be
specially allocated to the Partners in a manner consistent with the manner in
which their Capital Accounts are required to be adjusted pursuant to such
Regulations Section.
(D) Other Allocation Rules.
(1) For purposes of determining the Profits, Losses
or any other items allocable to any period, Profits, Losses and any such other
items shall be determined on a daily, monthly, or other basis, as determined by
the General Partner using any permissible method under Code Section 706 and the
Regulations thereunder.
(2) Except as otherwise provided in this Agreement,
all items of Partnership income, gain, loss, deduction and any other allocations
not otherwise provided for shall be divided among the Partners in the same
proportions as they share Profits and Losses, as the case may be, for the year.
(3) The Partners are aware of the income tax
consequences of the allocations made by Sections 2(A)-(F) hereof and hereby
agree to be bound by the provisions of Sections 2(A)-(F) hereof in reporting
their shares of Partnership income and loss for income tax purposes.
(4) Solely for purposes of determining a Partner's
proportionate share of the "excess nonrecourse liabilities" of the Partnership
within the meaning of Regulations Section 1.752-3(a)(3), the Partners' interests
in Partnership profits shall be equal to their Percentages of Partnership
Interest.
(E) Tax Allocations - Code Section 704(c).
(1) In accordance with Code Section 704(c) and the
Regulations thereunder, income, gain, loss and deduction with respect to any
property contributed to the capital of the Partnership
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<PAGE>
shall, solely for tax purposes, be allocated among the Partners so as to take
account of any variation between the adjusted basis of such property to the
Partnership for federal income tax purposes and its initial Gross Asset Value
(computed in accordance with the definition in Section 2.1 of the Agreement).
(2) In the event the Gross Asset Value of any
Partnership Asset is adjusted, subsequent allocations of income, gain, loss and
deduction with respect to such asset shall take account of any variation between
the adjusted basis of such asset for federal income tax purposes and its Gross
Asset Value in the same manner as under Code Section 704(c) and the Regulations
thereunder.
(3) Any elections or other decisions relating to such
allocations shall be made by the General Partner in any manner that reasonably
reflects the purpose and intention of this Agreement. Allocations pursuant to
this Section 2(E) are solely for purposes of federal, state and local taxes and
shall not affect, or in any way be taken into account in computing, any
Partner's Capital Account or share of Profits, Losses, other items, or
distributions pursuant to any provision of this Agreement.
(F) Regulatory Compliance. The foregoing provisions of this
Section 2 relating to the allocation of Profits, Losses and other items for
federal income tax purposes are intended to comply with Treasury Regulations
Sections 1.704-1(b) and 1.704-2, and shall be interpreted and applied in a
manner consistent with such Treasury Regulations.
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<PAGE>
The Common Shares represented by this certificate are subject to
restrictions on transfer for the purpose of the Trust's maintenance of its
status as a real estate investment trust under the Internal Revenue Code of
1986, as amended (the "Code"). Subject to certain further restrictions and
except as provided in the Amended and Restated Declaration of Trust of the Trust
("Trust Agreement"), no Person may (i) Beneficially or Constructively Own Common
Shares in excess of 8.5% (or such other percentage as may be determined by the
Board of Trustees) of the number of outstanding Common Shares, unless such
Person is the Excluded Holder (in which case the Excluded Holder Limit shall be
applicable); (ii) Beneficially or Constructively Own Preferred Shares of any
series of Preferred Shares in excess of 9.8% of the number of outstanding
Preferred Shares of such series, (iii) Beneficially Own Equity Shares that would
result in the Equity Shares being beneficially owned by fewer than 100 Persons
(determined without reference to any rules of attribution), (iv) Beneficially
Own Equity Shares that would result in the Trust being "closely held" under
Section 856(h) of the Code, or (v) Constructively Own Equity Shares that would
cause the Trust to Constructively Own 10% or more of the ownership interests in
a tenant of the Trust's real property, within the meaning of Section
856(d)(2)(B) of the Code. Any Person who attempts to Beneficially or
Constructively Own shares of Equity Shares in excess of the above limitations
must immediately notify the Trust in writing. If any restrictions above are
violated, the Equity Shares represented hereby will be transferred automatically
to a Share Trust and shall be designated Shares-in-Trust to a trustee of a trust
for the benefit of one or more charitable beneficiaries. In addition, upon the
occurrence of certain events, attempted transfers in violation of the
restrictions described above may be void ab initio. All capitalized terms in
this legend have the meanings defined in the Trust Agreement, as the same may be
further amended from time to time, a copy of which, including the restrictions
on transfer, will be sent without charge to each shareholder who so requests.
Such requests must be made to the secretary of the Trust at its principal
office.
Certificate Number Shares
C-________________ ________________
RESOURCE ASSET INVESTMENT TRUST
Common Shares of Beneficial Interest
Par Value $.01 Per Share
CUSIP ________________
THIS CERTIFIES THAT ____________________________________________ (the
"Holder") is the owner of _____________________________________ common shares of
beneficial interest (the "Common Shares") of RESOURCE ASSET INVESTMENT TRUST
(the "Trust"), a statutory real
<PAGE>
estate investment trust formed under the laws of the State of Maryland,
representing undivided beneficial interests in the Trust. Subject to the
restrictions set forth in Article VII of the Trust Agreement (as defined below),
the Common Shares are transferrable on the books and records of the Trust, in
person or by a duly authorized attorney, upon surrender of this certificate duly
endorsed and in proper form for transfer.
The designations, rights, privileges, restrictions, preferences and
other terms and provisions of the Common Shares are set forth in, and this
certificate and the Common Shares represented hereby are issued and shall in all
respects be subject to the terms and provisions of, the Amended and Restated
Declaration of Trust of the Trust, dated as of _____________, 1997, as the same
may be amended from time to time (the "Trust Agreement"). The Trust will furnish
a copy of the Trust Agreement to the Holder without charge upon written request
to the Trust at its principal place of business or registered office.
Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.
This certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Trust has caused this certificate to be signed
in facsimile by its duly authorized officers.
_____________________________________ _______________________________
Jay J. Eisner Betsy Z. Cohen
Secretary Chief Executive Officer
Countersigned and Registered by
____________________, Transfer
Agent and Registrar
By: _________________________________
Authorized Signature
<PAGE>
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto _____________________________,
_____________________________________ of the Common Shares represented by the
within Certificate, and hereby irrevocably constitute(s) and appoint(s)
_________________________________________________ Attorney to transfer the said
Common Shares on the books of the Trust with full power of substitution in the
premises.
Dated: ___________________________ __________________________________
Assignor
__________________________________
Assignor
In presence of ___________________
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the certificate, in every particular, without
alteration or enlargement, or any change whatever. The signature should be
guaranteed by an eligible guarantor institution (a bank, stock broker, savings
and loan association or credit union with membership in an approved signature
guarantee medallion program), pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT (the "Agreement"), dated as of ____________,
1997, by and among Resource Asset Investment Trust ("RAIT"), a Maryland real
estate investment trust, RAIT General, Inc. ("RGI"), a Maryland corporation,
RAIT Limited, Inc. ("RLI"), a Maryland corporation (RAIT, RGI and RLI are herein
sometimes collectively called "Indemnitors" or individually called an
"Indemnitor"), RAIT Partnership, L.P., a Delaware limited partnership (the
"Operating Partnership") and the undersigned individual (the "Indemnitee").
W I T N E S S E T H:
WHEREAS, the Indemnitee has agreed to serve as a trustee ("Trustee"),
director ("Director") and/or officer ("Officer") of one or more of RAIT, RGI or
RLI; and
WHEREAS, Section 2-418 of the General Corporation Law of the State of
Maryland (as applicable to Maryland real estate investment trusts pursuant to
Section 8-301(15), Title 8, of the Maryland Code) empowers real estate
investment trusts and corporations to indemnify any person who is or was serving
as a trustee, director, officer, employee or agent of the trust or corporation
or any person who, while a trustee, director, officer, employee or agent of the
trust or corporation, is or was serving at its request as a director, officer,
partner, trustee, employee or agent of another corporation, partnership, limited
liability company, association, joint venture, trust or other enterprise (which,
for purposes of this Agreement shall include, without limitation, employee
benefit plans and administrative committees thereof); and
WHEREAS, said Section 2-418 and the Bylaws of each of RAIT, RGI and RLI
specify that the indemnification set forth in said Section 2-418 and in the
Bylaws, respectively, shall not be deemed to limit the right of each of RAIT,
RGI and RLI to indemnify any person against any liability and expenses to the
fullest extent permitted by law, nor shall it be deemed exclusive of any other
rights to which those seeking indemnification may be entitled; and
WHEREAS, RGI and RLI are the general partner and initial limited
partner, respectively, of the Operating Partnership, and are wholly-owned
subsidiaries of RAIT; and
WHEREAS, RAIT has contributed all or substantially all of the proceeds
of an offering of its common shares of beneficial interest to RGI and RLI, and
RGI and RLI have contributed such proceeds to the Operating Partnership.
NOW, THEREFORE, in order to induce the Indemnitee to serve as a
Trustee, Director and/or Officer of one or more of RAIT, RGI
<PAGE>
or RLI, and in consideration of his continued service, each of RAIT, RGI and RLI
(to the extent the Indemnitee is a Trustee, Director or Officer of it, or
serving at its request as a director, officer, partner, trustee, employee or
agent of any corporation, partnership, limited liability company, association,
joint venture, trust or other enterprise) hereby agrees to indemnify the
Indemnitee as follows:
1. Indemnity. Each Indemnitor (to the extent the Indemnitee is an Officer,
Director or Trustee of it, or serving at the request of any of them as a
director, officer, partner, trustee, employee or agent of any corporation,
partnership, limited liability company, association, joint venture, trust or
other enterprise) will indemnify, save and hold harmless the Indemnitee, his
executors, administrators or assigns, or, if the Indemnitee is deceased, his
estate, spouse, heirs, executors and administrators, for any Expenses or Fines
(as defined in Section 2 hereof) which the Indemnitee is or becomes legally
obligated to pay in connection with any Proceeding. As used herein, the term
"Proceeding" shall mean any threatened, pending or completed claim, action, suit
or proceeding, including any appeals, whether brought by or in the right of the
Indemnitor or otherwise and whether of a civil, criminal, administrative or
investigative nature, in which the Indemnitee may be or may have been involved
as a party or otherwise, (i) by reason of the fact that the Indemnitee is or was
a Trustee, Director or Officer of the Indemnitor, (ii) by reason of any actual
or alleged error or misstatement or misleading statement made or suffered by the
Indemnitee, (iii) by reason of any action taken by the Indemnitee or of any
inaction on the Indemnitee's part while acting as such Trustee, Director or
Officer, or (iv) by reason of the fact that the Indemnitee was serving at the
request of the Indemnitor as a director, officer, partner, trustee, employee or
agent of another corporation, partnership, limited liability company,
association, joint venture, trust or other enterprise; provided that in each
such case the Indemnitee acted in good faith within the course and scope of the
Indemnitee's duties and in a manner which the Indemnitee reasonably believed to
be in or not opposed to the best interests of the Indemnitor, and, in the case
of a criminal proceeding, in addition the Indemnitee had no reasonable cause to
believe that his act or omission was unlawful.
2. Expenses. As used in this Agreement, the term "Expenses" shall mean
all reasonable expenses incurred by the Indemnitee in connection with the
Proceeding which shall include, without limitation, damages, judgments, fines,
penalties, settlements, costs, attorneys' fees, disbursements and costs of
attachment or similar bonds, investigations, and any such expenses of
establishing a right to indemnification under this Agreement (the "Expenses").
"Fines" shall include, without limitation, any excise tax assessed with respect
to any employee benefit plan. Any such Expenses may be paid by the Company in
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<PAGE>
advance of the final disposition of such action, suit or proceeding.
3. Exclusions. The Indemnitor shall not be liable under this Agreement
to pay any Expenses or Fines in connection with any claim made against the
Indemnitee:
(a) to the extent that payment is actually made to the
Indemnitee under a valid, enforceable and collectible insurance policy;
(b) to the extent that the Indemnitee is indemnified and
actually paid otherwise than pursuant to this Agreement;
(c) in connection with a judicial action by or in the right of
the Indemnitor, in respect of any claim, issue or matter as to which the
Indemnitee shall have been adjudged to be liable to the Indemnitor, unless and
only to the extent that any court in which such action was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, the Indemnitee is fairly and
reasonably entitled to indemnity for such Expenses or Fines as such court shall
deem proper;
(d) if it is established by final judgment in a court of law
or other final adjudication, that (i) the act or omission of the Indemnitee was
material to the matter giving rise to the proceeding and was committed in bad
faith or was the result of active and deliberate dishonesty, (ii) the Indemnitee
actually received an improper personal benefit in money, property or services,
or (iii) in the case of any criminal proceeding, the Indemnitee had reasonable
cause to believe that the act or omission was unlawful;
(e) if it is proved by final judgment in a court of law or
other final adjudication to have been based upon or attributable to the
Indemnitee having gained any personal profit or advantage to which he was not
legally entitled;
(f) for a disgorgement of profits made from the purchase and
sale by the Indemnitee of securities pursuant to Section 16(b) of the Securities
Exchange Act of 1934 and amendments thereto or similar provisions of any state
statutory law or common law; or
(g) for any judgment, fine or penalty which the Indemnitor is
prohibited by applicable law from paying as indemnity or for any other reason.
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<PAGE>
4. Termination of the Proceeding.
(a) The termination of any Proceeding which is covered by this
Agreement by judgment, order or settlement, shall not of itself create a
presumption for the purposes of this Agreement that the Indemnitee did not act
in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Indemnitor and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
(b) The termination of any proceeding by conviction, or by a
plea of nolo contendere or its equivalent, or an entry of an order of probation
prior to judgment, creates a rebuttable presumption that the Indemnitee did not
meet the requisite standard of conduct for good faith or otherwise.
5. Enforcement. If a claim or request under this Agreement is not paid
by the Indemnitor, or on its behalf, within thirty (30) days after a written
claim or request has been received by the Indemnitor, the Indemnitee may at any
time thereafter bring suit against the Indemnitor to recover the unpaid amount
of the claim or request, and if successful in whole or in part, the Indemnitee
shall be entitled to be paid all of the Expenses of prosecuting such suit. The
burden of proving that the Indemnitee is not entitled to indemnification for any
reason shall be upon the Indemnitor.
6. Recoupment. The Indemnitor shall have the right to recoup from the
Indemnitee the amount of any item or items of Expenses theretofore paid by the
Indemnitor pursuant to this Agreement to the extent that such Expenses are not
reasonable in nature or amount; provided, however, that the Indemnitor shall
have the burden of proving such Expenses to be unreasonable.
7. Subrogation. In the event of payment under this Agreement, the
Indemnitor shall be subrogated to the extent of such payment to all of the
rights of recovery of the Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Indemnitor effectively to
bring suit to enforce such rights.
8. Indemnification of Expenses of Successful Party. Notwithstanding any
other provision of this Agreement, to the extent that the Indemnitee has been
successful on the merits or otherwise in defense of any Proceeding or in defense
of any claim, issue or matter therein, including dismissal without prejudice,
the Indemnitee shall be indemnified against any and all Expenses incurred in
connection therewith.
9. Partial Indemnification. If the Indemnitee is entitled
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<PAGE>
under any provision of this Agreement to indemnification by the Indemnitor for
some portion of Expenses or Fines, but not, however, for the total amount
thereof, the Indemnitor shall nevertheless indemnify the Indemnitee for the
portion of such Expenses or Fines to which the Indemnitee is entitled.
10. Indemnification Hereunder Not Exclusive. Nothing herein shall be
deemed to diminish or otherwise restrict the Indemnitee's right to
indemnification under any provision of the Indemnitor's Declaration of Trust,
Articles of Incorporation or Bylaws, as the case may be, and amendments thereto,
or under law.
11. Advance of Expenses. Expenses incurred by the Indemnitee in
connection with any Proceeding, except the amount of any settlement, shall be
paid by the Indemnitor in advance upon request of the Indemnitee that the
Indemnitor pay such Expenses. The Indemnitee hereby undertakes to repay to the
Indemnitor the amount of any Expenses theretofore paid by the Indemnitor to the
extent that it is ultimately determined that such Expenses were not reasonable
or that the Indemnitee is not entitled to indemnification.
12. Approval of Expenses. No Expenses for which indemnity shall be
sought under this Agreement, other than those in respect of judgments and
verdicts actually rendered, shall be incurred without the prior written consent
of the Indemnitor, which consent shall not be unreasonably withheld.
13. Coverage. The provisions of this Agreement shall apply with respect
to the Indemnitee's service in those capacities set forth in Section 1 of this
Agreement prior to the date of this Agreement and with respect to all periods of
such service after the date of this Agreement, even though the Indemnitee may
have ceased to serve in any or all of such capacities.
14. Guaranty. The Operating Partnership hereby guarantees, and agrees
to be liable for, the obligations of each Indemnitor hereunder, and each
Indemnitor hereby guarantees, and agrees to be liable for, the obligations of
each of the other Indemnitors hereunder.
15. General Provisions.
15.1 Notice of Claim. The Indemnitee, as a condition precedent
to his right to be indemnified under this Agreement, shall give written notice
to the Indemnitor as soon as practicable of any claim made against him for which
will or could be sought under this Agreement. Notice to the Indemnitor shall be
given at its principal office and shall be directed to the Chief Executive
Officer (or, if no one occupies such office, the President), unless the Chief
Executive Officer is the Indemnitee, in which case it shall be directed to the
President (or such
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<PAGE>
other person as the Indemnitor shall designate in writing to the Indemnitee).
Notice shall be deemed duly given when addressed as follows and (i) when
personally delivered, (ii) when transmitted by telecopy, electronic or digital
transmission with receipt confirmed, (iii) one day after delivery to an
overnight air courier guaranteeing next day delivery, or (iv) upon receipt if
sent by certified or registered mail. In each case notice shall be sent to:
If to the Indemnitee:
If to Indemnitor: 1521 Locust Street, 6th Floor
Philadelphia, PA 19102
Any party may change the address to which notice is to be sent or delivered by
written notice to the other parties.
15.2 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland without giving
effect to principles of conflicts of law.
15.3 Assignment. This Agreement may not be assigned by any
party.
15.4 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original but all
of which taken together shall constitute one and the same instrument.
15.5 Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect.
15.6 Entire Agreement. This Agreement contains the entire
agreement and understanding between the Indemnitors and the Indemnitee with
respect to the indemnification of the Indemnitee by the Indemnitors as
contemplated hereby, and no representations, promises, agreements or
understandings, written or oral, not herein contained shall be of any force or
effect. This Agreement shall not be changed unless in writing and signed by both
the Indemnitee and the Indemnitors.
[SIGNATURES CONTAINED ON FOLLOWING PAGE]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first above written.
RESOURCE ASSET INVESTMENT TRUST
By: _______________________________________
Name:
Title:
RAIT LIMITED, INC.
By: _______________________________________
Name:
Title:
RAIT GENERAL, INC.
By: _______________________________________
Name:
Title:
RAIT PARTNERSHIP, L.P.
By: RAIT General, Inc., General
Partner
By: _____________________________
Name:
Title:
INDEMNITEE
__________________________________________
(Name)
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<PAGE>
LOAN PURCHASE AND SALE AGREEMENT
THIS LOAN PURCHASE AND SALE AGREEMENT ("Agreement") dated this ___ day
of ______________, 199_ is by and between RAIT PARTNERSHIP, L.P., a Delaware
limited partnership ("Buyer") and _________________________, a
__________________________ ("Seller").
BACKGROUND
A. Seller is the lawful owner of a loan (the "Loan") made by Seller on
or about _______________, 199_ to _________________________ ("Borrower"), which
Loan is evidenced by a promissory note dated _______________, 199_ and any and
all extensions or modifications thereto (the "Note"), and is secured by, inter
alia, a Mortgage and Security Agreement from Borrower to Seller also dated
_______________, 199_ and any and all extensions or modifications thereto (the
"Mortgage"), which Mortgage creates a lien in favor of Seller on Borrower's real
property located at __________________________ (the "Property"). The Loan is
further evidenced and/or secured by the other documents, instruments and
agreements listed on Exhibit "A" hereto, which Exhibit "A" is incorporated
herein. The Note, the Mortgage and other documents, instruments and agreements
listed on Exhibit "A" are hereinafter referred to in this Agreement as the "Loan
Documents."
B. Buyer desires to purchase from Seller, and Seller desires to sell
and assign to Buyer, the Loan and Loan Documents, subject to the terms and
conditions contained in this Agreement.
TERMS
NOW THEREFORE, in consideration of the premises and the mutual
agreements set forth herein, and intending to be legally bound, Seller and Buyer
agree as follows:
1. Agreement to Sell and Purchase. Seller agrees to sell and assign to
Buyer, and Buyer agrees to purchase and assume from Seller, all of Seller's
right, title and interest in and to the Loan and Loan Documents, on the terms
and conditions set forth herein. Seller will also sell and assign to Buyer all
of Seller's right, title and interest in and to title insurance policy (the
"Title Policy") Number _________________, issued by _______________________
Title Insurance Company on or about _______________, 199_ insuring certain of
the Loan Documents securing the Loan.
2. Purchase Price. The purchase price (the "Purchase Price") for the
Loan, Loan Documents and Title Policy shall be the sum of
________________________________ Dollars ($_____________) payable at Closing (as
defined in Section 5 of this Agreement) by wire transfer of immediately
available funds.
3. Representations and Warranties of Seller. Seller hereby represents
and warrants to Buyer as of the date hereof, or as of such other date as is
specifically provided below, that each of the representations and warranties set
forth below is true and correct with respect to the Loan:
<PAGE>
(a) Authority. Seller is a corporation organized, and in good
standing, under the laws of the State of Delaware and is authorized to conduct
business in each jurisdiction in which it conducts business and has full power
and authority, and has taken all action necessary, to execute and deliver this
Agreement and any and all other documents required to be executed or delivered
by Seller in connection with this Agreement and to fulfill Seller's obligations
under, and to consummate the transactions contemplated by, this Agreement.
(b) Legally Valid and Binding. This Agreement constitutes the
legal, valid and binding obligation of Seller enforceable against Seller in
accordance with its terms (subject to bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally).
(c) No Consent Required. Neither the execution, delivery and
performance of this Agreement nor the consummation of the transactions
contemplated hereby is prohibited by, or requires Seller to obtain any consent,
authorization, approval or registration under, any law, statute, rule,
regulation, judgment, order, writ, injunction or decree which is binding upon
Seller.
(d) Loan Balance. As of _______________, 199_, the total
outstanding balance of the Loan is $________________, consisting of
$________________ of principal, $_______________ of accrued and unpaid interest,
$________________ of late charges, penalties and default interest and
$______________ of other costs and expenses assessable to Borrower under the
Loan Documents.
(e) Sole Owner; Authority to Sell. Except as otherwise
disclosed by Seller to Buyer, immediately prior to the sale of the Loan to
Buyer, Seller will be the sole owner of, and will have good and marketable title
to, the Loan, subject to no lien, adverse claim, participation interest,
security interest, pledge, charge or other encumbrance. On the Closing Date, the
Loan will be duly and validly assigned by Seller to the Buyer, the related Note
will be endorsed and delivered to the Buyer, together with the other Loan
Documents. Following the sale of the Loan, Buyer will own the Loan, free and
clear of any lien, adverse claim, security interest, pledge, charge or other
encumbrance.
(f) Sole Beneficiary. Immediately prior to the assignment of
the Loan to the Buyer, Seller will be the sole beneficiary of the rights
thereunder, subject to no other claim whatsoever, except for such participation
interests which shall have been disclosed by Seller to Buyer. Following the
assignment of the Loan, Seller will be the sole beneficiary of the rights
thereunder, except for such participation interests which shall have been
disclosed by Seller to Buyer.
(g) No Right to Modify. Seller intends to relinquish all of
its rights to possess, control and monitor the Loan sold pursuant to this
Agreement. After the Closing Date, Seller will have no right to modify or alter
the terms of the sale of the Loan and Seller will have no right to repurchase
the Loan.
(h) Loan Documents. Exhibit "A" attached hereto accurately
sets forth all written documents entered into and/or held by Seller with respect
to the Loan. Seller has delivered, or no later than the Closing Date will
deliver, to the Buyer each of the Loan Documents.
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<PAGE>
(i) Compliance with Applicable Laws. To the best of Seller's
knowledge, the Loan, and all parties and procedures involved in the servicing of
the Loan, complies with, or is exempt from, applicable state or federal laws,
regulations and other requirements pertaining to usury, equal credit opportunity
or disclosure laws applicable to the Loan.
(j) Servicing and Collection Is Legal. In connection with the
servicing or collection of the Loan, there is no agreement for Seller to pay any
fee or other amount to any third party, and no agreement for any third party to
pay any fee or other amount to Seller other than as disclosed in writing to, and
approved by, Buyer.
(k) No Defenses. To the best of Seller's knowledge, the Note
and the related Loan Documents (i) are not subject to any offset, abatement,
diminution, defense or counterclaim (including the defense of usury), and (ii)
no such right of rescission, offset, abatement, diminution, defense or
counterclaim has been asserted in favor of the Borrower against Seller.
(l) Documents Valid. To the best of Seller's knowledge, the
Note, and each of the Loan Documents and other agreements delivered in
connection therewith, is the legal, valid and binding obligation of the maker,
Borrower, guarantor or other party executing such document, enforceable in
accordance with its terms, except as such enforcement may be limited by
bankruptcy, insolvency, reorganization, receivership, moratorium or other laws
relating to or affecting the rights of creditors generally and by general
principles of equity regardless of whether such enforcement is considered in a
proceeding in equity or at law. To the best of Seller's knowledge, all other
parties executing documents evidencing, securing or guaranteeing the Loan had
legal capacity and proper authority and power to enter into such documents.
(m) Assignment of Loan. If requested by Buyer, any assignment
of any of the Loan Documents which is a recorded document, will be delivered in
recordable form. The endorsement of the Note constitutes the legal, valid and
binding assignment of such Note, and together with the assignment of the other
Loan Documents, if any, legally and validly conveys all right, title and
interest of Seller in and to the Loan to Buyer.
(n) Liens. Each Property is free and clear of all encumbrances
and liens except for (i) any liens which Seller shall have disclosed to Buyer,
(ii) liens for real estate taxes and special assessments not yet due and
payable, (iii) covenants, conditions and restrictions, rights of way, easements
and other matters of public record as of the date of recording of the most
recently recorded Mortgage on the Property, such exceptions appearing of record
being acceptable to mortgage lending institutions generally, and (iv) exceptions
and exclusions specifically referred to in the title commitment or attorney's
opinion of title contained in Seller's mortgage loan files. Except for claims
described in clauses (i) through (iv) of this paragraph, no party has made a
claim to the Seller, nor notified the Seller that such party believes there to
be a claim, which claim would impair the priority of the lien against the
Property created by the Loan Documents or impair the collectibility of the Loan.
(o) Lien on Personal Property. To the best of Seller's
knowledge, all furniture, fixtures, equipment, inventory, accounts, general
intangibles and all other
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<PAGE>
personal property of the Borrower owned or used in connection with the operation
of the Property are subject to:
1. a lien or security interest created by (A) the
Mortgage or (B) a security agreement, assignment of leases and/or rents, chattel
mortgage or equivalent document related to or delivered in connection with the
Loan in those jurisdictions in which the mortgage cannot include such property,
in accordance with practices which are customary among prudent mortgage lenders;
and
2. a Uniform Commercial Code financing statement or
statements filed and/or recorded (or sent for filing and/or recording on the
Closing Date) in all places necessary to perfect a valid lien thereon.
(p) No Modification, Release or Satisfaction. To the best of
Seller's knowledge, and except as specifically disclosed by Seller to Buyer, no
material terms of the Loan Documents have been waived, modified, altered,
satisfied, canceled in any respect or rescinded.
(q) No Taxes, Assessments or Liabilities. To the best of
Seller's knowledge, all taxes and governmental charges and assessments affecting
Loan Documents, the Property, all insurance premiums and all water, sewer and
municipal charges that prior to the related Closing Date became due, payable and
owing and that by filing of a notice or other appropriate instrument by a
governmental agency could become a lien upon the Property, have been paid, or an
escrow of funds in an amount sufficient to cover such payments has been
established.
(r) Liabilities. To the best of Seller's knowledge there does
not exist for Seller any cost, expense (including reasonable attorneys' fees and
expenses), claim, loss, commitment, liability and obligation, accrued or
contingent (each a "Liability"), now or hereafter arising from or related to the
ownership, use, possession, enjoyment or operation of any Loan, Loan Documents
or the Property, including, without limitation, any Liability related to (i) the
management or operation of the Loan, Loan Documents or the Property, (ii) any
claim or commencement of any action or proceeding by a third party asserting any
liability or damage relating to the Mortgage, Loan Documents or Property based
on any actual or alleged act or omission (including any actual or alleged
negligence or misconduct or any breach of contract) of Seller or any affiliate
of either or any of its agents or employees, (iii) set-aside letters or
performance guaranties with respect to the Mortgage, Loan Documents or the
Property, or (iv) legally binding commitments (whether conditional or
unconditional, and regardless of whether any applicable conditions are capable
of being or are likely to be satisfied) with respect to the advance of funds in
connection with the Loan, including, without limitation, commitments with
respect to the advance of additional loans, the issuance of letters of credit,
the advancement of funds upon a drawing under any outstanding letters of credit
and any other unfunded commitments to extend credit.
(s) No Buy-downs or Third Party Advances. Seller has not,
directly or indirectly, advanced funds to any third party, or received any
advance of funds by a third party other than the Borrower for the payment of any
amount required by the Note, the Loan Documents or the Mortgage.
(t) No Condemnation or Damages. To the best of Seller's
knowledge,
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<PAGE>
there is no proceeding pending, or to Seller's knowledge threatened,
for the total or partial condemnation of Property or any part thereof. To the
best of Seller's knowledge, the Property is lawfully used and occupied under
applicable law by the owner thereof and/or by the tenants under leases.
(u) No Mechanics' Liens. To the best of Seller's knowledge,
the Property is free and clear of any mechanics' and materialmen's liens or
liens in the nature thereof, and, to the best of Seller's knowledge, no rights
are outstanding that under law could give rise to any such liens.
(v) Borrower Properly Licensed and in Compliance With Terms of
Loan Documents. To the best of Seller's knowledge, on the Closing Date, the
Borrower was in possession of all material licenses, permits and other
authorizations necessary and required by applicable law for the conduct of its
business; and all such licenses, permits and authorizations were valid and in
full force and effect. To the best of Seller's knowledge, all conditions on the
Borrower's part to be fulfilled under the terms of any lease of the Property
have been satisfied.
(w) Compliance with Laws. To the best of Seller's knowledge,
the Property is in compliance with and lawfully used under any applicable
zoning, building, safety or environmental law, ordinance or regulation and all
inspections, licenses and certificates required, whether by law, regulation or
insurance standards to be made or issued with respect to the Property and with
respect to the use and occupancy of the same, including but not limited to
certificates of occupancy and fire underwriter certificates, have been made by
or issued by the appropriate governmental or quasi-governmental authorities or
other authorities having jurisdiction over the Property, and Seller has not
received notification from any governmental authority that the Property is in
material noncompliance with such laws or regulations, is being used, operated or
occupied unlawfully or has failed to have or obtain such inspection, licenses or
certificates, as the case may be. Seller has not received notice of any
violation or failure to conform with any such law, ordinance, regulation,
standard, license or certificate.
(x) Title Insurance. The Mortgage is covered by a Title
Policy. To the best of Seller's knowledge, neither Seller, nor any other person
has done, by act or omission, anything, nor is there any fact, that would
materially impair the coverage of any such Title Policy. Such Title Policy:
1. is the ALTA form current at the time such Title
Policy was issued (or such comparable form as is customarily accepted, by
prudent lending institutions in the jurisdiction in which the subject real
property is located) with appropriate endorsements;
2. is in full force and effect, is freely assignable
and will inure to the benefit of the Buyer. Such Title Policy insures the Seller
for the original principal amount of the Loan after all advances of principal;
and
3. ensures that the Property complies in all material
respects with all covenants, conditions, restrictions and other matters shown in
said Title Policy, and the violation of any such matters would not cause a
forfeiture or reversion of title.
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<PAGE>
(y) Hazard Insurance. On the Closing Date the Property was
insured by a fire and extended perils insurance policy, issued by a qualified
insurer, providing coverage against loss or damage sustained by reason of fire,
lightning, windstorm, hail, explosion, riot, riot attending a strike, civil
commotion, aircraft, vehicles and smoke, and, to the extent required as of the
date of origination by Seller consistent with its normal commercial mortgage
lending practices, against earthquake and other risks insured against by Persons
operating like properties in the locality of the Property, in an amount not less
than the greatest of (i) one hundred percent (100%) of the replacement cost of
all improvements to the Property, (ii) the outstanding principal balance of the
Loan, or (iii) the amount necessary to avoid the operation of any co-insurance
provisions with respect to the Property, and consistent with the amount that
would have been required as of the date by a commercial bank in its normal
commercial mortgage lending activities with respect to similar properties in the
same locality. "Replacement cost" means the amount determined by a third-party
appraiser to be the replacement cost of such improvements, as reported in the
most recent appraisal of the Property. All such insurance policies
(collectively, the "hazard insurance policy") contain a standard mortgagee
clause naming Seller, its successors and assigns as mortgagee, are not
terminable and may not be reduced without thirty (30) days' prior written notice
to the mortgagee. All premiums on such insurance policies due and payable prior
to the Closing Date have been paid. Such insurance policies require prior notice
to Seller of termination or cancellation, and no such notice has been received.
The Mortgage, obligates the Borrower to maintain all such insurance and, at such
Borrower's failure to do so, authorizes the mortgagee to maintain such insurance
at the Borrower's cost and expense and to seek reimbursement therefor from such
Borrower.
(z) Property Leased to Tenants. To the best of Seller's
knowledge (i) the related Property is not subject to any leases other than the
leases ("Leases") described in the rent roll contained in the Seller's loan
files, and such rent roll is accurate and complete in all material respects,
including description of the rent and term and any extraordinary rights of
tenants (such as option rights of first refusal and rights of termination), and
(ii) no person has any possessory interest in the Property or right to occupy
the same except under and pursuant to the provisions of the Leases.
(aa) Leases Are Subject to Mortgage. To the best of Seller's
knowledge:
1. the Borrower is the owner of the fee interest in
the Property which is the subject of any Lease and owner and holder of the
landlord's interest under any Lease for use and occupancy of all or any portion
of the Property;
2. each Lease that is a commercial lease of all or
any portion of the Property is subordinate to the Mortgage unless otherwise
approved in writing by Buyer;
3. with respect to any Lease having the benefit of a
non- disturbance or similar recognition agreement, the totality of the
circumstances and conditions with respect to the Mortgage, the Property, the
Borrower, each of the tenants (alone or considered with other tenants) of the
Property, or the Borrower's or any tenant's credit standing, would not generally
cause prudent mortgage lenders making loans similar to the Loan in the area in
which the Property is located to consider it imprudent to grant such
nondisturbance or similar recognition agreement;
4. with respect to the Property, there are no prior
assignments of
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<PAGE>
the Leases, landlord's interest under those Leases or any portion of the rents,
additional rents, charges, issues, profits or accounts due and payable or to
become due and payable thereunder (hereinafter collectively referred to as the
"Rents") which are now outstanding and have priority over the Mortgage or any
assignment of leases, rents and profits contained in the Loan Documents except
as given in connection with the Loan; and
5. with respect to the Property, an assignment of
leases and/or rents and any security agreement, chattel mortgage or equivalent
document related to and delivered in connection with the Loan have been recorded
concurrently with the Mortgage (except where prudent lending practices do not
require such recording) and establish and create valid and enforceable perfected
liens on and security interests in the Borrower's interest in the Leases and
Rents thereunder.
(bb) Commercial Tenants' Leases. With respect to the Leases,
to the best of Seller's knowledge:
1. each such Lease is in full force and effect;
2. no construction, alteration or other tenant
improvement work remains to be paid for or to be performed by or on behalf of
the Borrower under any such Lease;
3. the term of each such Lease has commenced, the
tenant thereunder is occupying the space demised to it and has commenced the
payment of Rent, and no tenant has paid Rent for more than one (1) month in
advance (except as a security deposit);
4. there is no default under any such Lease on the
part of the Borrower that remains uncured;
5. all brokerage and leasing commissions payable by
reason of such Leases were fully paid, and no further brokerage or leasing
commission will become payable by reason of such Leases or the exercise of any
options thereunder (other than leasing commissions payable upon exercise of
renewal or expansion options under lease brokerage agreements clearly identified
in writing to Buyer);
6. the Borrower has no obligation, directly or
indirectly, to find substitute space for any present tenants, former tenants or
other persons, or to take over or pay Rent on behalf of any present tenants,
former tenants or other persons for any space in any other buildings;
7. each tenant has performed its material obligations
to be performed on or before the Closing Date under the Lease to which it is a
party, and, except as may be disclosed in the rent roll, and each tenant is not
otherwise in material default under such Lease;
8. no Lease contains any option to purchase, any
right of first refusal to lease or purchase, any right to terminate the Lease or
vacate the premises prior to expiration of the lease term, except as otherwise
disclosed by Seller to Buyer.
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<PAGE>
(cc) Default, Material and Acceleration. There is no default,
breach, violation or event of acceleration existing under the Mortgage or the
Note, and, to the best of Seller's knowledge, no event (other than payments due
but not yet delinquent) which, with the passage of time or with notice and the
expiration of any grace or cure period, would constitute a default, breach,
violation or event of acceleration. Seller has not waived any material default,
breach, violation or event of acceleration of any of the foregoing, and,
pursuant to the terms of the Loan, no person other than the holder of the Note
may declare an event of default or accelerate the related indebtedness under the
Loan. To the best of Seller's knowledge, the Borrower is not in default in
payment of or any other material obligation under any other debt obligation owed
or owing to Seller or any affiliate of Seller. The Note is not currently
delinquent.
(dd) No Fraud. Neither Seller nor any of its officers,
employees or agents has participated in or condoned any fraud in connection with
the servicing of the Loan, and in originating and underwriting the Loan, to the
best of Seller's knowledge, no fraud was committed against it.
(ee) Other Facts Known to Seller. To the best of Seller's
knowledge, no statement, report, form, document, or other information prepared
by Seller or any affiliate of Seller, and to Seller's knowledge, no statement,
report, form, document or other information prepared or furnished by any other
party in connection with this Agreement or in connection with the transactions
contemplated hereby contains any untrue statement of fact or omits to state a
fact necessary to make the statements contained therein not misleading.
(ff) No Notice of Bankruptcy. Seller has not been served with
notice that Borrower is a debtor in any state or federal bankruptcy or
insolvency proceeding.
(gg) Deed of Trust. If the Mortgage is a deed of trust, a
trustee, duly qualified under applicable law to serve as such has either been
properly designated and currently so serves or may be substituted in accordance
with applicable law. Except in connection with a trustee's sale after default by
the Borrower, no fees or expenses are payable by the beneficiary of such deed of
trust to such trustee.
(hh) True Sale. Seller shall record its transfer of the Loan
to Buyer as a sale of its interest therein under generally accepted accounting
principles. Seller shall also report the transfer as a sale in all financial
statements and reports to regulatory and supervisory agencies and authorities to
which it reports, if any. For federal income tax purposes, Seller will treat the
transfer of the Loan as a sale.
4. Representations and Warranties of Buyer. Buyer hereby represents and
warrants to Seller as of the date hereof, or as of such other date as is
specifically provided below, that each of the representations and warranties set
forth below is true and correct with respect to the Loan:
(a) Authority. Buyer is a limited partnership organized, and
in good standing, under the laws of the State of Maryland and has full power and
authority, and has taken all action necessary, to execute and deliver this
Agreement and any and all other documents required to be executed or delivered
by Buyer in connection with this Agreement and to fulfill Buyer's obligations
under, and to consummate the transactions contemplated by, this Agreement.
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<PAGE>
(b) Legally Valid and Binding. This Agreement constitutes the
legal, valid and binding obligation of Buyer enforceable against Buyer in
accordance with its terms (subject to bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally).
(c) No Consent Required. Neither the execution, delivery and
performance of this Agreement nor the consummation of the transactions
contemplated hereby is prohibited by, or requires Buyer to obtain any consent,
authorization, approval or registration under, any law, statute, rule,
regulation, judgment, order, writ, injunction or decree which is binding upon
Buyer.
5. Limitation on Seller's Representations and Warranties. Buyer
acknowledges and agrees that, except as expressly set forth in Section 3 of this
Agreement, Seller is making no representation or warranty regarding the Loan,
any of the Loan Documents, Borrower or the Property, including, without
limitation, any representation or warranty with respect to (i) the business or
financial or other condition of Borrower, (ii) the monetary value or the
physical condition of the Property, (iii) the status, payment or nonpayment of
any real estate taxes or assessments with respect to the Property, (iv) the
state of title to the Property, or (v) the leases, rents, income or expenses of
the Property.
6. No Reliance on Seller. In entering into this Agreement and in
purchasing the Loan and Loan Documents, Buyer has not relied upon any oral or
written information from Seller, or any of its employees, affiliates, agents or
representatives, other than the representations and warranties of Seller
expressly set forth in Section 3 of this Agreement. Buyer further acknowledges
that no officer, employee or representative of Seller has been authorized to
make, and that Buyer has not relied upon, any statements or representations
other than those specifically contained in Section 3 of this Agreement. Without
limiting the generality of the foregoing, no appraisal, tax status report,
environmental audit reports or any document prepared by Borrower and provided by
Seller to Buyer shall be deemed a representation or warranty by Seller as to any
of the information contained therein.
7. Closing. The closing (the "Closing") of the transaction described
herein shall be consummated on _______________, 199_ (the "Closing Date"), at
the offices of Seller, 1521 Locust Street, Philadelphia, Pennsylvania 19102, or
at such other place and/or time as the parties may hereafter agree to in
writing.
(a) Seller shall deliver to Buyer at Closing, the following:
(i) The original Note, endorsed to Buyer pursuant to
a duly executed allonge in the form attached hereto as Exhibit "B";
(ii) The original Mortgage, and an executed
assignment thereof in the form attached hereto as Exhibit "C";
(iii) The original assignment of leases listed on
Exhibit "A", and an executed assignment thereof in the form attached hereto as
Exhibit "D";
(iv) An original counterpart of each other Loan
Document;
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<PAGE>
(v) Duly executed UCC-3 statements assigning to Buyer
the rights of Seller, as secured party, in and to any existing financing
statements;
(vi) The original Title Policy;
(vii) A notice of assignment of Loan addressed to the
Borrower in the form attached hereto as Exhibit "E"; and
(viii) A wire transfer of immediately available funds
to Buyer in an amount equal to all escrows, if any, then held by Seller (the
"Escrow Funds") and any account records reflecting amounts actually held in
escrow by Seller on the Closing Date, if any, for taxes, governmental
assessments, insurance premiums, water, sewer and municipal charges, deposits,
transferable security deposits, replacement reserves or other escrowed funds
relating to the Loan. Notwithstanding any other provision of this Agreement to
the contrary, Seller makes no representation or warranty with respect to the
amounts in any such escrows, but rather Seller agrees only to transfer such
amounts which are held by Seller as of the Closing Date. Buyer shall deliver, or
cause to be delivered, such documents evidencing the transfer and assignment of
the amounts in such escrows, as Seller and Seller's counsel may reasonably
require. All such Escrow Funds shall be held and applied by Buyer for their
designated purposes. Effective as of the Closing Date, Buyer hereby assumes all
of the obligations of Seller in connection with or arising out of such Escrow
Funds and accruing from and after the Closing Date and shall indemnify and hold
harmless Seller from and against any and all liabilities, claims, losses, costs
and expenses (including, without limitation, attorneys' fees and disbursements)
incurred by Seller and arising out of the Escrow Funds actually delivered to
Buyer. The provisions of the immediately preceding two (2) sentences shall
survive Closing and recordation of any assignments of any of the Loan Documents.
In each case where an original is required, if Seller does not have such
original, Seller will provide an affidavit of lost document in form customarily
acceptable to mortgage lenders.
Buyer shall bear sole responsibility for, and the cost of, recording all
mortgages, assignments, instruments and other documents delivered to Buyer at or
after the Closing.
(b) Buyer shall deliver to Seller at Closing a wire transfer
of the Purchase Price.
8. Future Assurances. Whenever reasonably requested to do so by the
other party, the Seller and the Buyer shall execute, acknowledge, and deliver
any and all such further conveyances, assignments, confirmations, satisfactions,
releases, instruments of further assurance, approvals, consents and any and all
such further instruments and documents as may be necessary in order to complete
any and all conveyances, transfers, sales and assignments herein provided, and
to do any and all acts reasonably requested in order to carry out the intent and
purpose of this Agreement.
9. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania without regard to
conflict of law principles.
10. Notices. All communications among the parties or notices in
connection with
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<PAGE>
this Agreement shall be in writing, hand-delivered or sent by
nationally recognized overnight courier, addressed to each party as follows:
To Seller: _____________________
_____________________
_____________________
Attention:____________________
To Buyer: RAIT Partnership, L.P.
c/o RAIT General, Inc.
1521 Locust Street, Suite 600
Philadelphia, PA 19102
Attention: Jay Eisner, President
All such communications and notices shall be effective upon receipt.
11. Time. Time is of the essence for all provisions of this Agreement.
12. Interpretation. The headings of the various sections of this
Agreement are for convenience only and shall not affect the meaning or
construction of any provisions hereof.
13. Entire Agreement. This Agreement (including all exhibits attached
hereto) is the final expression of, and contains the entire agreement between
the parties with respect to the entire subject matter hereof and supersedes all
prior understandings with respect hereto.
14. Counterparts. This Agreement may be executed in any number of
counterparts with the same effect as if all parties executed the same document.
All counterparts shall be construed together and shall constitute one and the
same agreement.
15. Amendments. This Agreement may not be modified, changed or
supplemented nor may any provision hereof be waived except in a writing signed
by the party to be charged with such change.
16. Severability. If any term or provision of this Agreement or
application thereof shall to any extent be invalid or unenforceable, the
remainder of this Agreement shall not be affected thereby and each term and
provision of this Agreement shall be valid and enforced to the fullest extent
permitted by law.
17. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors and assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first written above.
BUYER:
RAIT PARTNERSHIP, L.P., a Delaware limited
partnership
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<PAGE>
By: RAIT General, Inc., its general partner
By: ___________________________
Jay Eisner, President
SELLER:
[Name of Seller]
By:________________________________
Name:
Title:
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EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is executed this ___ day of
_______, 1997 by and between RESOURCE ASSET INVESTMENT TRUST, a Maryland real
estate investment trust (the "Company") and BETSY Z. COHEN (the "Executive").
WHEREAS, the Executive has been offered employment by the Company as
Chairman, Chief Executive Officer and Trustee (the "Office"); and
WHEREAS, the Executive wishes to be employed in the Office by the
Company; and
WHEREAS, the Company desires to assure the availability of the
Executive's services in the Office.
NOW, THEREFORE, in consideration of the premises and mutual obligations
hereinafter set forth the parties agree as follows:
1. Employment.
The Company hereby employs the Executive in the Office and the
Executive hereby accepts such employment, positions and responsibilities, and
agrees to serve the Company in such capacities upon the terms and conditions set
forth herein.
2. Services.
(a) The Executive will devote her best efforts, skills and abilities to
the business and affairs of the Company and its subsidiaries during the Term, it
being understood that the Executive has business interests separate and apart
from those of the Company and will be required to devote only such time to the
Company as is reasonably required to fulfill her duties hereunder. The
executive's services shall be performed within a reasonable commuting distance
of Philadelphia except for reasonable travel.
(b) The Executive's duties shall include such duties, authorities and
responsibilities as may be consistent with her Office, including, but not
limited to, the management and strategic planning of the Company. She shall have
the authority to hire and fire all Company personnel, to retain consultants when
she deems necessary to implement the Company's policies and to execute contracts
on behalf of the Company in the ordinary course of business.
(c) In carrying out her duties, the Executive shall report to and
accept direction from the Board of Trustees of the Company.
3. Term.
The Executive's employment hereunder shall continue in full force and
effect for a period of one (1) year, unless sooner terminated in accordance with
the provisions hereof.
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Such term shall automatically extend so that on any day that this Agreement is
in effect, it shall have a then current term of one (1) year (the "Contract
Period"). Such automatic extensions shall cease upon the Company's written
notice to the Executive of its election to terminate this Agreement at the end
of the one (1) year period then in effect. Subsequent to the initial one (1)
year term, Executive may terminate this Agreement upon not less than ninety (90)
days' notice to the Company.
4. Compensation.
(a) Base Salary. During the Contract Period, the Company shall pay to
the Executive a Base Salary of Two Hundred Fifty Thousand Dollars ($250,000) per
annum, payable in equal monthly installments. It is understood that the Company
will review annually and may, in the discretion of the Board of Trustees,
increase or decrease (but not below $250,000) the Base Salary, as adjusted, in
light of the Executive's performance and other factors. It is understood that
the Executive may perform other services for entities owned directly or
indirectly by the Company and the Base Salary shall be intended to compensate
for such services.
(b) Incentive Compensation Plan. During the Contract Period, the
Executive shall be eligible to receive bonus payments as determined by the
compensation committee of the Company. Payment of any such bonus shall be made
within fifteen (15) days of the receipt by the Company of its audited financial
statements for the preceding fiscal year, but in no event later than 105 days
after the end of the preceding fiscal year. In addition, Executive shall
receive, upon completion of the initial public offering of the Company, options
to acquire two hundred twenty-five thousand (225,000) shares of the Company's
stock at the initial offering price. Executive shall be eligible for further
grants of incentive stock options on an annual basis as determined by the
compensation committee of the Company, issuable simultaneously with the payment
of bonuses as described above.
5. Benefits.
During the period of employment, the Executive shall be entitled to
participate on a substantially equal basis as all other employees of the Company
in all employee benefit plans and arrangements now in effect or which may
hereafter be established and which are generally applicable to other employees
of the Company or any of its subsidiaries.
6. Termination.
Anything herein contained to the contrary notwithstanding, the
Executive's employment hereunder shall terminate as a result of any of the
following events:
(a) The Executive's death;
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(b) Termination by the Company, for Cause (as hereinafter defined).
"Cause" shall encompass the following: (i) material and willful misconduct of
the Executive in connection with the performance of any of her duties,
including, without limitation, misappropriation of funds or property of the
Company or any of its affiliates or securing or attempting to secure personally
any profit in connection with any transaction entered into on behalf of the
Company or any of its affiliates; (ii) conduct by the Executive that would
result in material injury to the reputation of the Company, if she were retained
in her position with the Company, by reason of conviction of a felony involving
any material conflict of interest or self dealing related to the Company, moral
turpitude, bankruptcy, insolvency or general assignment for the benefit of her
creditors; or (iii) continued, deliberate negligent performance or
non-performance by the Executive of her duties hereunder.
(c) The Executive becomes disabled by reason of any permanent
disability (defined as physical or mental inability, confirmed by a licensed
physician, to perform the essential functions of the services described herein)
for more than one hundred eighty (180) days in the aggregate during any 365-day
period (a "Disability"); or
(d) Termination by the Executive for "Good Reason" upon forty-five (45)
days' prior written notice to the Company. "Good Reason" shall mean the
occurrence of any of the following events: (i) relocation in contravention of
Paragraph 2 of this Agreement; (ii) a Change in Control (as defined
hereinafter); (iii) without the written consent of the Executive, a substantial
change in the services or duties required of the Executive hereunder or the
imposition of any services or duties substantially inconsistent with, or in
diminution of, the Executive's position, services or duties, or status with the
Company; (iv) failure to continue the Executive's coverage under any benefit
plan as required under paragraph 5 except pursuant to a change to a benefit plan
that applies to senior executives of the Company generally or is required by law
or regulation; or (v) any material breach by the Company of any provision of
this Agreement; provided, however, that Termination by the Executive for Good
Reason shall be effective only if such failure has not been cured to the
Executive's reasonable satisfaction within thirty (30) days after notice of such
failure has been given to the Company. If notice has been given under the
previous sentence for a failure of the Company, the Executive may terminate this
Agreement for Good Reason without further notice in the case of a similar
failure.
For the purposes of this subparagraph 6(d), "Change in Control" means
the occurrence of any of the following events:
i) any person, corporation, partnership or
unincorporated association (each a "Person") or Persons acting together,
excluding employee benefit plans of the Company, are or become the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act or any
successor provisions thereto), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the combined voting power of
the Company's then outstanding securities;
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ii) the Company's shareholders approve (or, in the
event no approval of the Company's shareholders is required, the Company
consummates) a merger, consolidation, share exchange, division or other
reorganization or transaction of the Company (a "Fundamental Transaction") with
any other entity, other than a Fundamental Transaction which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least sixty percent (60%) of
the combined voting power immediately after such Fundamental Transaction of (a)
the Company's outstanding securities, (b) the surviving entity's outstanding
securities, or (c) in the case of a division, the outstanding securities of each
entity resulting from the division;
iii) the shareholders of the Company approve a plan
of complete liquidation or winding-up of the Company or an agreement for the
sale or disposition (in one transaction or a series of transactions) of all or
substantially all of the Company's assets; or
iv) during any period of twenty-four (24) consecutive
months, individuals who at the beginning of such period constituted the
Company's Board (including for this purpose any new director whose election or
nomination for election by the Company's shareholders was approved by a vote of
at least two-thirds (2/3) of the directors then still in office who were
directors at the beginning of such period) cease for any reason to constitute at
least a majority of the Board.
7. Consideration Payable to Executive Upon Termination or in the
Event of Disability.
(a) During any period that the Executive fails to perform her duties
hereunder as a result of incapacity due to Permanent Disability ("Disability
Period"), the Executive shall continue to receive her full salary at the rate
then in effect for such period until her employment is terminated pursuant to
subparagraph 6(c) hereof (together with her bonus, so long as any such
disability is for less than sixty (60) days in the aggregate in any bonus year),
provided that payments so made to the Executive shall be reduced by the sum of
the amounts, if any, payable to the Executive at or prior to the time of any
such payment under disability benefits of the Company and which were not
previously applied to reduce any such payment.
(b) If the Executive's employment shall terminate pursuant to
subparagraph 6(b), the Executive shall receive her full Base Salary, together
with all benefits required pursuant to paragraph 5, through the date of
termination, but shall not be entitled to receive any additional payments,
benefits or compensation otherwise due subsequent to the date of termination.
(c) If the Executive's employment by the Company under this Agreement
shall be terminated for "Good Reason" as specified under subparagraph 6(d), or
pursuant to subparagraphs 6(a) or 6(c) hereof, the Company shall pay to the
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Executive (or Executive's estate, if applicable) a lump sum severance payment,
in cash, without discount, in an amount equal to the sum of (i) Executive's
Average Compensation, multiplied by (ii) the number of years, or fraction
thereof, remaining under the term hereof. For the purposes of this subparagraph
7(c), "Average Compensation" shall mean the average of the three highest annual
total compensation received by the Executive during any of the then current
calendar year (on an annualized basis) and the then preceding five (5) calendar
years during which the Executive was employed by the Company for the entire
calendar year. If the Executive has been employed for fewer than three years,
Average Compensation shall be the Executive's highest compensation during any
consecutive 12 month period. The Executive shall not be required to mitigate the
amount of any payment provided for in this subparagraph 7(c) by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for therein be reduced by any compensation of any retirement benefit heretofore
or hereafter earned by the Executive as the result of employment by any other
person, firm or corporation.
(d) Upon termination of this Agreement pursuant to subparagraphs 6(a),
6(b)(iii), 6(c) and 6(d), the vesting of all options to purchase securities of
the Company granted to the Executive during her employment with the Company
shall be accelerated to the later of the effective date of termination of this
Agreement, or six months after the date the option was granted, and any
provision contained in the agreements under which such options were granted that
is inconsistent with such acceleration is hereby modified to the extent
necessary to provide for such acceleration; such acceleration shall not apply to
any option that by its terms would vest prior to the date provided for in this
subparagraph 7(d).
8. Confidential Information.
All confidential information or trade secrets which the Executive
currently has or may obtain during the period of employment relating to the
business of the Company and its affiliates shall not be published, disclosed, or
made accessible by her to any other person, firm, or corporation except in the
business and for the benefits of the Company and its affiliates. The provisions
of this paragraph 8 shall survive the termination of this Agreement, but shall
not apply to any information which is or becomes publicly available otherwise
than by any breach of this paragraph 8.
9. Covenant Not to Compete.
The Executive shall not, for a period of one (1) year following the
termination of Executive's employment with the Company, for whatever reason,
without the prior written consent of the Company, engage in direct or indirect
competition with the Company or with any mortgage Real Estate Investment Trust
focusing on subordinate financing. For purposes of this paragraph, "engage"
shall include the Executive's acting as an owner (of more than 10%), employee,
shareholder, consultant, director or officer, directly or indirectly, of an
entity so engaged.
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10. Remedies in Case of Breach of Certain Covenants or Termination.
The Company and the Executive agree that the damages that may result to
the Company from misappropriation of confidential information or competition as
prohibited by paragraphs 8 and 9 could be estimated only by conjecture and not
by any accurate standard, and, therefore, any breach by the Executive of the
provisions of such paragraphs, in addition to giving rise to monetary damages,
will be enjoined.
11. Representations and Warranties.
(a) The Executive represents and warrants to the Company that she is
under no contractual or other restriction or obligation which would prevent the
performance of her duties hereunder, or which interfere with the rights of the
Company hereunder. The Executive represents and agrees that she has no
agreements or arrangements with the Company or any of its affiliates providing
for the compensation of the Executive in any respect other than as set forth in
this Agreement.
(b) The Company represents and warrants to the Executive that it has
all requisite power and authority to execute, deliver, and perform this
Agreement and all necessary' corporate proceedings of the Company have been duly
taken to authorize the execution, delivery, and performance of this Agreement by
the Company.
12. Indemnification.
(a) If the Executive is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (herein a "Proceeding"), by reason of
the fact that she is or was an employee (which term includes officer, director,
agent and any other capacity) of the Company or is or was serving at the request
of the Company as an employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such Proceeding is
alleged action in an official capacity as an employee or agent or in any other
capacity while serving as an employee or agent, the Executive shall be
indemnified and held harmless by the Company to the fullest extent authorized by
the Maryland General Corporation Law, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification rights than
said law permitted the Company to provide prior to such amendment), against all
expense, liability and loss (including, but not limited to, attorneys' fees,
judgments, fines, ERISA excise taxes and penalties and amounts paid or to be
paid in settlement) incurred or suffered by the Executive in connection
therewith and such indemnification shall continue as to the Executive after she
has ceased to be a director, officer, employee or agent and shall inure to the
benefit of the Executive's heir, executors, and administrators; provided,
however, that the Company shall indemnify any such person seeking
indemnification in connection with a Proceeding (or part thereof) initiated by
the Executive (other than a proceeding to enforce this Section 12) only if
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such Proceeding (or part thereof) was authorized directly or indirectly by the
Board of the Company. The right to indemnification conferred in this
paragraph shall be a contract right and shall include the right to be promptly
upon request, paid by the Company the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that if the
Maryland General Corporation Law requires the payment of such expenses incurred
by an employee in her capacity as an employee (and not in any other capacity in
which service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, payment shall be made only upon
delivery to the Company of an undertaking, by or on behalf of the Executive, to
repay all amounts so advanced if it shall ultimately be determined that such
employee is not entitled to be indemnified under this paragraph or otherwise.
(b) The indemnification provided by this Paragraph 12 shall not be
limited or exclude any rights, indemnities or limitations of liability to which
the Executive may be entitled, whether as a matter of law, under the Trust
Agreement or Bylaws of the Company, by agreement, vote of the stockholders or
disinterested directors of the Company or otherwise.
(c) The Executive (an "Indemnitee"), in seeking indemnification under
this Agreement, shall give the Company (the "Indemnitor") prompt written notice
of any claim, suit or demand that the Indemnitee believes will give rise to
indemnification under this Agreement; provided, however, that the failure to
give such notice shall not affect the liability of the Indemnitor under this
Agreement unless the failure to give such notice materially and adversely
affects the ability of the Indemnitor to defend itself against or to cure or
mitigate the damages. Except as hereinafter provided, the Indemnitor shall have
the right (without prejudice to the right of the Indemnitee to participate at
its expense through counsel of its own choosing) to defend and to direct the
defense against any such claim, suit or demand, at the Indemnitor's expense and
with counsel chosen jointly by Indemnitor and Indemnitee, and the right to
settle or compromise any such claim, suit or demand; provided, however, that the
Indemnitor shall not, without the Indemnitee's written consent, which shall not
be unreasonably withheld, settle or compromise any claim or consent to any entry
of judgment. The Indemnitee shall, at the Indemnitor's expense, cooperate in the
defense of any such claim, suit or demand. If the Indemnitor, within a
reasonable time after notice of a claim fails to defend the Indemnitee, the
Indemnitee shall be entitled to undertake the defense, compromise or settlement
of such claim at the expense of and for the account and risk of the Indemnitor.
(d) The Executive will be covered during the entire term of this
Agreement by Officer and Director liability insurance in amounts and on terms
similar to that afforded to other executives of the Company or its affiliates,
which such insurance shall be paid by the Company.
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(e) The provisions of this paragraph 12 shall survive termination of
this Agreement, unless Executive's employment with the Company is terminated for
cause.
13. Severability.
In case any one or more of the provisions contained herein shall, for
any reason, be held to be invalid, illegal, or unenforceable in any respect such
validity, illegality or unenforceability shall not affect any other provisions
of this Agreement, and this Agreement shall be construed as if such invalid,
illegal or unenforceable provision(s) had never been contained herein, provided
that such invalid, illegal or unenforceable provision(s) shall first be
curtailed, limited or eliminated only to the extent necessary to remove such
invalidity, illegality or unenforceability with respect to the applicable law as
it shall then be applied.
14. Modification Agreement.
This Agreement shall not be modified by any oral agreement, either
expressed or implied, and all modifications thereof shall be in writing and
signed by the parties hereto.
15. Waiver.
The waiver of any right under this Agreement by any of the parties
hereto shall not be construed as a waiver of the same right at a future time or
as a waiver of any other rights under this Agreement.
16. Governing Law.
This Agreement shall be governed by and construed in accordance with
the internal laws of the Commonwealth of Pennsylvania, without giving affect to
the principles of conflicts of laws.
17. Notices.
Any notice to be given pursuant to this Agreement shall be sufficient
if in writing and mailed by certified or registered mail, postage-prepaid, to
the addresses listed below:
If to Company:
Resource Asset Investment Trust
1521 Locust Street, Sixth Floor
Philadelphia, Pennsylvania 19102
If to Executive:
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IN WITNESS WHEREOF, the parties hereto have executed or caused to be
executed this Agreement as of the date first written above.
RESOURCE ASSET INVESTMENT TRUST
By: ____________________________
Daniel Promislo, Trustee
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BETSY Z. COHEN
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EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is executed this ___ day of
_______, 1997 by and between RESOURCE ASSET INVESTMENT TRUST, a Maryland real
estate investment trust (the "Company") and JAY J. EISNER (the "Executive").
WHEREAS, the Executive has been offered employment by the Company as
President and Chief Operating Officer (the "Office"); and
WHEREAS, the Executive wishes to be employed in the Office by the
Company; and
WHEREAS, the Company desires to assure the availability of the
Executive's services in the Office.
NOW, THEREFORE, in consideration of the premises and mutual obligations
hereinafter set forth the parties agree as follows:
1. Employment.
The Company hereby employs the Executive in the Office and the
Executive hereby accepts such employment, positions and responsibilities, and
agrees to serve the Company in such capacities upon the terms and conditions set
forth herein.
2. Services.
(a) The Executive will devote his best efforts, skills and abilities
and his full-time services and undivided attention during regular business hours
to the business and affairs of the Company and its subsidiaries during the Term.
The Executive's services shall be performed within a reasonable commuting
distance of Philadelphia except for reasonable travel.
(b) The Executive's duties shall include such duties, authorities and
responsibilities as may be consistent with his Office, including, but not
limited to, the management of the day-to-day operation of the Company. He shall
have the authority to hire and fire non- executive Company personnel, to retain
consultants when he deems necessary to implement the Company's policies and to
execute contracts on behalf of the Company in the ordinary course of business,
and such different duties as may be designated by the Chief Executive Officer of
the Company or the Board of Trustees.
(c) In carrying out his duties, the Executive shall report to and
accept direction from the Chief Executive Officer of the Company.
3. Term.
The Executive's employment hereunder shall continue in full force and
effect for a period of one (1) year, unless sooner terminated in accordance with
the provisions hereof.
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Such term shall automatically extend so that on any day that this Agreement is
in effect, it shall have a then current term of one (1) year (the "Contract
Period"). Such automatic extensions shall cease upon the Company's written
notice to the Executive of its election to terminate this Agreement at the end
of the one (1) year period then in effect. Subsequent to the initial one (1)
year term, Executive may terminate this Agreement upon not less than ninety (90)
days' notice to the Company.
4. Compensation.
(a) Base Salary. During the Contract Period, the Company shall pay to
the Executive a Base Salary of One Hundred Fifty Thousand Dollars ($150,000) per
annum, payable in equal monthly installments. It is understood that the Company
will review annually and may, in the discretion of the Board of Trustees,
increase or decrease (but not below $150,000) the Base Salary, as adjusted, in
light of the Executive's performance and other factors. It is understood that
the Executive may perform other services for entities owned directly or
indirectly by the Company and the Base Salary shall be intended to compensate
for such services.
(b) Incentive Compensation Plan. During the Contract Period, the
Executive shall be eligible to receive bonus payments as determined by the
compensation committee of the Board of Trustees. Payment of any such bonus shall
be made within fifteen (15) days of the receipt by the Company of its audited
financial statements for the preceding fiscal year, but in no event later than
105 days after the end of the preceding fiscal year. In addition, Executive
shall receive, upon completion of the initial public offering of the Company,
options to acquire seventy-five thousand (75,000) shares of the Company's stock
at the initial offering price. Executive shall be eligible for further grants of
incentive stock options on an annual basis as determined by the compensation
committee of the Board of Trustees, issuable simultaneously with the payment of
the bonuses as described above.
5. Benefits.
During the period of employment, the Executive shall be entitled to
participate on a substantially equal basis as all other employees of the Company
in all employee benefit plans and arrangements now in effect or which may
hereafter be established and which are generally applicable to other employees
of the Company or any of its subsidiaries.
6. Termination.
Anything herein contained to the contrary notwithstanding, the
Executive's employment hereunder shall terminate as a result of any of the
following events:
(a) The Executive's death;
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(b) Termination by the Company, for Cause (as hereinafter defined).
"Cause" shall encompass the following: (i) material and willful misconduct of
the Executive in connection with the performance of any of his duties,
including, without limitation, misappropriation of funds or property of the
Company or any of its affiliates or securing or attempting to secure personally
any profit in connection with any transaction entered into on behalf of the
Company or any of its affiliates; (ii) conduct by the Executive that would
result in material injury to the reputation of the Company, if he were retained
in his position with the Company, by reason of conviction of a felony involving
any material conflict of interest or self dealing related to the Company, moral
turpitude, bankruptcy, insolvency or general assignment for the benefit of his
creditors; or (iii) continued, deliberate negligent performance or
non-performance by the Executive of his duties hereunder.
(c) The Executive becomes disabled by reason of any permanent
disability (defined as physical or mental inability, confirmed by a licensed
physician, to perform the essential functions of the services described herein)
for more than one hundred eighty (180) days in the aggregate during any 365-day
period (a "Disability"); or
(d) Termination by the Executive for "Good Reason" upon forty-five (45)
days' prior written notice to the Company. "Good Reason" shall mean the
occurrence of any of the following events: (i) relocation in contravention of
Paragraph 2 of this Agreement; (ii) subsequent to a Change in Control (as
defined hereinafter) and without the written consent of the Executive, a
substantial change in the services or duties required of the Executive hereunder
or the imposition of any services or duties substantially inconsistent with, or
in diminution of, the Executive's position, services or duties, or status with
the Company; (iii) failure to continue the Executive's coverage under any
benefit plan as required under paragraph 5 except pursuant to a change to a
benefit plan that applies to senior executives of the Company generally or is
required by law or regulation; or (iv) any material breach by the Company of any
provision of this Agreement; provided, however, that Termination by the
Executive for Good Reason shall be effective only if such failure has not been
cured to the Executive's reasonable satisfaction within thirty (30) days after
notice of such failure has been given to the Company. If notice has been given
under the previous sentence for a failure of the Company, the Executive may
terminate this Agreement for Good Reason without further notice in the case of a
similar failure.
For the purposes of this subparagraph 6(d), "Change in Control" means
the occurrence of any of the following events:
i) any person, corporation, partnership or
unincorporated association (each a "Person") or Persons acting together,
excluding employee benefit plans of the Company, are or become the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act or any
successor provisions thereto), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the combined voting power of
the Company's then outstanding securities;
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ii) the Company's shareholders approve (or, in the
event no approval of the Company's shareholders is required, the Company
consummates) a merger, consolidation, share exchange, division or other
reorganization or transaction of the Company (a "Fundamental Transaction") with
any other entity, other than a Fundamental Transaction which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least sixty percent (60%) of
the combined voting power immediately after such Fundamental Transaction of (a)
the Company's outstanding securities, (b) the surviving entity's outstanding
securities, or (c) in the case of a division, the outstanding securities of each
entity resulting from the division;
iii) the shareholders of the Company approve a plan
of complete liquidation or winding-up of the Company or an agreement for the
sale or disposition (in one transaction or a series of transactions) of all or
substantially all of the Company's assets; or
iv) during any period of twenty-four (24) consecutive
months, individuals who at the beginning of such period constituted the
Company's Board (including for this purpose any new director whose election or
nomination for election by the Company's shareholders was approved by a vote of
at least two-thirds (2/3) of the directors then still in office who were
directors at the beginning of such period) cease for any reason to constitute at
least a majority of the Board.
7. Consideration Payable to Executive Upon Termination or in the
Event of Disability.
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to Permanent Disability ("Disability
Period"), the Executive shall continue to receive his full salary at the rate
then in effect for such period until his employment is terminated pursuant to
subparagraph 6(c)hereof (together with his bonus, so long as any such disability
is for less than sixty (60) days in the aggregate in any bonus year), provided
that payments so made to the Executive shall be reduced by the sum of the
amounts, if any, payable to the Executive at or prior to the time of any such
payment under disability benefits of the Company and which were not previously
applied to reduce any such payment.
(b) If the Executive's employment shall terminate pursuant to
subparagraph 6(b), the Executive shall receive his full Base Salary, together
with all benefits required pursuant to paragraph 5, through the date of
termination, but shall not be entitled to receive any additional payments,
benefits or compensation otherwise due subsequent to the date of termination.
(c) If the Executive's employment by the Company under this Agreement
shall be terminated for "Good Reason" as specified under subparagraph 6(d), or
pursuant to subparagraphs 6(a) or 6(c) hereof, the Company shall pay to the
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Executive (or Executive's estate, if applicable) a lump sum severance payment,
in cash, without discount, in an amount equal to the sum of (i) Executive's
Average Compensation, multiplied by (ii) the number of years, or fraction
thereof, remaining under the term thereof. For the purposes of this subparagraph
7(c) "Average Compensation" shall mean the average of the three highest annual
total compensation received by the Executive during any of the then current
calendar year (on an annualized basis) and the then preceding five (5) calendar
years during which the Executive was employed by the Company for the entire
calendar year. If the Executive has been employed for fewer than three years,
Average Compensation shall be the Executive's highest compensation during any
consecutive 12 month period. The Executive shall not be required to mitigate the
amount of any payment provided for in this subparagraph 7(c) by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for therein be reduced by any compensation of any retirement benefit heretofore
or hereafter earned by the Executive as the result of employment by any other
person, firm or corporation.
(d) Upon termination of this Agreement pursuant to subparagraphs 6(a),
6(b)(iii), 6(c) and 6(d), the vesting of all options to purchase securities of
the Company granted to the Executive during his employment with the Company
shall be accelerated to the later of the effective date of termination of this
Agreement, or six months after the date the option was granted, and any
provision contained in the agreements under which such options were granted that
is inconsistent with such acceleration is hereby modified to the extent
necessary to provide for such acceleration; such acceleration shall not apply to
any option that by its terms would vest prior to the date provided for in this
paragraph 7(d).
8. Confidential Information.
All confidential information or trade secrets which the Executive
currently has or may obtain during the period of employment relating to the
business of the Company and its affiliates shall not be published, disclosed, or
made accessible by him to any other person, firm, or corporation except in the
business and for the benefits of the Company and its affiliates. The provisions
of this paragraph 8 shall survive the termination of this Agreement, but shall
not apply to any information which is or becomes publicly available otherwise
than by any breach of this paragraph 8.
9. Covenant Not to Compete.
The Executive shall not, for a period of one (1) year following the
termination of Executive's employment with the Company, for whatever reason,
without the prior written consent of the Company, engage in direct or indirect
competition with the Company or with any mortgage Real Estate Investment Trust
focusing on subordinate financing. For purposes of this paragraph, "engage"
shall include the Executive's acting as an owner (of more than 10%), employee,
shareholder, consultant, director or officer, directly or indirectly, of an
entity so engaged. In addition, Executive shall not at any time for a period of
one (1) year following the termination of Executive's employment with the
-5-
<PAGE>
Company, without the prior written consent of the Company, directly or from
third parties who were customers or potential customers of the Company during
the two (2) years prior to the termination of Executive's employment hereunder,
business similar to the business transacted by the Company in general or by the
Company with such customers in particular. For purposes of this paragraph, a
"customer" shall mean any person in whom the Company has made an investment
through mortgage or other debt financing, any person whose mortgage or other
debt financing has been acquired by the Company, and a "potential customer" is a
person to whom the Company has made a written proposal regarding mortgage or
other debt financing (or the acquisition of any such financing from a third
party), whether or not the proposal was consummated.
10. Remedies in Case of Breach of Certain Covenants or Termination.
The Company and the Executive agree that the damages that may result to
the Company from misappropriation of confidential information or competition as
prohibited by paragraphs 8 and 9 could be estimated only by conjecture and not
by any accurate standard, and, therefore, any breach by the Executive of the
provisions of such paragraphs, in addition to giving rise to monetary damages,
will be enjoined.
11. Representations and Warranties.
(a) The Executive represents and warrants to the Company that he is
under no contractual or other restriction or obligation which would prevent the
performance of his duties hereunder, or which interfere with the rights of the
Company hereunder. The Executive represents and agrees that he has no agreements
or arrangements with the Company or any of its affiliates providing for the
compensation of the Executive in any respect other than as set forth in this
Agreement.
(b) The Company represents and warrants to the Executive that it has
all requisite power and authority to execute, deliver, and perform this
Agreement and all necessary' corporate proceedings of the Company have been duly
taken to authorize the execution, delivery, and performance of this Agreement by
the Company.
12. Indemnification.
(a) If the Executive is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (herein a "Proceeding"), by reason of
the fact that he is or was an employee (which term includes officer, director,
agent and any other capacity) of the Company or is or was serving at the request
of the Company as an employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such Proceeding is
alleged action in an official capacity as an employee or agent or in any other
capacity while serving as an employee or agent, the Executive shall be
indemnified and held harmless by the Company to the fullest extent authorized
-6-
<PAGE>
by the Maryland General Corporation Law, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification rights than
said law permitted the Company to provide prior to such amendment), against all
expense, liability and loss (including, but not limited to, attorneys' fees,
judgments, fines, ERISA excise taxes and penalties and amounts paid or to be
paid in settlement) incurred or suffered by the Executive in connection
therewith and such indemnification shall continue as to the Executive after he
has ceased to be a director, officer, employee or agent and shall inure to the
benefit of the Executive's heir, executors, and administrators; provided,
however, that the Company shall indemnify any such person seeking
indemnification in connection with a Proceeding (or part thereof) initiated by
the Executive (other than a proceeding to enforce this Section 12) only if such
Proceeding (or part thereof) was authorized directly or indirectly by the Board
of the Company. The right to indemnification conferred in this paragraph shall
be a contract right and shall include the right to be promptly upon request,
paid by the Company the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that if the Maryland
General Corporation Law requires the payment of such expenses incurred by an
employee in his capacity as an employee (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, payment shall be made only upon
delivery to the Company of an undertaking, by or on behalf of the Executive, to
repay all amounts so advanced if it shall ultimately be determined that such
employee is not entitled to be indemnified under this paragraph or otherwise.
(b) The indemnification provided by this Paragraph 12 shall not be
limited or exclude any rights, indemnities or limitations of liability to which
the Executive may be entitled, whether as a matter of law, under the Trust
Agreement or Bylaws of the Company, by agreement, vote of the stockholders or
disinterested directors of the Company or otherwise.
(c) The Executive (an "Indemnitee"), in seeking indemnification under
this Agreement, shall give the Company (the "Indemnitor") prompt written notice
of any claim, suit or demand that the Indemnitee believes will give rise to
indemnification under this Agreement; provided, however, that the failure to
give such notice shall not affect the liability of the Indemnitor under this
Agreement unless the failure to give such notice materially and adversely
affects the ability of the Indemnitor to defend itself against or to cure or
mitigate the damages. Except as hereinafter provided, the Indemnitor shall have
the right (without prejudice to the right of the Indemnitee to participate at
its expense through counsel of its own choosing) to defend and to direct the
defense against any such claim, suit or demand, at the Indemnitor's expense and
with counsel chosen jointly by Indemnitor and Indemnitee, and the right to
settle or compromise any such claim, suit or demand; provided, however, that the
Indemnitor shall not, without the Indemnitee's written consent, which shall not
be unreasonably withheld, settle or compromise any claim or consent to any entry
of judgment. The Indemnitee shall, at the Indemnitor's expense, cooperate in the
-7-
<PAGE>
defense of any such claim, suit or demand. If the Indemnitor, within a
reasonable time after notice of a claim fails to defend the Indemnitee, the
Indemnitee shall be entitled to undertake the defense, compromise or settlement
of such claim at the expense of and for the account and risk of the Indemnitor.
(d) The Executive will be covered during the entire term of this
Agreement by Officer and Director liability insurance in amounts and on terms
similar to that afforded to other executives of the Company or its affiliates,
which such insurance shall be paid by the Company.
(e) The provisions of this paragraph 12 shall survive termination of
this Agreement, unless Executive's employment is terminated for cause.
13. Severability.
In case any one or more of the provisions contained herein shall, for
any reason, be held to be invalid, illegal, or unenforceable in any respect such
validity, illegality or unenforceability shall not affect any other provisions
of this Agreement, and this Agreement shall be construed as if such invalid,
illegal or unenforceable provision(s) had never been contained herein, provided
that such invalid, illegal or unenforceable provision(s) shall first be
curtailed, limited or eliminated only to the extent necessary to remove such
invalidity, illegality or unenforceability with respect to the applicable law as
it shall then be applied.
14. Modification Agreement.
This Agreement shall not be modified by any oral agreement, either
expressed or implied, and all modifications thereof shall be in writing and
signed by the parties hereto.
15. Waiver.
The waiver of any right under this Agreement by any of the parties
hereto shall not be construed as a waiver of the same right at a future time or
as a waiver of any other rights under this Agreement.
16. Governing Law.
This Agreement shall be governed by and construed in accordance with
the internal laws of the Commonwealth of Pennsylvania, without giving affect to
the principles of conflicts of laws.
17. Notices.
Any notice to be given pursuant to this Agreement shall be sufficient
if in writing and mailed by certified or registered mail, postage-prepaid, to
the addresses listed below:
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<PAGE>
If to Company:
Resource Asset Investment Trust
1521 Locust Street, Sixth Floor
Philadelphia, Pennsylvania 19102
If to Executive:
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed or caused to be
executed this Agreement as of the date first written above.
RESOURCE ASSET INVESTMENT TRUST
By: ___________________________
Daniel Promislo, Trustee
-------------------------------
JAY J. EISNER
-10-
<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. 1 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
October 29, 1997
<PAGE>
JOHNSON, MCCLELLAN, SULLINS & PAGE
REAL ESTATE APPRAISERS AND CONSULTANTS
- --------------------------------------------------------------------------------
12355 Sunrise Valley Drive, Suite 690, Reston VA 20191
Phone: (703) 648-3250 FAX: (703) 648-9416
October 31, 1997
Mr. Jay J. Eisner
President
Resource Asset Investment Trust
1521 Locust Street
Philadelphia, Pennsylvania 19102
Dear Mr. Eisner:
Appraiser consents to the use of their name and reference to the valuation
amounts from the following appraisals in the Resource Asset Investment Trust
registration statement to be filed with the Securities and Exchange Commission:
Property Valuation Date
-------- --------------
Firehouse Square July 14, 1997
Sincerely,
Johnson, McClellan, Sullins & Page
/s/ Richard E. McClellan
- --------------------------
Richard E. McClellan
Principal
<PAGE>
[GRAPHIC]
Joseph Dennis Pasquarella & Co.
REAL ESTATE
October 31, 1997
Mr. Jay J. Eisner
President
RESOURCE ASSET INVESTMENT TRUST
1521 Locust Street
Philadelphia, PA 19102
Dear Mr. Eisner:
Appraiser consents to the use of their name and reference to the valuation
amounts from the following appraisals in the Resource Asset Investment Trust
registration statement to be filed with the Securities and Exchange Commission:
PROPERTY VALUATION DATE
-------- --------------
Hoopskirt Factory Apartments August 22, 1997
Wistar Alley Apartments September 3, 1997
Third Quarter Apartments September 3, 1997
Penn's View Apartments September 3, 1997
Canal House Apartments August 22, 1997
2032 Juniper Street September 22, 1997
Sincerely,
JOSEPH DENNIS PASQUARELLA & CO.
/s/ Joseph Dennis Pasquarella & Co.
mk
#852
1601 Market Street * Suite 890 * Philadelphia, PA 19103 *
Phone: (215) 587-6000 * FAX: (215) 587-6007
<PAGE>
M. RICHARD COHEN
REAL ESTATE BROKER-APPRAISER
REGISTERED PROFESSIONAL ENGINEER
SIXTEEN-SEVENTEEN LOMBARD STREET - PHILADELPHIA, PENNSYLVANIA 19146
TELEPHONE: (215) 790-1415
FAX (215) 790-9736
October 30, 1997
Jay J. Eisner
President
Resource Asset Investment Trust
1521 Locust Street
Philadelphia, PA 19102
Dear Mr. Eisner
Appraiser consents to the use and filing of the appraisal listed below as an
exhibit to the Resource Asset Investment Trust registration statement to be
filed with the Securities and Exchange Commission, and consents to the use of
their name and reference to the property valuation in the registration statement
in connection therewith:
Property Valuation Date
-------- --------------
1845 Walnut Street February 1, 1997
Sincerely,
/s/ M. Richard Cohen
------------------------------
M. Richard Cohen
MAI, SRA, ASA, PE, R/W
PA (GA507L) / NJ (RG01588)
State Certified General
Real Estate Appraiser
<PAGE>
M. RICHARD COHEN
REAL ESTATE BROKER-APPRAISER
REGISTERED PROFESSIONAL ENGINEER
SIXTEEN-SEVENTEEN LOMBARD STREET - PHILADELPHIA, PENNSYLVANIA 19146
TELEPHONE: (215) 790-1415
FAX (215) 790-9736
October 30, 1997
Jay J. Eisner
President
Resource Asset Investment Trust
1521 Locust Street
Philadelphia, PA 19102
Dear Mr. Eisner:
Appraiser consents to the use of their name and reference to the property
valuation in the Resource Asset Investment Trust registration statement to be
filed with the Securities and Exchange Commission for the following appraisals:
Property Valuation Date
-------- --------------
Lincoln Court September 10, 1997
1826-30 Green Street September 15, 1997
Sincerely,
/s/ M. Richard Cohen
-----------------------------------
M. Richard Cohen
MAI, SRA, ASA, PE, R/W
PA (GA507L)/NJ (RG01588)
State Certified General
Real Estate Appraiser
<PAGE>
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
Tacony Music Hall o Second Floor
4819 Longshore Avenue
Philadelphia, PA 19135
-----
Tel: (215) 331-1551
Fax: (215) 332-9266
October 31, 1997
Jay J. Eisner
Resource Asset Investment Trust
1521 Locust Street
Philadelphia, PA 19102
Re: 126-132 S. 18th Street
Philadelphia, Pennsylvania
Dear Mr. Eisner:
Appraiser consents to the use of their name and reference to the valuation
amount from the following appraisal in the Resource Asset Investment Trust
registration statement to be filed with the Securities and Exchange
Commission:
Property Valuation Date
- -------------------------------------------------------------------------------
126-132 S. 18th Street October 6, 1997
Respectfully submitted,
/s/ Louis A. Iatarola
--------------------------------------------
Louis A. Iatarola, MAI, SRA
LAI/bal
APPRAISAL REPORT
1845 Walnut Street
Philadelphia, PA 19103
FOR
Mr. Jay J. Eisner
Resource Asset Investment Trust
1521 Locust Street
Philadelphia, PA 19102
BY
M. Richard Cohen
MAI, SRA, ASA, PE, R/W
AS OF
February 1, 1997
DATE OF REPORT
February 21, 1997
M. RICHARD COHEN
<PAGE>
[Letterhead of M. Richard Cohen]
February 21, 1997
Mr. Jay J. Eisner
Resource Asset Investment Trust
1521 Locust Street
Philadelphia, PA 19102
Re: 1845 Walnut Street
Philadelphia, PA 19103
Dear Mr. Eisner:
As requested I have inspected and appraised the above captioned property. It is
my opinion that the fair market value of the subject property, as of February 1,
1997, was:
THIRTY FOUR MILLION DOLLARS
($34,000,000)
The analysis leading to the above result is detailed in the report that follows.
This is a summary-type appraisal report.
Sincerely,
/s/ M. Richard Cohen
M. Richard Cohen
MAI, ASA, PE, SPA, R/W
PA(GA5O7L)/NJ(RG01588)
State Certified General
Real Estate Appraiser
MRC: sfm
<PAGE>
TABLE OF CONTENTS
Page No.
--------
The Property .......................................................... 1
Owner ................................................................. 1
History of Title ...................................................... 1
Purpose of Appraisal .................................................. 1
Function of Appraisal ................................................. 2
Scope of Appraisal .................................................... 2
Land .................................................................. 3
Utilities ............................................................. 3
Assessment ............................................................ 3
Annual Real Estate Taxes .............................................. 4
Zoning ................................................................ 4
Plot Plan ............................................................. 4
Description of Improvements ........................................... 6
Hazardous Substances .................................................. 8
Neighborhood Analysis ................................................. 9
Office Market ......................................................... 12
Flood Hazard District ................................................. 14
Highest and Best Use .................................................. 15
Valuation Analysis .................................................... 16
Income Approach ....................................................... 17
Sales Comparison Approach ............................................. 23
Reconciliation ........................................................ 35
Certification ......................................................... 37
M. RICHARD COHEN
<PAGE>
TABLE OF CONTENTS
Page No.
--------
Assumptions, Limiting Conditions & Contingencies ...................... 38
Professional Qualifications ........................................... 40
Addendum:
Photographs
Neighborhood Map
Flood Map
Zoning Map
M. RICHARD COHEN
<PAGE>
THE PROPERTY
The subject property is a high-rise, 25-story office building with parking
for 465 vehicles located at 1845 Walnut Street, Philadelphia, Pa. The building
was originally constructed in 1968. Therefore, the building is approximately 30
years old. It faces Rittenhouse Square.
OWNER
Mutual Associates, LTD. (Acquired November 13, 1985)
HISTORY OF TITLE
There has been no transfer of this property within the past three years.
PURPOSE OF APPRAISAL
The purpose of this appraisal is to estimate the fair market value of the
subject property as of an effective date of February 1, 1997.
As utilized in this appraisal report, fair market value is defined as
follows: The most probable price which a property should bring in a competitive
and open market under all conditions requisite to a fair sale, the buyer and
seller, each acting prudently, knowledgeably and assuming the price is not
affected by undue stimulus. Implicit in this definition is the consummation of a
sale as of a specified date and the passing of title from seller to buyer under
conditions whereby:
1
M. RICHARD COHEN
<PAGE>
PURPOSE OF APPRAISAL (Continued)
a. buyer and seller are typically motivated;
b. both parties are well informed or well advised, and each acting in
what he considers his own best interest;
c. a reasonable time is allowed for exposure in the open market;
d. payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
e. the price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
FUNCTION OF APPRAISAL
The function of this appraisal is to be used as a guideline in financing
of the subject property.
SCOPE OF APPRAISAL
The appraiser visited the subject property and made an inspection of the
building and the locality. The appraiser also reviewed data with respect to the
Center City office market including rental information and sales information.
All the data were correlated into an estimate of fair market value for the
subject property.
2
M. RICHARD COHEN
<PAGE>
LAND
The subject site is a rectangular-shaped parcel located on the north side
of Walnut Street and the south side of Sansom Street, between 18th and 19th
Streets, in the City of Philadelphia. The site has approximately 161'10" of
frontage on the north side of Walnut Street and the south side of Sansom Street
and a depth of approximately 223'6". The site also enjoys the common use for
light, air and passageway over a certain private street area, 31'+/- in width,
which is partly within and partly adjoining the subject's western boundary
connecting Walnut and Sansom Streets.
Total site area is approximately 36,170 square feet. The site is at street
grade, level, and served by all utilities.
Walnut Street at the subject location is a 50' wide, asphalt-paved cartway
with concrete curbs and sidewalks and carries three lanes of traffic (one lane
for metered parking) in a westerly direction. Sansom Street at the subject
location is a 40' wide, asphalt paved cartway, with two traffic lanes and
concrete sidewalks and curbing on both sides.
UTILITIES
This site is served by all municipal improvements including water, sewer,
and gas.
ASSESSMENT
$7,600,000
3
M. RICHARD COHEN
<PAGE>
ANNUAL REAL ESTATE TAXES
$627,760
ZONING
The site is zoned C-5, Commercial District. This is the most liberal
Center City zoning classification for commercial use. All of the high-rise
Center City office buildings have C-5, Commercial zoning.
The floor area ratio for C-5 in Center City Philadelphia permits 1200%
building size. Actually, most Center City office buildings have bonus factors
available which permit a typical building to be 1800% of the land area.
PLOT PLAN
The following is a plot plan for the subject property:
4
M. RICHARD COHEN
<PAGE>
[GRAPHIC OMITTED]
5
M. RICHARD COHEN
<PAGE>
DESCRIPTION OF IMPROVEMENTS
The subject is improved with a 25-story plus basement, office building
including a five-level, 465-car, parking garage. A detailed description of the
subject's improvements is as follow:
Foundation: Poured reinforced concrete footings and
foundation walls with concrete slab on
grade. The office building was constructed
over the parking garage.
Framing: Steel reinforced concrete columns, beams,
joists, floors and roof deck.
Exterior Walls: Smooth finish concrete with brick facing on
the ground level. Anodized bronze panels
between the windows on the office floors.
Roof: Flat with single-ply membrane cover over a
concrete deck.
HVAC: Heat is supplied via Philadelphia central
steam loop distributed by a perimeter
radiation system and three tempered air
systems. Cooling is provided by a chilled
water system via perimeter radiation system
and three tempered air systems.
Electricity: Two separate services with a main high
tension service of 13,200 volts and on-site
transformers to step-down to 220/110 volt
services. Electric circuit breakers
throughout. Lighting is a combination of
fluorescent and incandescent fixtures.
Sprinklers and
Fire Protection: Dry standpipe in each stair tower and wet
pipe to fire hose on hallway of each floor.
The parking garage has a dry standpipe
system. The subject property is sprinklered
from the sub-basement through the parking
levels. Office floors have been retrofitted
with sprinklers. The interior system was
upgraded with a central annunciator panel
installed in 1987. Each floor has smoke
detectors and pull stations.
6
M. RICHARD COHEN
<PAGE>
DESCRIPTION OF IMPROVEMENTS (Continued)
Elevators & Stairwells: Ten Otis 3,500 lb. elevators serve the
office tower. One of the elevators is used
as a service elevator and has a double-sided
door leading directly to the loading area.
Five elevators service floors 6-16 and the
other five serve floors 16-25. There are two
Eastern 2,500 lb. elevators serving the
garage levels 1-5. There is no elevator
service to the basement level. Access from
the garage to the main lobby is by going
outside to the Walnut Street entrance or by
going through the loading area.
Plumbing: Cast iron waste lines with lead joints and
copper supply lines. Average quality
lavatory fixtures. Domestic hot water is
provided by heat exchangers connected to
steam condensate lines.
Interior Finish: Primarily painted and/or papered drywall
with accent paneling. Office area doors are
combination plate glass with metal frames
and/or solid or hollow core flush wood with
veneer faces. The lobby entrance has a
double set of aluminum and glass entrance
doors.
Floors: Concrete in the basement, granite in the
lobby, carpeting and/or tile in offices and
ceramic tile in the lavatories.
Windows: Aluminum-framed, fixed-sash, single-pane
glass panels in the offices. All windows are
tinted to reduce solar gain.
Loading Facilities: Drive-in loading area is accessed from
private roadway which abuts the subject's
western elevation. Loading area is at grade
and limited to one trailer.
Parking: The building contains a parking garage on
floors 1 through 5. The garage has a 465-car
capacity.
Miscellaneous: Battery-operated emergency lights are
located on each floor. Basement level is
used primarily for parking with some
mechanical and utility service rooms.
7
M. RICHARD COHEN
<PAGE>
DESCRIPTION OF IMPROVEMENTS (Continued)
Layout and Finish: The subject property has an entrance from
Walnut Street providing access to the
elevator lobby for upper floor offices.
Access is also provided to commercial
tenants on ground level from inside the
lobby. Finishes include granite floors,
marble and hardwood paneled walls and
painted plaster ceilings with recessed
incandescent and fluorescent lighting.
Each floor has one men's and one ladies'
washroom. Each washroom is finished with
ceramic tile floors, papered walls and
acoustical tile ceiling. In addition, some
tenants have installed private washrooms.
Area
----
Building Area: Floor 1 3,271
Fl. 6-19 @ 17,238 SF-Each 241,332
Fl. 20-25 @ 17,700 SF-Each 106,694
-------
Total 351,297
The property is measured on a BOMA full
floor measurement with floor factors of
approximately 12% to 16%. City records state
net rentable area as 347,000+/- square feet.
Age: The subject was constructed in 1968.
HAZARDOUS SUBSTANCES
The appraiser did not note any potential environmental hazards at the time
of inspection or from any of the information that was supplied to the appraiser.
The owners of the building indicated that all asbestos had been removed.
The appraiser is not an expert in environmental hazards. If this becomes
an issue, it should be further investigated by the lender.
8
M. RICHARD COHEN
<PAGE>
NEIGHBORHOOD ANALYSIS
The subject property is located in the western sector of Center City
Philadelphia opposite Rittenhouse Square. This location is approximately four
blocks west of City Hall. It is just south of the West Market Street office
building development area fronting on Rittenhouse Square. This is an area of
major office buildings, apartments and retail stores. There are also a number of
hotels close to the subject property.
The subject location is easily accessible by train, public transportation,
automobiles, etc. Market Street, from City Hall to 21st Street, is developed on
both sides with modern office buildings. This has become the major office center
of Philadelphia. Development of this area has been sparked by the removal of the
"Chinese Wall" which was a viaduct carrying the railroad tracks from 30th Street
Station to Suburban Station. These tracks are now underground. Demolition of the
"Chinese Wall" freed up a considerable amount of construction sites for new
office buildings. The office market is currently in a state of oversupply based
on typical absorption rates.
Chestnut Street and Walnut Street, from Broad Street to approximately 19th
Street, have been the major retail commercial district for Center City
Philadelphia. This is not an area where department stores are located. Instead,
it is an area where small specialty shops have been located for many years. The
Liberty Place shopping, hotel and office complex, which is between 16th and 17th
Street on Chestnut, is the first new development of stores to
9
M. RICHARD COHEN
<PAGE>
NEIGHBORHOOD ANALYSIS (Continued)
be constructed on Chestnut Street in the past 25 years. The last project that
was constructed was located at 16th and Chestnut Street. This was demolished for
Liberty Place.
Approximately 20 years ago, Chestnut Street was converted into a
pedestrian and transit way. All traffic was barred to Chestnut Street between
18th Street and 7th Street. This was supposed to revitalize Chestnut Street as a
shopping district. It has not been very successful. Walnut Street, west of Broad
Street, has been doing better than Chestnut Street, west of Broad Street. It has
been able to attract high-priced shoppers. The opening of Liberty Place's retail
facility, in the 1600 block of Chestnut Street, has served as a catalyst to
promote and increase retail activity along West Chestnut and Walnut Streets. The
ultimate goal of Liberty Place was to attract the suburban shoppers rather than
the City shoppers which have been attracted to the Gallery development on East
Market Street. City shoppers are less affluent than suburban shoppers, and
therefore, do not spend as much money, nor do they seek the same high-quality
merchandise.
Several new developments that are west of Broad Street are doing very
well. Many new restaurants have opened on Walnut Street between 15th Street and
18th Street. Border's Bookstore occupies the former Nan Duskin property on
Walnut Street. A Daffy discount store opened at 17th and Chestnut Streets.
Liberty Place opened in 1990 with a new concept of shopping for Center City. If
Liberty Place, on the 1600 block of Chestnut Street is successful, this
10
M. RICHARD COHEN
<PAGE>
NEIGHBORHOOD ANALYSIS (Continued)
could be a significant step forward toward the economic growth of Chestnut and
Walnut Streets west of Broad Street.
The retail space in Liberty Place consists of 252,000 square feet. This
can be a significant magnet for the area. The Ritz Carlton Hotel, which contains
243,000 square feet and 290 rooms, located at 17th and Chestnut Streets, can
also supply new shopping demand for Chestnut Street in this area. The same is
true for the two office towers. There is also a Liberty Place underground
parking garage. It has a capacity of 750 parking spaces. This is a self-park
facility. Of the total parking capacity, approximately 115 spaces are reserved
for hotel guests. The remaining parking is available to the public.
Another important aspect of the subject location is the attempt that is
presently being made by the local business community to upgrade the environment
in the Center City business district, west of Broad Street. This has now become
a Special Center City Service District. The property owners in the area are
required to pay an annual fee. This fee is then used by the Special Services
District for additional safety protection, street cleaning, and general
neighborhood improvement. Although this is an expensive endeavor for the
property owners, it should help to upgrade the image of the Center City shopping
district.
11
M. RICHARD COHEN
<PAGE>
OFFICE MARKET
The subject property is located in Center City Philadelphia. This
particular location at 1845 Walnut Street is west of Broad Street, which marks
the center of the business district. Properties east of Broad Street are
considered to be in east Center City and properties west of Broad Street are
considered to be in west Center City.
Broad Street, in the vicinity of Center City, is about to become the
Avenue of the Arts with a substantial amount of new investment being made by the
City of Philadelphia for new theaters, museums, and other artistic and cultural
events. There are also a number of "B-" and "C+" office buildings in this area.
Office buildings, in Center City Philadelphia, are ranked from "A" to "C".
The rating refers to the quality of the location as well as the quality of the
building.
The area surrounding City Hall and extending along Broad Street was the
original office center of Philadelphia. Offices lined Broad Street both north
and south of City Hall and extended for several blocks east and west of City
Hall. At one time, Broad Street was the "Class A" location of Center City
Philadelphia office buildings. Today, the "A" location in Center City
Philadelphia is considered to be in the area known as Penn Center along West
Market Street and extending north to the Parkway.
The older office buildings, which were originally constructed in the
vicinity of City Hall, are now considered to be the "B" and "C" buildings.
Buildings in this location, that fit this category
12
M. RICHARD COHEN
<PAGE>
OFFICE MARKET (Continued)
include the Packard Building, the PSFS Building, the Land Title Building, the
North American Building, the Avenue of The Arts Building, and other similar
office buildings.
Some of the older office buildings have been rehabilitated to modern
office space. Two of these are the Widener Building and the Wanamaker Building.
Both were historic structures. Both were completely renovated in recent years.
They are north and east of the subject property.
There are plans to rehabilitate the former City Hall Annex Building. This
is located on Juniper Street opposite City Hall. This is an old building that
was formerly occupied as municipal space. The building is not in good condition.
It is completely vacant. Plans to develop this building have been delayed until
market conditions improve.
The local market for real estate in Center City Philadelphia has declined
considerably in the past few years. Most of this is due to the declining economy
and the downsizing that has followed the decline in the economy.
The subject property is south and west of the new Pennsylvania Convention
Center. This should help the subject location as well as the entire Market
Street area.
At the present time there are approximately 38.5 million square feet of
office space in Center City Philadelphia. Approximately 20% of this space was
constructed within the past 10 years. The average vacancy rates for all downtown
office space
13
M. RICHARD COHEN
<PAGE>
OFFICE MARKET (Continued)
as of 1996 is around 13.6.%. This includes all space. For Class "B" office space
only, the vacancy was closer to 23%. This has been declining in the current
market.
There has been a trend for old buildings to be put in "mothballs" because
the economics of operating the upper floor space is not financially feasible.
This was recently applied to the Avenue of the Arts Building (Western Savings
Fund Building).
As more properties are taken off the market, the demand for the remaining
buildings improves. Downsizing appears to have stopped. Vacancy should begin to
decline. (See article in addendum section of this report.)
FLOOD HAZARD DISTRICT
The subject property is not located in a flood hazard district. A flood
map is included in the Addendum section of this report.
14
M. RICHARD COHEN
<PAGE>
HIGHEST AND BEST USE
The highest and best use of a property must satisfy several criteria:
1. It must be physically possible to develop the property with the
highest and best use.
2. It must be legally permissible to develop the property with the
highest and best use.
3. It must be economically feasible to develop the property with the
highest and best use.
4. There must be a demand for the highest and best use.
Highest and best use is examined both as a developed site and as vacant
land. For the vacant land, it was the opinion of the appraiser that the highest
and best use of this property would be to hold for future development. When
future development does take place, it will most likely be a high-rise office
building with stores facing Rittenhouse Square.
An office building is a legal development. It is physically possible to
use this property as office space which has been the case since it was
constructed 30 years ago.
Therefore, it was the opinion of the appraiser that the highest and best
use of the subject property, as it is currently developed, is the existing use
as an office building. The ground floor commercial space is best used for retail
stores.
15
M. RICHARD COHEN
<PAGE>
VALUATION ANALYSIS
There are three approaches utilized in the valuation of real estate: the
Sales Comparison Approach, the Income Approach and the Cost Approach.
The subject property is a high-rise office building. It is Class "A-" to
"B+" space. It is approximately 86% occupied. The appraiser used similar
buildings in Center City Philadelphia for comparison to the subject property.
There have been a number of sales within the past few years. Therefore, the
Sales Comparison Approach was one of the main approaches utilized in valuing
this property.
The Cost Approach was not utilized. The Cost Approach was considered a
weak approach because of several factors. The Cost Approach is a summation of
the depreciated replacement cost of the building plus the value of the land. In
the case of the subject property, there are very few vacant parcels of land that
could be considered comparable with the subject property. Land sites facing
Rittenhouse Square rarely sell. The comparables that do exist generally require
a large adjustment for variations in comparability. It is also difficult to
estimate replacement cost new for a building as old as the subject property. In
addition to this, it is difficult to estimate accrued depreciation due to
physical, functional and economic factors. For this reason, the Cost Approach
was not used, which is a departure from USPAP.
The Income Approach was based on the income and expenses for the past
three years. Direct capitalization was used.
16
M. RICHARD COHEN
<PAGE>
INCOME APPROACH
The subject property is an income-producing parcel of real estate.
Therefore, the Income Approach is a meaningful method of valuing this property.
The following is a summary of the rent roll for 1845 Walnut Street as of
December 1996:
17
M. RICHARD COHEN
<PAGE>
INCOME APPROACH (Continued)
- --------------------------------------------------------------------------------
RENT ROLL FOR 1997
- --------------------------------------------------------------------------------
SUITE TENANT SF OCCUPIED ANNUAL RENTAL
================================================================================
10 Eastern Telelogic $ 1,000
- --------------------------------------------------------------------------------
101 Jefferson Bank 2,164 91,968
- --------------------------------------------------------------------------------
104 Marsha Taylor 1,259 33,061
- --------------------------------------------------------------------------------
110 Bruce Sardarian 376 8,130
- --------------------------------------------------------------------------------
600 Gustine Pelagatti 1,544 27,972
- --------------------------------------------------------------------------------
601 Vacant 2,231 0
- --------------------------------------------------------------------------------
605 JEVS (See 700) See 700
- --------------------------------------------------------------------------------
639 Joseph A. Petrellis 576 11,900
- --------------------------------------------------------------------------------
635 Raymond Partito 840 14,700
- --------------------------------------------------------------------------------
659 Building Superintendent 870 0
- --------------------------------------------------------------------------------
700 JEVS 28,405 397,670
- --------------------------------------------------------------------------------
800 CSS 7,898 161,251
- --------------------------------------------------------------------------------
804 Katner 1,037 17,716
- --------------------------------------------------------------------------------
805 Vacant 7,463 63,750
- --------------------------------------------------------------------------------
855 Kruza 840 0
- --------------------------------------------------------------------------------
900 Mediaworks--Includes 968 12,345 181,199
- --------------------------------------------------------------------------------
910 Vacant 4,893 0
- --------------------------------------------------------------------------------
1000 New Lease 3,000
FKB Storage 334
Feldman Storage 168 1,680
- --------------------------------------------------------------------------------
1041 Global Storage 840 0
- --------------------------------------------------------------------------------
1060 Vacant 11,896 0
- --------------------------------------------------------------------------------
1085 Mann & Co. 1,000 0
- --------------------------------------------------------------------------------
1100 Global Financial Press (New) 17,238 168,235
- --------------------------------------------------------------------------------
1200 Okbia 6,914 129,349
- --------------------------------------------------------------------------------
1300 Asher & Co. 17,238 $ 273,222
- --------------------------------------------------------------------------------
1400 The Savitz Organization 8,264 181,808
- --------------------------------------------------------------------------------
1401 Drucker & Scaccetti 8,974 197,428
- --------------------------------------------------------------------------------
1500 Vacant 3,705 0
================================================================================
18
M. RICHARD COHEN
<PAGE>
INCOME APPROACH (Continued)
- --------------------------------------------------------------------------------
RENT ROLL FOR 1997
- --------------------------------------------------------------------------------
SUITE TENANT SF OCCUPIED ANNUAL RENTAL
================================================================================
1501 Galli, Reilly & Stellato 13,533 $ 166,343
- --------------------------------------------------------------------------------
1601 Rush & Seiken 4,532 86,112
- --------------------------------------------------------------------------------
1607 Owner 3,292 9,000
- --------------------------------------------------------------------------------
1655 Global >>>Marshall Den 9,414 155,331
- --------------------------------------------------------------------------------
1700 Marshall Denneney 69,493 1,130,364
- --------------------------------------------------------------------------------
1800 Marshall Denneney--See 1700
- --------------------------------------------------------------------------------
1900 Marshall Denneney--See 1700
- --------------------------------------------------------------------------------
2000 Raynes McCarty 17,779 364,467
- --------------------------------------------------------------------------------
2100 Marshall Denneney--see 1700
- --------------------------------------------------------------------------------
2200 Tabas & Rosen 8,787 109,848
- --------------------------------------------------------------------------------
2206 Metropolitan Reporting 5,500 77,133
- --------------------------------------------------------------------------------
2240 A. Martin Herring 1,512 28,728
- --------------------------------------------------------------------------------
2258 Lucy Peters International 1,980 33,640
- --------------------------------------------------------------------------------
2300 Fine, Kaplan & Black 7,461 151,449
- --------------------------------------------------------------------------------
2310 Daniel Tristle 2,712 43,392
- --------------------------------------------------------------------------------
2363 Robert J. Basicks 840 13,200
- --------------------------------------------------------------------------------
2364 Bell Atlantic Mobile 504 22,560
- --------------------------------------------------------------------------------
2370 Commonwealth Securities 1,559 28,062
- --------------------------------------------------------------------------------
2371 Vacant 4,703 0
- --------------------------------------------------------------------------------
2400 Willig, Williams & Davidson 27,482 645,827
- --------------------------------------------------------------------------------
2500 Willig, Williams & Davidson See 2400
- --------------------------------------------------------------------------------
2550 Philadelphia Investment 1,680 0
- --------------------------------------------------------------------------------
2570 Willig, Williams & Davidson 6,725 47,270
- --------------------------------------------------------------------------------
TOTAL 352,134 SF $5,074,773
================================================================================
The income was considered to be stable because there is a small turnover
of tenants planned for the next six years. The following is a schedule of lease
expirations:
19
M. RICHARD COHEN
<PAGE>
INCOME APPROACH (Continued)
-----------------------------------------
SCHEDULE OF LEASE EXPIRATIONS
-----------------------------------------
SQUARE PERCENT
YEAR FOOTAGE OF BLDG.
=========================================
1997 12,919 3.67%
-----------------------------------------
1998 13,800 3.92%
-----------------------------------------
1999 1,554 0.44%
-----------------------------------------
2000 17,509 4.98%
-----------------------------------------
2001 14,120 4.02%
-----------------------------------------
2002 15,185 4.32%
-----------------------------------------
2003 40,052 11.39%
-----------------------------------------
2004 2,456 0.70%
-----------------------------------------
2005 27,482 7.82%
-----------------------------------------
2006 117,849 33.52%
-----------------------------------------
2007 4,205 1.20%
-----------------------------------------
2008 13,533 3.85%
-----------------------------------------
TOTAL 280,664
=========================================
Except for 2003 and 2006, there is very little turnover in this building.
This is beneficial when appraising a building such as this, because it
stabilizes the income stream.
The appraiser utilized overall capitalization when appraising this
property. This was considered preferable when compared with discount cash flow
analysis. The discounted cash flow analysis requires projections as to the
growth of rental income, the growth of expenses, the future value of the
building and other factors. An income and expense statement was projected for
1997 based on the experience of the building in prior years. The projections
were
20
M. RICHARD COHEN
<PAGE>
INCOME APPROACH (Continued)
prepared by Resource America, Cushman & Wakefield and Equitable Life Assurance.
Cushman & Wakefield has been managing this building. Equitable Life Assurance is
the former asset manager for Lehman Brothers. The following is a summary of the
income and expenses projected for 1997 for the subject property:
Revenues
Office Building Rent $ 5,718,332
Pass Throughs 177,500
-----------
Total Revenues $ 5,895,832
Operating Expenses
Office Building Maintenance & Repairs
Maintenance Supplies $ 32,000
Janitor and Cleaning Supplies 60,000
HVAC Repairs 75,000
Plumbing & Electric Repairs 40,000
Elevator Maintenance 88,000
Trash Removal 15,000
Exterminating Expense 1,000
Cleaning Service 625,000
Decorating Expense 12,500
Misc. Maintenance & Repairs 30,000
-----------
$ 878,500
Utilities
Electricity $ 815,543
Steam 150,000
Water & Sewer 39,101
Water Treatment 3,000
-----------
$ 1,007,645
Taxes and Insurance
Insurance $ 55,600
Boiler Insurance 3,300
Miscellaneous Insurance 37,500
Real Estate Taxes 810,000
Miscellaneous Taxes 41,500
-----------
$ 747,900
Marketing & Leasing
Advertising $ 25,000
-----------
$ 25,000
21
M. RICHARD COHEN
<PAGE>
INCOME APPROACH (Continued)
Payroll & Related
Managers' Salaries $ 51,000
Front Desk Salaries 2,000
Engineers' Salaries 150,000
Janitors' Salaries 25,000
Security Salaries 90,000
Payroll Taxes 33,000
Employee Health Insurance 35,000
Workman Compensation 44,000
-----------
$ 430,000
Management Fee @ 2% $ 117,917
-----------
$ 117,917
Other General and Administrative
Legal $ 25,000
Accounting 25,000
Telephone 5,500
Porter Services 17,500
Office Supplies 3,500
Laundry & Uniforms 1,500
Miscellaneous 12,500
-----------
$ 90,500
===========
Total Operating Expenses $ 3,297,461
Net Operating Income $ 2,598,370
-----------
Garage
Parking Fee Income From Parkway $ 707,200
Other Revenues 26,500
-----------
Net Garage Revenue $ 733,700
Garage Receipts $ 733,700
It is noted in the above income and expense statement that there are two
sources of income for this property - office space (including ground floor
commercial) and garage rental. The building garage is operated by Parkway Corp.
Parkway Corp. is the most "knowledgeable" parking facility manager in the City
of Philadelphia.
22
M. RICHARD COHEN
<PAGE>
INCOME APPROACH (Continued)
The combined net income was:
Office Net Operating Income $ 2,598,370
Garage Income 733,700
-----------
Total NOI $ 3,332,070
The net operating income was almost equal to the total operating expenses.
This indicates that the operating ratio for this building was approximately 50%.
Fifty percent is typical for Center City office buildings in today's market, and
therefore, this was considered to be a reliable approach for valuing the
property.
The appraiser utilized an overall capitalization rate of 10%. Therefore,
the value as indicated by the Income Approach was:
$3,332,070 / 10% = $33,320,000
CALL
$33,500,000 -- Value As Indicated By
The Income Approach
SALES COMPARISON APPROACH
The appraiser was able to find a few sales in the West Market Street area
that could be compared with the subject property. The following sales were among
those considered by the appraiser:
Sale No. 1 - 1600 Market Street, Philadelphia, Pa.
The sale of this property for a consideration of $89 million took place in
October 1994. The grantor was Travelers Insurance. The grantee was Yarmouth
Group, Inc. This was actually a stock purchase and not a traditional real estate
transaction. Refinancing was $51.5 million. This was reported to be a
below--market interest rate.
23
M. RICHARD COHEN
<PAGE>
SALES COMPARISON APPROACH (Continued)
The property was improved with a 40-story building with two lower levels.
Construction took place in 1983. The building contained 880,000 square feet of
gross building area and 760,000 square feet of net rentable area. Construction
was fireproof. The building had 17 passenger elevators. The unit sale price was
$101.00 per square foot. The building quality was similar to the subject.
24
M. RICHARD COHEN
<PAGE>
SALES COMPARISON APPROACH (Continued)
[PHOTO OMITTED]
SALE NO. 1
1600 MARKET STREET
25
M. RICHARD COHEN
<PAGE>
SALES COMPARISON APPROACH (Continued)
Sale No. 2 - Ten Penn Center, 18th & John F. Kennedy Boulevard,
Philadelphia, Pa.
The sale of this property for a consideration of $65 million took place in
July 1994. This was actually a sale price allocation for this property which was
packaged with two other buildings and were offered for sale on a combined basis.
The grantor was Striker Business Trust. The grantee was Ten Penn Center
Associates. The building contained 650,000 square feet. It was a modern
structure. Based on the separation of this transaction from the other building,
it was estimated that the sale price was approximately $100.00 per square foot.
However, it is difficult to separate this from the other two buildings.
Another factor that was important in this transaction was the lease to Sun
Corporation. Sun Corporation leased 300,000 square feet of office space in this
building. It was expected that this space would be vacated in the near future.
This was a negative factor requiring an adjustment.
26
M. RICHARD COHEN
<PAGE>
SALES COMPARISON APPROACH (Continued)
[PHOTO OMITTED]
SALE NO. 2
TEN PENN CENTER
18TH & JOHN F. KENNEDY BOULEVARD
27
M. RICHARD COHEN
<PAGE>
SALES COMPARISON APPROACH (Continued)
Sale No. 3 - Offering - 2000 Market Street, Philadelphia, Pa.
This property is a 29-story modern office building owned by Metropolitan
Life Insurance Company. The building contains 665,000 square feet of net
rentable area. The property is reported to be under agreement of sale to a joint
venture of Cassidy and Pinkard with Sonnenblick-Goldman. The building had been
actively leasing in the last year. It is reported to have 500,000 square feet of
new long--term leases. It is predicted that the sale price will be in the range
of $85.00 per square foot to $110.00 per square foot.
In comparing this property to the subject property, the locations are
similar. However, the condition of the subject property is superior to the
comparable. The subject property has been completely renovated. The comparable
sale has not been renovated. It has been partially renovated. The size of the
comparable property was significantly larger than the subject property. Larger
properties sell for lower unit values. Therefore, an upward adjustment was
required for size.
28
M. RICHARD COHEN
<PAGE>
SALES COMPARISON APPROACH (Continued)
[PHOTO OMITTED]
SALE NO. 3
2000 MARKET STREET
29
M. RICHARD COHEN
<PAGE>
SALES COMPARISON APPROACH (Continued)
Sale No. 4 - Eight Penn Center Plaza, Philadelphia, Pa.
This 235,000 square foot building was purchased by the Steinhardt Group,
Inc. in May 1995. The grantor was Teacher Retirement System of Texas. The sale
price was $8,500,000. It was an all cash transaction. The building is at 17th
and JFK Boulevard. The unit sale price was $36.00 per square foot.
30
M. RICHARD COHEN
<PAGE>
SALES COMPARISON APPROACH (Continued)
[PHOTO OMITTED]
SALE NO. 4
EIGHT PENN CENTER PLAZA
31
M. RICHARD COHEN
<PAGE>
SALES COMPARISON APPROACH (Continued)
Sale No. 5 - 1601 Market Street, Philadelphia, Pa.
The sale of this property for a consideration of $33,800,O00 took place in
August of 1996. The building was 36 stories high. The purchaser was Sam Zell.
The floor area was 700,000 square feet. The unit sale price was $48.25 per
square foot.
32
M. RICHARD COHEN
<PAGE>
SALES COMPARISON APPROACH (Continued)
[PHOTO OMITTED]
SALE NO. 5
1601 MARKET STREET
33
M. RICHARD COHEN
<PAGE>
SALES COMPARISON APPROACH (Continued)
------------------------------------------------------------
SALES RECAPITULATION
------------------------------------------------------------
N.R.A. SALE SALE PRICE
ADDRESS S.F. DATE PER S.F.
============================================================
1600 Market Street 760,000 10/94 $101.00
------------------------------------------------------------
Ten Penn Center 650,000 07/94 100.00
------------------------------------------------------------
Eight Penn Center 235,000 05/95 36.00
------------------------------------------------------------
1601 Market Street 700,000 08/96 48.25
------------------------------------------------------------
Seven Penn center 288,500 03/96 64.00
------------------------------------------------------------
2000 Market Street 665,000 U/A *
------------------------------------------------------------
* Unconfirmed reports indicate $85 per S.F.
============================================================
Sale No. 1 and Sale No. 2 were not considered standard transactions. One
was a stock transfer and the other was an allocation. For this reason, they may
be higher than other sales in Center City. The other three sales were considered
to be "typical" transactions. Originally, the quality of the buildings was
similar to the subject. Location was also similar, although the subject property
had frontage on Rittenhouse Square and the comparable properties all had
frontage on Penn Center.
Currently available on the sale market is 2000 Market Street. This
property is owned by Metropolitan Life Insurance Company. The building contains
650,000 square feet. It is expected to sell in the range of $85.00 per square
foot to a $110.00 per square foot.
It was noted that none of the comparable sales included garage space. They
were all for office space only. Therefore, it was necessary to add the value of
the garage to the value of the office building for the subject property. There
are very few garage sales
34
M. RICHARD COHEN
<PAGE>
SALES COMPARISON APPROACH (Continued)
that take place in the City of Philadelphia. It is generally indicated by
garage, investors that at the present time $10,000 per space is the typical
value. In the case of the subject property, which has 465 parking spaces, this
would be equivalent to an "add on" value of $4,650,000.
The office space was valued at $85.00 per square foot. This was equivalent
to a value for the office of $29,835,000. The total value by the Sales
Comparison Approach was $34,500,000. The following are the calculations leading
to this result:
Office Space of 351,000 SF x $85/SF = $29,835,000
465 Parking Spaces x $10,000/Space = 4,650,000
-----------
$34,485,000
CALL
Value By Sales Comparison Approach $34,500,000
RECONCILIATION
Income Approach - $33,500,000
Sales Comparison Approach - $34,500,000
Cost Approach - N/A
The subject property was valued using a Sales Comparison Approach and an
Income Approach. The result of both of these approaches was similar.
This building is a well-maintained building. The building was constructed
in 1968. It also has substantial parking, which is an asset for a building in
Center City Philadelphia, because parking is very scarce. In addition to this,
the proximity to Rittenhouse Square adds a dimension to the parking demand,
because the parking facilities are used during the day and in the evening.
35
M. RICHARD COHEN
<PAGE>
RECONCILIATION (Continued)
Taking all factors into consideration, it was the opinion of the appraiser
that the fair market value of the subject property, as of February 1, 1997, was:
THIRTY FOUR MILLION DOLLARS
($34,000,000)
36
M. RICHARD COHEN
<PAGE>
CERTIFICATION
I certify that to the best of my knowledge and belief...
- -- The statements of fact contained in this report are true and correct.
- -- The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are my personal,
unbiased professional analyses, opinions, and conclusions.
- -- I have no present or prospective interest in the property that is the
subject of this report, and I have no personal interest or bias with
respect to the parties involved.
- -- My compensation is not. contingent on an action or event resulting from
the analyses, opinions, or conclusions in, or the use of, this report.
- -- I have made a personal inspection of the property that is the subject of
this report.
- -- The appraisal assignment was not based on a requested minimum valuation, a
specific valuation, or the approval of a loan.
- -- My analyses, opinions, and conclusions were developed, and this report has
been prepared in conformity with the Uniform Standards of Professional
Appraisal Practice.
- -- No one provided significant professional assistance to the person signing
this report.
- -- The Appraisal Institute conducts a program of continuing education for its
members. The appraiser, M. Richard Cohen, is currently recertified under
this program.
- -- This appraisal is subject to the limiting conditions that appear as
follows.
Respectfully submitted,
/s/ M. Richard Cohen
M. Richard Cohen
MAI, ASA, PE, SRA, R/W
PA(GA5O7L)/NJ(RG01588)
State Certified General
Real Estate Appraiser
37
M. RICHARD COHEN
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
The certification of the Appraiser appearing in the appraisal report is subject
to the following conditions and to such other specific and limiting conditions
as are set forth by the Appraiser in the report.
1. The Appraiser assumes no responsibility for matters of a legal
nature affecting the property appraised or the title thereto, nor
does the Appraiser render any opinion as to the title, which is
assumed to be good and marketable. The property is appraised as
though under responsible ownership.
2. Any sketch in the report may show approximate dimensions and is
included to assist the reader in visualizing the property. The
Appraiser has made no survey of the property.
3. The Appraiser is not required to give testimony or appear in court
because of having made the appraisal with reference to the property
in question, unless arrangements have been previously made therefor.
4. Any distribution of the valuation in the report between land and
improvements applies only under the existing program of utilization.
The separate valuations for land and building must not be used in
conjunction with any other appraisal and are invalid if so used.
5. The Appraiser assumes that there are no hidden or inapparent
conditions of the property, subsoil, or structures, which would
render it more or less valuable. The Appraiser assumes no
responsibility for such conditions, or for engineering which might
be required to discover such factors.
6. Information, estimates, and opinions furnished to the Appraiser, and
contained in the report, were obtained from sources considered
reliable and believed to be true and correct. However, no
responsibility for accuracy of such items furnished the Appraiser
can be assumed by the Appraiser.
7. Disclosure of the contents of the appraisal report is governed by
the Bylaws and Regulations of the professional appraisal
organizations with which the Appraiser is affiliated.
38
M. RICHARD COHEN
<PAGE>
ASSUMPTIONS, LIMITING CONDITIONS & CONTINGENCIES (Continued)
8. Neither all, nor any part of the content of the report, or copy
thereof (including conclusions as to the property value, the
identity of the Appraiser, professional designations, reference to
any professional appraisal organizations, or the firm with which the
Appraiser is connected), shall be used for any purpose by anyone but
the client specified in the report, the borrower if appraisal fee
paid by same, the mortgagee or its successors and assigns, mortgage
insurers, consultants, professional appraisal organizations, any
state or federally approved financial institution, any department,
agency or instrumentality of the United States or any state or the
District of Columbia, without the previous written consent of the
Appraiser nor shall it be conveyed by anyone to the public through
advertising, public relations, news, sales, or other media, without
the written consent and approval of the Appraiser.
9. On all appraisals, subject to satisfactory completion, repairs, or
alterations, the appraisal report and value conclusion are
contingent upon completion of the improvements in a workmanlike
manner.
10. With the delivery of this appraisal, the employment is completed and
the appraisal fee is due and payable upon receipt of billing. If
further reports are necessary, or court appearances desired,
separate arrangements must be made for additional services.
39
M. RICHARD COHEN
<PAGE>
PROFESSIONAL QUALIFICATIONS OF
M. RICHARD COHEN
WORK ACTIVITY: Real Estate Appraiser & Valuation
Engineer
EDUCATION: University of Pennsylvania
B.S. Degree - Civil Engineering
M.B.A. Degree - Real Estate and
Finance
PREVIOUS WORK EXPERIENCE: Albert M. Greenfield & Co.
Senior Appraiser of Real Estate
Phila. Industrial Devel [ILLEGIBLE]
Director of Planning
R.C. Weldon & Co. - [ILLEGIBLE]
Contractors
LICENSES: Licensed General Real [ILLEGIBLE]
Appraiser - Pennsylvania [ILLEGIBLE]
Jersey, Real Estate [ILLEGIBLE]
Pennsylvania, Registered [ILLEGIBLE]
Professional Engineer [ILLEGIBLE]
Pennsylvania
PROFESSIONAL ASSOCIATIONS: The Appraisal Institute [ILLEGIBLE]
Senior Member, American [ILLEGIBLE]
Appraisers (ASA)
Senior Member, American Right of
Way Association (R/W)
Pennsylvania Society of
Professional Engineers (PE)
TEACHING EXPERIENCE: A member of the faculty of University of
Pennsylvania Wharton School for 17 years
(1970-1987), teaching Economics of
Construction, Valuation and Real Estate
Practice
40
M. RICHARD COHEN
<PAGE>
PROFESSIONAL QUALIFICATIONS OF M. RICHARD COHEN (Continued)
BANKING EXPERIENCE: Formerly a Director of Elkins Park National
Bank
Formerly Advisory Board Member of Industrial
Valley Bank
Formerly a Director of Cayuga Savings and
Loan Association
SCOPE OF WORK AREA: Pennsylvania, New Jersey, Ohio, New York,
Maryland, Michigan, Delaware, California,
Texas, North Carolina, South Carolina,
Georgia, and Louisiana
PUBLICATIONS: Contributing Author to Appraising Easements
published by the National Trust for Historic
Preservation
41
M. RICHARD COHEN
<PAGE>
ADDENDUM
M. RICHARD COHEN
<PAGE>
[PHOTO OMITTED]
1845 WALNUT STREET
PHILADELPHIA, PA
M. RICHARD COHEN
<PAGE>
[PHOTO OMITTED]
VIEW SHOWING RITTENHOUSE SQUARE
M. RICHARD COHEN
<PAGE>
[PHOTO OMITTED]
SANSOM STREET FRONTAGE
M. RICHARD COHEN
<PAGE>
[GRAPHIC OMITTED]
Location Map
<PAGE>
[GRAPHIC OMITTED]
Flood Plain Map
<PAGE>
[GRAPHIC OMITTED]
1845 Walnut Street/Philadelphia, PA
1st Floor
Floor Plan
<PAGE>
[GRAPHIC OMITTED]
1845 Walnut Street/Philadelphia, PA
6th Floor
Floor Plan
<PAGE>
[GRAPHIC OMITTED]
1845 Walnut Street/Philadelphia, PA
7th Floor
Floor Plan
<PAGE>
[GRAPHIC OMITTED]
1845 Walnut Street/Philadelphia, PA
8th Floor
Floor Plan
SELF CONTAINED
APPRAISAL REPORT
COMPLETE APPRAISAL
OF
1805-09 WALNUT STREET
PHILADELPHIA, PENNSYLVANIA
FOR
RESOURCE ASSET INVESTMENT TRUST
BY
LOUIS A. IATAROLA, MAI, SRA
<PAGE>
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
Tacony Music Hall - Second Floor
4819 Longshore Avenue
Philadelphia, PA 19135
----------
Tel: (215) 331-1551
Fax: (215) 332-9266
September 23, 1997
Resource Asset Investment Trust and
RAIT Partnership, A Delaware Limited Partnership
1521 Locust Street
Philadelphia, PA 19102
Attention: Jay Eisner
Re: 1805-09 Walnut Street
Philadelphia, Pennsylvania
--------------------------
Dear Mr. Eisner:
In accordance with your request, the captioned property was inspected
April 29, 1997 for the purpose of estimating market value of the leased fee
interest created by virtue of two long term teases with credit tenants that will
bring the building to 100% occupancy.
The property consists of an interior lot of 12,314 +/- square feet
improved with an eight story structure containing a gross building area of
64,000 +/- square feet and a rentable area of 58,192 +/- square feet which
includes storage area in the basement.
The first, second and third floors are currently undergoing a complete
renovation program transforming these floors into a retail bookstore and coffee
shop for Barnes & Noble Superstores, Inc. The remaining floors are occupied as
corporate headquarters for a local retailer known as Urban Outfitters with two
non-related tenants on the fourth floor. The property was fully leased as of the
date of inspection.
The improvements were situated along the premier retail Shopping district
of Center City along Walnut Street on Rittenhouse Square, a prestigious location
which has attracted numerous upscale retailers, restaurants and service type
businesses.
<PAGE>
Jay Eisner
September 23, 1997
Page Two
As a result of our investigation, which involved research of data relating
to similar commercial properties in the Greater Philadelphia marketplace, it is
my opinion that the as is market value of the leased fee interest in the subject
property as of April 29, 1997, assuming a reasonable time as allowed for
exposure on the open market was:
EIGHT MILLION FOUR HUNDRED THOUSAND DOLLARS
($8,400,000.00)
It will be demonstrated in the accompanying text that contract rents are
essentially at market level. As a result, while the leased fee interest has been
valued at $8.4 million the fee simple interest an the property as of April 29,
1997 was also:
EIGHT MILLION FOUR HUNDRED THOUSAND DOLLARS
($8,400,000.00)
In addition, based on analysis of market data, conversations with real
estate brokers and this appraiser's experience, with emphasis placed upon
current market conditions, the marketing period to effect a sale for the subject
property was estimated to be approximately 9/12 months.
The accompanying report contains a complete analysis of the property, its
surroundings and supplemental supporting data employed in arriving at the market
value conclusion. My findings are summarized an the text of this report which
resulted in a rather comprehensive analysis of the property's economic worth.
This appraisal has been prepared in accordance with "Uniform Standards of
Professional Appraisal Practice" (USPAP) as published by the Appraisal Standards
Board of the Appraisal Foundation. This appraisal assignment was not based on a
requested minimum valuation, a specific valuation, or the approval of a loan.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
Jay Eisner
September 23, 1997
Page Three
Appraiser consents to the use and filing of this appraisal as an exhibit
to the Resource Asset Investment Trust registration statement that has been
filed with the Securities and Exchange Commission and consents to the use of
their name in the registration statement in connection therewith.
I trust you will find this report In good order Thank you for the
opportunity to be of service and please feel free to contact me should you wish
to discuss my views and analysis in greater depth.
Respectfully submitted,
/s/ Louis A. Iatarola
Louis A. Iatarola, MAI, SRA
PA Certified General Real Estate Appraiser
Certificate No. GAOOO176L
LAI/bal
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
TABLE OF CONTENTS
PAGE NO.
--------
SUMMARY OF SALIENT FACTS AND CONCLUSIONS ................................. 1
PURPOSE AND FUNCTION OF THE APPRAISAL .................................... 2
SCOPE OF THE APPRAISAL ................................................... 4
REGIONAL ANALYSIS ........................................................ 6
NEIGHBORHOOD ANALYSIS .................................................... 10
THE SUBJECT PROPERTY ..................................................... 21
SITE ............................................................... 21
IMPROVEMENTS ....................................................... 22
OWNERSHIP ................................................................ 30
OCCUPANCY AND LEASE INFORMATION .......................................... 31
ASSESSMENT AND TAXES ..................................................... 34
FLOOD PLAIN INFORMATION .................................................. 34
ZONING ................................................................... 35
HIGHEST AND BEST USE ..................................................... 36
VALUATION ANALYSIS ....................................................... 40
INCOME CAPITALIZATION APPROACH ..................................... 42
INCOME CAPITALIZATION APPROACH VIA DIRECT CAPITALIZATION ........... 56
SALES COMPARISON APPROACH .......................................... 60
MARKETING PERIOD ......................................................... 71
EXPOSURE TIME ............................................................ 72
CERTIFICATE OF APPRAISAL ................................................. 73
ADDENDUM
ASSUMPTIONS AND LIMITING CONDITIONS
SUBJECT PHOTOGRAPHS
LEGAL DESCRIPTION
ARGUS - DCF SUPPORTING SCHEDULES
EXCERPTS FROM ZONING CODE
QUALIFICATIONS
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-1-
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
LOCATION 1805-09 Walnut Street
Philadelphia, Pennsylvania
REGISTERED OWNER Alison/Rittenhouse Associates, L.P.
LAND AREA 12,314 +/- square feet with 69.25' of
frontage along Walnut Street.
IMPROVEMENTS Eight story plus basement mixed-use
commercial building which is currently
undergoing rehabilitation and renovation on
the first, second and third floors,
converting this area into a Barnes & Noble
Bookstore. The upper floors are currently
used as office space for non-related
tenants. Gross building area was calculated
to contain 64,000 +/- square feet and a
rentable area of 58,192 +/- square feet.
ZONING C-5 Commercial
HIGHEST & BEST USE Retail/office
PROPERTY RIGHTS
APPRAISED Leased Fee
MARKET VALUE
INDICATIONS Income Capitalization Approach $8,400,000
Sales Comparison Approach $8,300,000
Cost Approach Not Applicable
FINAL ESTIMATE OF
OF MARKET VALUE $8,400,000
EFFECTIVE DATE OF
MARKET VALUE April 29,1997
DATE OF INSPECTION April 29, 1997
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-2-
PURPOSE AND FUNCTION OF THE APPRAISAL
The purpose of this appraisal was to estimate the market value of the
leased fee interest in the subject property as of April 29, 1997, date of
inspection, subject to existing leases which will be discussed in detail in the
following text.
As used herein, market value may be defined as "the most probable price
which a property should bring in a competitive and open market under all
conditions requisite to a fair sale, the buyer and seller, each acting
prudently, knowledgeably and assuming the price is not affected by undue
stimulus". Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions
whereby:
a. buyer and seller are typically motivated.
b. both parties are well informed or well advised, and acting in what
they consider their own best interest.
c. a reasonable time is allowed for exposure in the open market.
d. payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
e. the price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
The function of this report was to establish Market Value as defined to
assist the client in mortgage loan underwriting.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-3-
An appraisal of thus property was issued under date of May 27, 1997 to
MetLife Capital Financial Corp. with an effective date of valuation of April
29, 1997. On September 22, 1997 a request was obtained from Bill Wheeler of
Alison/Rittenhouse Associates to re-issue the appraisal to Resource Asset
Investment Trust. Permission was obtained from Tom Clancy of MetLife Capital
Financial Corporation to accommodate Mr. Wheeler's request.
PROPERTY RIGHTS APPRAISED
The fee simple estate subject to existing leases (leased fee interest)
constituted the real property evaluated in this report. Besides zoning controls
or deed restrictions and easements of record, the property was valued subject to
existing leases which will be discussed an the accompanying text.
The property was assumed to be free of contamination by asbestos,
petrochemicals and radon gas and other contaminants which, if present, may
adversely affect the value conclusions contained within the report. If any
contamination is found at the subject property, the appraiser reserves the right
to reanalyze the property reflective of the contamination and adjust the
property value as necessary.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-4-
SCOPE OF THE APPRAISAL
In valuing the subject property, the appraiser performed a number of
independent investigations and analyses with regard to the neighborhood, subject
property and market data. The investigations performed and the data sources
utilized are listed below.
NEIGHBORHOOD ANALYSIS
Examined demographic information provided by the Greater Philadelphia
Chamber of Commerce and the United States Bureau of the Census.
SUBJECT PROPERTY ANALYSIS
Physically inspected the subject property on April 29, 1997, at which time
photographs depicting the property, adjacent areas and street scene were taken.
Reviewed the Legal Description of the subject property. Reviewed a site survey
prepared by Catania Consulting Engineers prepared under date of January 26,
1996. Conversations were held with municipal representatives pertaining to the
subject property's tax assessment and zoning classification. Reviewed Flood
Insurance Rate Maps published by the U.S. Department of Housing and Development
in order to determine the subject's potential for flooding.
MARKET DATA ANALYSIS
Obtained data on commercial buildings which were considered to be similar
to the subject by reviewing data in my office files, reviewing trade
publications and researching data at City Hall. Verified all transactions by
either checking the public record or interviewing a principal in the
transaction. Also, obtained rental data on properties considered similar to the
subject. Verified each lease with the real estate agent, or either the lessor or
lessee.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-5-
Data accumulated was then processed in formulating an opinion of Market
Value for the property. Features unique to the subject property; i.e., pertinent
physical characteristics, functional utility and locational attributes, all of
which will be elaborated upon in the accompanying text, were taken into account
in final reconciliation.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-6-
REGIONAL ANALYSIS
The subject is located along the north side of Walnut Street, between 18th
and 19th Streets, in the Rittenhouse Square section of the City of Philadelphia
within the City of Philadelphia's Central Business District (CBD). The City of
Philadelphia is part of the Philadelphia Metropolitan Statistical Area (MSA) and
is part of the overall "Delaware Valley" region.
The Delaware Valley region extends from Wilmington, Delaware on the south
to Trenton, New Jersey on the north. This is an expansive geographical area
which disregards both county and state lines. Residents of the Delaware Valley
region spend over eight billion dollars annually making it a significant market.
The region also produces billions of dollars of diversified merchandise which is
sold all over the world. The key word for the economic picture of the region is
"diversification" which is based on the location and the ability of the area to
be continually adapted and utilized as a support to industry and commerce.
Because of substantial diversification, there have been no major "boom" and/or
"bust" periods as were experienced in many other regional areas in the United
States over the last ten years, but rather a growth pattern typically following
major national trends of expansion and contraction.
In virtually all sectors of the Delaware Valley region there was
significant industrial, commercial and residential growth up to the beginning of
1990s. While the effects of the national economic downturn the early part of
this decade and resulting poor retail estate conditions tended to impact the
Delaware Valley region, as well as the nation, during the ten year period
between 1980 and 1990 there were numerous office buildings, light industrial
parks and mixed-use projects developed in locations where access was convenient
by either car or public transportation. Commercial development, including the
construction of regional shopping malls and strip shopping centers, was
significant during the late 1970s through the mid 1980s in those suburban areas
experiencing population growth. Residential tract development was
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-7-
also strong during that same period, especially in the suburban areas of
Pennsylvania and New Jersey.
The Philadelphia MSA, as defined by the U.S. Census Bureau, is a nine
county area encompassing portions of both the Commonwealth of Pennsylvania and
the State of New Jersey, with the City of Philadelphia as the focal point. The
MSA includes Bucks, Chester, Delaware, Montgomery and Philadelphia Counties in
Pennsylvania, and Burlington, Camden, Gloucester and Salem Counties in New
Jersey. The Philadelphia MSA is ranked fourth in the nation in terms of size.
The Delaware Valley Regional Planning Commission (DVRPC) also tracks
population data for the Delaware Valley region. While similar to the U.S. Census
data, the DVRPC area utilizes the five county area in Pennsylvania but
substitutes Mercer County, including the City of Trenton, for Salem County, in
the State of New Jersey. For purposes of consistency in the analysis, the DVRPC
regional data will be utilized, as it is considered more reflective of the
"recognized" Delaware Valley regional area.
Population for the nine county DVRPC Region indicated a 3.2 percent
increase between 1980s and 1990s. Total population for the five county area
located in Pennsylvania, was 3,728,909 persons as of 1990s, a 1.3 percent
increase over the 1980s figure. Total population for the four county area in the
State of New Jersey was 1,453,796 which was an 8.3 percent increase over the
1980s population level. While the largest individual population increase for the
region occurred in Chester County (18.9 percent), the overall increase within
Pennsylvania was reduced due to the population losses in both Philadelphia and
Delaware Counties. The out-migration of Philadelphia is due in part to the
Philadelphia city wage tax (4.86 percent for residents and 4.223 percent for
non-residents in 1996) which is levied against individuals and businesses. In
contrast, all four counties in New Jersey experienced population growth, with
Gloucester County experiencing the second largest population increase
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-8-
(15.1 percent) in the regional area. Population figures for 1980 to 1990 by
county are shown below:
================================================================================
POPULATION FOR PHILADELPHIA
METROPOLITAN STATISTICAL AREA (MSA)
FOR 1980, 1990 AND 1994
- --------------------------------------------------------------------------------
County 1980 1990 %+ 1994 %+
- --------------------------------------------------------------------------------
Philadelphia 1,688,210 1,585,577 -6.1% 1,524,338 -3.86%
Bucks 479,180 541,174 12.9% 567,238 4.82%
Chester 316,660 376,396 18.9% 397,307 5.56%
Delaware 555,023 547,651 -1.3% 548,366 0.13%
Montgomery 643,377 678,111 5.4% 700,308 .26%
Burlington 362,542 395,066 9.0% 398,807 .95%
Camden 471,650 502,824 6.6% 506,579 .75%
Gloucester 199,917 230,082 15.1% 241,523 .97%
Mercer 317,019 325,824 2.78% 329,430 .11%
- --------------------------------------------------------------------------------
TOTAL 5,033,578 5,182,705 2.96% 5,213,896 0.60%
================================================================================
Source: Delaware Valley Regional Planning Commission
The region's population is anticipated to continue to increase through the
remainder of the 1990s and into the next century, with New Jersey experiencing
the greatest majority of forecasted growth. The five county Pennsylvania region
is anticipated to increase its population to 3,927,300 residents by the Year
2000 and to 3,976,500 by 2010, indicating 3.4 percent and 4.6 percent increases
over the 1990 levels. New Jersey is forecasted to experience continued
population growth with 1,622,800 residents anticipated by the Year 2000 with a
further increase to 1,742,900 residents by 2010, reflecting 10.5 percent and
18.6 percent increase over the 1990 figure. On a regional basis, the nine county
area is forecasted to have a total population of 5,550,100 residents by the Year
2000 and 5,719,400 residents by 2010, which are 5.4 percent and 8.5 percent
increases, respectively, over the 1990 level.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-9-
The Delaware Valley region has long been known for its very diverse
employment and economic base, which is one of the primary reasons for area's
overall stability. Employment in the Delaware Valley region remained strong
during the 1980 to 1990 period with the overall nine county region experiencing
increases. As with many other older metropolitan areas, there has been a shift
in employment away from manufacturing (both durable and non-durable goods) with
noticeable increases in the service, finance, real estate and insurance, and
retail sectors. The Delaware Valley region, especially in the metropolitan areas
such as Philadelphia, Camden, and Trenton, has experienced this overall
reorientation in employment. While this has caused significant job losses due to
the heavy manufacturing orientation of the region, the losses experienced in the
manufacturing sectors have been offset to a large extent by increases in other
areas.
As projected by the Pennsylvania Department of Labor and Industry, the
largest employment growth between 1985 and 1995 will be in the business
services, health services, restaurant, and wholesale trade categories. In
comparison, most job losses are anticipated in the manufacturing, textiles, and
fabricated metal products. The government employment sector is predicted to
remain relatively constant over the period with some slight declines. Employment
in the five county Pennsylvania area increased from 1,624,331 in 1980s to
1,838,806 in 1990s, indicating a 13.2 percent gain.
The regional area is benefitted by an integrated regional highway and
transportation system that is one of the best in the nation. Within Pennsylvania
primary highways include Interstates 76, 276, 476, and 95 as well as the
Pennsylvania Turnpike. Other major highways in the Pennsylvania portion of the
region include Routes 1, 3, 202, 322, 452, and 611. In addition, the regional
area is supplemented by a network of interconnecting local arterial highways,
secondary roads, and local feeder streets.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
[GRAPHIC OMITTED]
LOCATION MAP
<PAGE>
-10-
NEIGHBORHOOD ANALYSIS
The subject property is located on prestigious Rittenhouse Square in the
City of Philadelphia, directly facing the Park to the south. Rittenhouse Square,
a landscaped city park that is one square block, is bounded by 18th Street, 19th
Street, Walnut Street and Locust Street. A delightful open space with mature
trees, statuary, paved walkways and ample benches, through the year the square
is the site of various art and horticultural activities and is a central feature
of the neighborhood. The Rittenhouse Square Neighbor's Association oversees the
park and actively promotes the restoration of the area's 19th century historic
buildings. This location is convenient to nearby offices, historical sites,
hospitals, shopping, recreational facilities, dining and a number of
entertainment alternatives. The immediate area is a mixture of commercial and
residential uses. Generally, the residential uses are located south of Walnut
Street, with a heavy concentration along Spruce, Pine and Lombard Streets and
the smaller intersecting streets. The area is on the National Register of
Historic Places and also designated a city historic district by the Philadelphia
Historical Commission. The Graduate Hospital (18th and Lombard Streets) is
located four blocks south of Rittenhouse Square.
Adjoining the subject to the east is a historically-certified uniquely
designed structure with a rounded front that presently is occupied by Urban
Outfitters as a retail outlet. To the west is the former Rittenhouse Club,
another uniquely designed historical structure that is being purchased by the
same ownership as the subject who were originally proposing retail use for the
first floor. A gourmet supermarket had been proposed but area residents argued
strongly against such a use. At present, ownership is proposing a new hotel of
210 +/- rooms which would retain the structure's facade and be operated by and
part of the Grand Heritage chain. This latter proposal is in its very early
stages and its ultimate development is, at best, uncertain at the present time.
Farther west but on the same block, is 1845 Walnut Street, a 25 story, 350,000
+/- square foot older Class A, multi-tenant, office building with attached
multi-
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-11-
level self-park garage which was built in the early 1960s. Surrounding the Park
are a number of older, but very prestigious, apartments and condominium
structures and a co-operative apartment as well as the Rittenhouse Hotel and
Condominiums which was completed in the mid-1980s.
Philadelphia is a city of neighborhoods, each being very distinctive, with
individual characteristics. Communities closest to the subject include Fitler
Square to the west, a residential neighborhood located west of 22nd Street,
south of Walnut Street. The subject lies at the southwest corner of the city's
Central Business District (CBD) which stretches from the Benjamin Franklin
Parkway to Walnut Street and Front Street to 22nd Street. Walnut Street,
Chestnut Street and Broad Street represent the older, once prime office
locations with the most recent new activity concentrated along Market and Arch
Streets, west of Broad Street. Activity east of Broad Street has been centered
around the new Pennsylvania Convention Center and Marriott Hotel. There has been
no new office activity east of Broad Street and limited new retail, with
additional hotel rooms to serve the convention center being the current priority
for the area.
Broad Street, to the east of the subject, is emerging as the core of
artistic pursuits with South Broad Street, in the vicinity of Locust Street to
Washington Avenue, identified as the cornerstone of the Avenue of the Arts,
which is proposed to extend to North Broad Street. The Avenue of the Arts is a
$350 million project controlled by the Avenue of the Arts, Inc., a private
non-profit organization formed in 1992 and led by a committed volunteer board of
business, community and cultural leaders. The ongoing project has significantly
increased the number, quality and availability of the city's arts and
entertainment experiences, providing attractive and appropriate facilities for
experimental and community based arts groups, established cultural organizations
as well as internationally recognized artists.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-12-
Prominent land uses along the Avenue include the former Philadelphia
College of Arts (now encompassing other disciplines and now known as the
University of the Arts), the Academy of Music, Merriam Theater, new Wilma
Theatre, Philadelphia Arts Bank, Pennsylvania Ballet's headquarters, High School
for the Creative and Performing Arts (under construction), Performing Arts
Center (proposed), Firehouse Arts Center, Philadelphia Clef Club, and the
Doubletree and Bellevue Hotels. A new $140 +/- million Philadelphia Orchestra
Concert Hall and garage is proposed to be located at the southwest corner of
South Broad and Spruce Streets. Also part of the project is a new streetscape
which involved the redesign of S. Broad Street into a 1920s style grand
boulevard with a new cobblestone cartway, decorative street lighting which play
chimes, new sidewalks, public art and landscaped median strip. This 15 month,
$15 million project has been recently completed.
The Independence Mall area, Washington Square Park and other historic
buildings are located 12 blocks east of the subject. Within the Washington
Square area are several medical institutions. The Pennsylvania Hospital complex
is located at 8th and Spruce Streets, Thomas Jefferson University Hospital at
10th and Chestnut Streets, and Wills Eye Hospital at 9th and Walnut Streets. The
hospitals, numerous medical professional and Federal office buildings influence
the market, and help support the economic viability of the immediate area. In
addition, the Federal Courthouse, located at 6th and Arch Streets is a major
employer.
The main campus of the University of Pennsylvania is located 16 blocks
west of Rittenhouse Square within a few minutes driving time. Many persons
associated with the university (faculty, staff and students) live in the
Rittenhouse Square neighborhood.
Southeastern Pennsylvania Transportation Authority (SEPTA) provides an
abundance of public transportation for local residents, with easy access to all
sections of the city and suburbs, including bus lines running along Walnut,
Chestnut and Market Streets. In addition, the Lindenwold High Speed Line (stop
at 8th and Market
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-13-
Streets), the Market Street Subway (stop at 15th and Market Streets) and the
SEPTA regional commuter rail line with a major interconnection at 16th and
Market Streets (Suburban Station) all serve the subject area. The Broad Street
Subway (north/south) has a subterranean stop at Broad and Walnut Streets. Within
the past five years a new bus service was inaugurated to serve the Center City
area. Known as the Phlash, it's route runs from the Headhouse Square to Penn's
Landing through the Central Business District and westward along the Benjamin
Franklin Parkway to Logan Circle and returning via the Rittenhouse Square
neighborhood and returning to Headhouse Square.
Major roadways in the area include the Vine Street Expressway, north of
the subject, which connects with the Schuylkill Expressway (1-76) and the
Delaware Expressway (1-95). Access to New Jersey is via a number of bridges,
including the Walt Whitman, Benjamin Franklin and Betsy Ross. The Philadelphia
International Airport is twenty minutes by automobile during "off peak" traffic
hours.
Offsetting the positive aspects of the subject's convenient location is
the negative tax climate prevalent in the City of Philadelphia due to the high
business taxes and the City Wage Tax. This has forced many businesses and
residents to leave the city. When these factors are coupled with the federal
income tax law of 1988, which reduced the tax shelter benefits of investment
real estate, the diminished market activity in the sale of Center City
properties becomes evident. This was followed by the Savings and Loan crisis
which saw the failing of many lending institutions, the foreclosures of many
real estate loans due to earlier over-leveraging of the properties and multiple
property and package loan sales through the Resolution Trust Corporation (RTC)
and the Federal Deposit Insurance Corporation (FDIC). If the seller was not an
institution or a property owner about to lose the property, there was little
demand for the property in the open market since the sales through the
government agencies were, or perceived to represent, forced or liquidation
sales.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-14-
At the same time, the trouble in the lending communities made new
financing extremely difficult to secure, if not impossible. Therefore, few
"typical" sales occurred and the independent seller's price expectations were
not adjusted downward to reflect the realities of the market environment. Over
the last 24 months we have seen a renewed, although cautious market environment.
Investors are actively searching for property and lenders having money available
for financing, although speculative financing is still almost non-existent. The
marketplace is not as nearly aggressive as in past years and values, which
declined, are beginning to again increase in selected areas. The demand for the
first class product is very strong with the lesser product in demand but not
rebounding nearly as quickly. Sales are still somewhat limited but we have seen
in many of the marketplaces and with certain product types the return of
investor confidence and available financing.
OFFICE MARKET OVERVIEW
The Center City section of Philadelphia has witnessed significant
revitalization and growth until the late 1980s when the most recent recession
began. The current national economic conditions coupled with population and
business migration from the city's core to outlining suburbs has adversely
affected residential and commercial properties within Center City Philadelphia
in recent years. The downturn in the economy resulted in no new construction
being initiated for the office marketplace. The Philadelphia Central Business
District (CBD) is divided into two segments: East of Broad Street and West of
Broad Street. City Hall, located at the intersection of Broad and Market
Streets, is the hub of the four quadrants as follows:
NE Quadrant East of Broad Street North of Market Street
SE Quadrant East of Broad Street South of Market Street
NW Quadrant West of Broad Street North of Market Street
SW Quadrant West of Broad Street South of Market Street
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
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With the advent of Penn Center (NW Quadrant) in the late 1950s, the focus
of the office market began to shift from the SW Quadrant (South Broad Street to
18th Street). During the 1980s Penn Center witnessed a 9.0 +/- million square
foot increase in available Class A office space due to the new
construction/renovation of office towers including:
Blue Cross 1901 Market Street 850,000 SF
Commerce Square 2005 Market Street 925,000 SF
Mellon Bank 1735 Market Street 1,200,000 SF
One Liberty Place 1650 Market Street 1,200,000 SF
Two Liberty Place 50 S. 16th Street 650,000 SF
11 Penn Center 1835 Market Street 1,850,000 SF
Centre Square 1500 Market Street 670,000 SF
10 Penn Center 1801 Market Street 540,000 SF
3 Penn Center 1515 Market Street ----------
TOTAL 9,085,000 SF
Lured by rental discounts and incentives, tenants located in the SW
Quadrant Class B buildings began to move to the NW Quadrant's older Class A
buildings, leaving in their wake more than 3.5 +/- million square feet of Class
B space within the entire CBD for which there is now little demand. This also
occurred at many of the Class B buildings located along Chestnut and Walnut
Streets, west of Broad Street. In some cases these buildings shut down the upper
floor office space, sustaining the building with the street level retail only.
The Cushman & Wakefield Office Market Report - Mid Year 1997 summarized
the office market as follows:
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-16-
================================================================================
Area Class A Class B Class C
================================================================================
East of Broad Street
Inventory 5,407,983 5,977,321 263,000
Available 402,673 1,737,138 117,700
Vacancy 7.7 29.1 44.8
Rental/SF 19.02 15.77 9.86
- --------------------------------------------------------------------------------
West of Broad Street
Inventory 21,252,967 6,536,189 203,668
Available 2,369,574 1,152,431 28,227
Vacancy 11.2% 17.6 13.9%
Rental/SF 19.39 14.55 12.33
- --------------------------------------------------------------------------------
Total - East and West
Inventory 26,660,860 12,513,510 466,668
Available 2,559,624 2,839,668 145,927
Vacancy 9.6% 23.1% 31.3%
Rental/SF 19.33 15.28 10.34
================================================================================
The momentum that was generated in the first half of 1996 accelerated
during the second half of the year. Center City saw a positive absorption of
887,282 square feet in 1996, the highest since 1990. The West of Broad Street
sub-market is experiencing the type of growth recently found in the Philadelphia
suburbs. Comprised of mostly Philadelphia's newer Class A product, the overall
vacancy rate for West of Broad Street is 14.0%
The subject is unique in the Class B marketplace primarily due to its
Rittenhouse Square location, small "floor plates" and the fact that Barnes &
Noble will be occupying the first three floors. In addition, the subject is
presently 100% leased. According to its new leasing agent, the nearby older 25
story, 350,000 +/- square foot Class A, 1845 Walnut Street office building has
increased its occupancy from approximately 60% to 83% over the past year and
expects to be over 90% by the end of the year. This property has undergone lobby
and elevator renovations over the past year and includes an adjoining parking
garage. Some of the older Class B buildings along Walnut Street including 1528,
1616 and 1628 Walnut Street have
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
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undergone recent renovations and are beginning to make a comeback as the
concentration of upscale retail merchants along Walnut Street has had the affect
of attracting certain office tenants. Market Street, west of Broad Street,
location is still the prime office location in the CBD followed by JFK Boulevard
and Arch Street. Chestnut Street has limited office demand while Walnut Street
is best known for its retail orientation. As stated previously, the Rittenhouse
Square location and view has historically been a very strong attraction with
1845 Walnut Street starting to attract some law firms to the building.
In most cases, attractive and well maintained Class B office buildings
within the Rittenhouse Square sub-market have performed better than most and
should continue to do so.
RETAIL MARKET OVERVIEW
Serving the retail and commercial establishments within the Central
Business District is the Center City District, a quasi-governmental unit
inaugurated in 1991. The district boundaries are approximately Race Street
(north), Spruce Street (south) 6th Street (east) and 21st Street (west).
Commercial properties are assessed in order to pay for special services
including street cleaning, police foot patrol and marketing/ promotion programs.
The Center City District also works closely with merchants in the area in order
to improve the climate for retail trade. The District performs market studies of
the service area including a semi-annual survey of retail space occupancy rates.
The most recently published report was in December 1996. The study is summarized
as follows:
===================================================================
As of 8/91 As of 12/96 % Change
-------------------------------------------------------------------
No. Retail Premises 2,274 2,434 7.6%
Vacant 382 312 -18.3%
Occupied 1,892 2,122 12%
Occupancy Rate 83.2% 87.2%
===================================================================
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-18-
In addition to the foregoing information, we have had discussions with
real estate brokers active in the area. Our discussion focused on the Walnut
Street corridor from Broad Street westward to 20th Street. Historically, Market
and Chestnut Streets were the prime retail arteries. Office development replaced
much of the Market Street retail except for the Market Street East/Gallery
project between 9th and 11th Streets which includes a three level mall and
department stores, and the more recently completed Liberty Place, between 16th
and 17th Streets, which includes a two level mall area, two office towers and a
Ritz-Carlton Hotel.
Chestnut Street was long considered the prime retail block, followed by
Walnut Street. Approximately 15 years ago an attempt was made by the city to
convert the cartway into a pedestrian mall or transitway, limiting public
vehicular access and constructing larger and attractive sidewalks with new
lighting and bus stops. The idea experienced limited success with major
retailers shunning Chestnut Street to a degree. The city is currently
considering removing the transitway and attempting to develop a new concept that
might attract a better level of retailer to Chestnut Street. Also noted is the
fact that most new office development took place west of Broad Street with many
of the older Class B/C office buildings suffering significant vacancies or, in
some cases, vacating and closing the office space. Therefore, the client base
for many of the stores located east of Broad Street dwindled, forcing many to go
out of business or relocate. What remained in many blocks were smaller
operations with many having unsightly exterior store displays. At this point
Walnut Street, west of Broad Street, became the primary location for the major
retailer of national renown and many new restaurants.
Along the Walnut Street corridor, west of Broad Street, "high end"
national merchants have set up retail outlets. These include Polo Ralph Lauren,
Tiffany's, HMV Records, Starbucks, The Bombay Company, Nautica, The Gap,
Burberry, Banana Republic, Gap Kids, Jones of New York, Ann Taylor, Borders Book
Shop, The Talbots and Rodier of Paris. Bank branches noted along this section of
Walnut Street include
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-19-
Regent National Bank, 1st Executive Bank, PNC Bank, Brown Brothers Harriman,
Jefferson Bank, Mellon Bank, First Union Bank and CoreStates Bank.
Also of note is Temple University's Center City Campus located in the 1600
block of Walnut Street, Bally's recently opened Fitness Center at 15th and
Walnut Streets and a number of older Class B/C hi-rise office buildings some of
which have been shut down except for the ground floor retail space.
This section of Walnut Street offers some of the finest restaurants in
Philadelphia including the nationally acclaimed Le Bec Fin and the recently
opened Striped Bass Restaurant and Porto Fino. A new "moderately priced"
restaurant has opened in 1609 Walnut Street which is operated by Georges Perrier
the owner of Le Bec Fin. The presence of these restaurants has contributed to
the ambiance of the Walnut Street corridor especially during the evening hours.
The restaurants have attracted customers to the area thus benefitting adjacent
and nearby retail stores.
We performed exterior inspections of the retail stores along the Walnut
Street corridor west of Broad Street and found only one vacant space, The Nature
Company at 17th and Walnut Streets. This retailer is typically located within a
suburban mall and reportedly did not do well at this Center City location. The
lease has three years remaining and reportedly, the tenant is continuing to pay
the rent. This space will most likely be sub-leased in the near future.
18th Street is a secondary commercial strip from Chestnut Street to Locust
Street. Stores include Urban Outfitters, Houlihans Restaurant, Alaska Ice Cream,
Hats in the Belfry, and a variety of small retail stores. We note that 18th
Street is experiencing an upgrading of retail space and within the past 3-5
years has become a prime retail location. As existing leases terminate they are
either renegotiated to a higher rent or a new tenant is obtained and some of the
properties which were under common ownership for many years have changed hands.
Typically new tenants make
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
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significant investment in fitout of a new store or restaurant. In short, 18th
Street is now benefitting from the upgrading of the Walnut Street corridor west
of Broad Street that has occurred during the past 5 +/- years. Higher end retail
has literally "turned the corner" at 18th and Walnut Streets although the new
Barnes & Noble bookstore going in at 1805-09 Walnut Street will serve to extend
the Walnut Street corridor an additional block to the west.
Although the City of Philadelphia has experienced a downturn in employment
and downsizing of large companies, the Rittenhouse Square area has been
relatively stable. Residential apartments are scarce and a premium is paid for
units that offer an "up-scale" ambiance. The retail real estate market continues
to be strong along Walnut Street as evidenced by the recent introduction of
national "high end" retailers and fine restaurants.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-21-
THE SUBJECT PROPERTY
SITE
Based on the legal descriptions, the subject consists of an "L" shaped
interior parcel with 69'3" of frontage along the north side of Walnut Street and
25'3" along the south side of Sansom Street. Maximum depth is 235'. Total land
area is 12,314 +/- square feet. The westerly portion of the property abuts a 4'
wide alley to the north which connects with a 3'7 1/2" wide alley to the west
which travels along the rear of 126-132 S. 18th Street (common ownership with
the Alison Building) and terminates at Sansom Street to the north.
The site is level and at street grade and there appear to be no drainage
problems.
The site is served by all public utilities including electric, telephone,
natural gas and municipal water and sewer.
Walnut Street is a westbound one way asphalt paved street with concrete
curbs and sidewalks. The street contains two vehicle operating lanes and one
metered parking lane. Parking is prohibited during the afternoon "rush hours"
4:00 PM to 6:30 PM.
Normal utility easements are assumed and as noted previously, the legal
descriptions reference a 4' wide alley along a portion of the subject's northern
boundary line which connects to a 3'7 1/2" wide alley which parallels 18th
Street and runs behind 126-132 S. 18th Street to Sansom Street. Due to the
common ownership of these properties the alleys are not clearly identifiable,
appearing to be part of the rear paved parking/loading area at the rear of the
Alison Building. No other easements, encroachments or restrictions, either
recorded or unrecorded, or other legal constraints that could adversely affect
the subject and/or value was uncovered or revealed by the owner of client.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-22-
IMPROVEMENTS
The subject property consists of an eight story and basement property that
was for years the corporate headquarters of a large insurance company. More
recently it consisted of office space on some of the upper floors with street
level retail including a branch bank and coffee shop. As of the date of our
inspection, the branch bank had vacated due to a merger, the coffee shop had
vacated as part of a lease buy-out and Floors 5, 6, 7 and 8 were occupied as the
corporate offices of Urban Outfitters which also have a multi-level retail
outlet in the adjoining building.
FOUNDATION Reinforced poured concrete.
FRAMING Masonry common and bearing walls with
concrete framing throughout. Interior column
spacing is typically 12' x 15'.
FLOORING Reinforced concrete throughout with a
reported load capacity of 100 lbs per square
foot.
EXTERIOR WALLS Brick common, rear and side walls with
limestone walls along the first floor's
front elevation and limestone neo-classical
20th Century ornamental treatments,
including columns and cornices, accenting
the second and third floor front elevation.
Four elevated flag poles project from above
the second floor front elevation.
FENESTRATION Double hung single pane wood sash window
along the front and side elevations, many
with interior wood or aluminum storm sash
installed. The second floor front consists
of steel French doors with exterior
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-23-
FENESTRATION
(Continued) wrought iron railing providing a multiple
balcony affect. Bulk, brass framed, display
windows and cases serving the three former
storefronts along Walnut Street with each
storefront having a recessed entrance. The
main entrance doors serving the office lobby
and vestibule consist of a double set of
double brass framed glass doors.
Rear windows are steel framed, single pane,
part projecting sash, many with wire glass.
The eighth floor has anodized aluminum
framed double pane sash along three sides
including sliding doors providing access to
the roof.
ROOF Slightly pitched with built-up composition
cover. Reportedly, five years old.
INTERIOR FINISH The first, second and third floors are
presently being renovated and converted to a
Barnes & Noble Bookstore. Interior finish
has not been provided to the appraiser. The
fourth floor contains two tenant areas with
pine floors, wood panel walls and ceiling
and wallpaper over drywall in the Eberlein
Design space. The space occupied by the
realtor was recently finished with
wall-to-wall carpeting, painted sheetrock
walls, with wooden chair rail and baseboard
and painted sheetrock ceilings. Doors were
solid wood panel or glass panel units.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-24-
INTERIOR FINISH
(Continued) Ceilings in the Urban Outfitters space
consist of the exposed underside of the
concrete framing with some exposed brick on
the eighth floor. Office demising walls in
the Urban Outfitters space typically
consists of the floor-to-ceiling wood
studding with only one side covered with
drywall or plywood. Also noted in their
space were some interior doors which
consisted of heavy steel industrial style
swing or sliding doors. The fifth floor,
which they recently added to their leased
space appeared to be utilized for storage
only at this time, consists of more
typically finished office space with
carpeted floors, suspended acoustical tile
ceiling (many sections missing) and wood and
glass framed perimeter offices. It is
assumed that this space will eventually be
"stripped down" in a similar fashion to
their other floors.
The lobby is finished with marble floors and
walls with a decorative plaster ceiling and
decorative ceiling hung bulb lighting. Oak
panelled wall opposite the elevators.
Unless otherwise noted, floor cover consists
of exposed concrete or wall-to-wall carpet
with portions of the fourth floor having
random oak flooring.
The basement is on two levels and consists
of a number of rooms which house much of the
mechanical equipment. The area is generally
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-25-
INTERIOR FINISH
(Continued) unfinished with concrete flooring, exposed
concrete ceiling with ceiling hung
fluorescent lights and either painted
drywall or painted concrete block demising
walls.
HVAC Supplied by Trigen-Philadelphia Energy
Corporation's city steam loop system with
distribution via perimeter radiators.
Central air conditioning for Floors 4
through 7 via a newly installed rooftop
Carrier 110-ton self-contained chiller unit
with distribution through concealed or
exposed sheet metal ductwork. An older York
8-ton unit handles Floor 8. Another older
unit located in the basement does the lobby
and former three storefronts.
We understand that Barnes & Noble will be
piggybacking a new 85-100 ton chiller unit
to the subject's new system which will serve
their leased space instead of attempting to
install a totally separate split system. In
addition, Barnes & Noble will be utilizing
the subject's existing steam heat system.
ELECTRICITY Primary service is 2,400 volt with
distribution as needed. Each tenant space is
or will be individually sub-metered. An Onan
diesel emergency generator installed in the
basement.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-26-
SPRINKLER At present, the basement, 70% +/- of the
first floor and Floors 6, 7 and 8 are
sprinklered via a wet system. Barnes & Noble
will be installing sprinklers on Floors 4
and 5 shortly. Under City Code the entire
building must be sprinklered by September 1,
1998.
FIRE AND SECURITY Fire and smoke alarms throughout with pull
alarms, fire extinguishers, hoses and
standpipes at each stairway on each floor.
Two fire towers, one at the front leading
into the first floor elevator lobby and one
rear tower leading to the rear loading area
and continuing to the basement. Annunciation
panel at the front desk, monitored by a
third party service. Television monitors
serve the front and back of the building
with basement to be added. Card access
system serves the front door serving the
office lobby.
PLUMBING Cast iron waste lines and copper supply
lines. There are two lavatories on each
floor including the basement, although as
part of Barnes & Noble "soft" demolition,
they have removed the lavatories on Floors 2
and 3. The basement contains two 2-piece
lavatories. The first floor, at the rear of
the lobby and within the Barnes & Noble
space, are presently two 3-piece lavatories
each with two toilets and a sink.
On Floors 7 and 8 there are two 2-piece
lavatories on each floor. On Floors 5 and 6
the men's room contains two toilets, two
sinks and one urinal with the ladies' room
containing two toilets and two sinks.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-27-
PLUMBING
(Continued) The lavatories on the fifth floor are marked
"out of order". The fourth floor contains
two mens lavatories, one similar to the
fifth floor and one with two toilets and one
sink. The latter is at an interior location
appearing to originally have served an
executive area. The ladies' lavatory on this
level contains three toilets and two sinks.
Finish in the lavatories typically consists
of ceramic tile flooring, ceramic tile or
marble wainscoting or full walls and painted
drywall ceilings with fluorescent lighting.
It was assumed that Barnes & Noble will have
men's and ladies' lavatories at the rear of
the second floor.
ELEVATORS/ESCALATORS Two Otis 2,500 lb. capacity geared passenger
elevators serving all floors including
basement. One old Otis 2,500 lb. capacity 3'
x 5' hydraulic sidewalk type lift located in
the basement and serving only the basement
and rear ground level.
It has been reported that Barnes & Noble
will be installing escalators and a new
elevator to serve their space on Floors 1
through 3.
LOADING Loading consists of the rear elevator lift
which serves the rear ground level and
basement only. The former storefronts each
had a rear access door for loading. The
basement opens onto a rear below
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-28-
LOADING
(Continued) grade courtyard which is accessed from the
rear parking lot by steel stairs.
SITE IMPROVEMENTS The rear of the property consists of a paved
parking and loading area served by an
automatic steel overhead door fronting along
Sansom Street.
ESTIMATED BUILDING CALCULATIONS Gross Building Area 64,000 +/- SF
Rentable Building Area 58,192 +/- (includes
some basement storage)
AGE AND CONDITION
The subject property reportedly was constructed in two phases, 1923 and
1952. The overall condition of the subject space is rated average with Urban
Outfitters, which presently is occupying part of the fourth floor and all of the
5th, 6th, 7th and 8th floors having removed the suspended ceilings and some of
the other finishes in order to create an open "loft style" appearance with
painted exposed structural ceilings and columns with exposed ductwork. Floors 2
and 3 have been vacant for some time and as of our date of inspection were
undergoing "soft" demolition by Barnes & Noble in preparation for their
renovations which will also include a larger portion of the first floor and a
small space (3,000 +/- SF) in the basement. We understand that Barnes & Noble is
responsible for the majority their leasehold improvements including new HVAC,
electrical service, sprinklers and lavatories in addition to the installation of
escalators and an elevator. When complete, this will represent basically brand
new space.
The fourth floor presently contains two non-related tenants and has been
recently renovated to the specifications of the individual users.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-29-
After considering the condition of the subject property as a single
economic unit, it is our conclusion that the effective age of the subject, as a
whole, after the planned renovations, is 20 years. Based on our understanding of
the life cycle trends of urban retail buildings, the economic life of the
subject building improvements are estimated to be fifty years (defined as the
point when a complete renovation will be required, as contrasted with interim
updating every 10 to 15 years), compared to an estimated physical life of over
90 +/- years. Considering the estimated total life of the subject, and its
estimated effective age, the remaining economic life is estimated to be
approximately 30 years.
The foregoing estimates are predicated on continued maintenance
expenditures according to the level indicated by current standards and the
expenditures of an appropriate structural reserve for capital items. It should
be noted that the remaining economic life can be extended for a substantial
period, depending upon the quantity and quality of subsequent capital
expenditures and changes in market supply and demand patterns.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-30-
OWNERSHIP
As of the date of inspection the property was reportedly owned by Alison/
Rittenhouse Associates who purchased the subject property together with 126,
128, 130 and 132 S. 18th Street from Provident Mutual Life Insurance Company for
a reported total purchase price of $5,150,000. Settlement occurred on December
22, 1995. Ownership indicated that the allocated purchase price for the subject
was $4,150,000. Provident took back a purchase money mortgage on the subject in
the amount of $3,900,000 at 8% for a period of five years with a balloon payment
due January 1, 2001. Repayment consisted of a principal payment of $165,000 due
March 31, 1996; monthly installments of interest only beginning February 1, 1996
until January 1, 1998; then monthly installments of principal and interest of
$31,241.04 beginning February 1, 1998 until January 1, 2001. The transaction was
recorded in Deed Book VCS 1041, Page 493.
Previously, by deed dated December 21, 1992 and recorded in Deed Book VCS
215, Page 57, the two properties, along with 1801 Walnut Street, were sold by
Covenant Life Insurance Company (succeeded by Provident Mutual Life Insurance
Company) to Quarry Office Park Associates (Trammell Crow NE, Inc.) who
reportedly were proposing a major mixed-use project. The total recorded
consideration was $10,250,000 which included a $9,000,000 purchase money
mortgage. No property allocation of the acquisition price was provided. The
properties were subsequently taken back by Provident Mutual Life Insurance
Company be deed dated July 20, 1995 and recorded in Deed Book VCS 930, Page 205.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-31-
OCCUPANCY AND LEASE INFORMATION
The first, second and third floors are currently undergoing complete
renovation to be occupied by Barnes & Noble Bookstore and coffee shop. Total
leased area including a portion of the basement to be used for storage was
24,420 +/- square feet. Lease commencement date was March 15, 1997 with the term
of the lease running for 20 years with two five year option periods. The tenant
is responsible for its pro rata share of real estate taxes, insurance premiums,
common area maintenance plus use and occupancy tax and utilities. CAM expense
has been capped at $20,000 in the first year of the lease with 3% annual
increases thereafter. A tenant construction allowance of $1,000,000 will be paid
by the lessor to lessee within 30 days after tenants work is substantially
completed. Additionally, the rental amount has been reduced by $100,000 in the
first lease year only.
2,100 +/- square feet of the fourth floor has been leased to Eberlein
Design Consultants for a five year term beginning March 21, 1997. The lessee is
responsible for its pro rata share of electric for the fourth floor. An
additional 1,232 +/- square feet of this floor is leased to a real estate
company for 4 1/2 years commencing in June 1997. The lessee is responsible for
its pro rata share of electric. No lease has been provided.
The remaining portion of the fourth floor, 4,126 +/- square feet, has been
leased to Urban Outfitters for a 4 1/2 years term commencing June 1996. The
lessee is responsible for its pro rata share of electric only. Upon expiration
of the realty company and design company leases it has been reported that Urban
Outfitters will occupy these spaces at a predetermined rental rate of $15.00 per
square foot. Additionally, Floors 5, 6, 7 and 8, which total 26,614 +/- square
feet, are currently leased to Urban Outfitters, Inc. as their corporate
headquarters for a 15 year term which originally began January 7, 1994. The
fifth floor was added as a result of an amendment to the lease dated June 1,
1996. The lease term has been extended to
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-32-
May 31, 2011 which will co-terminate with the fourth floor lease. The lessee is
responsible for its pro rata share of electric, plus use and occupancy tax and
pro rata share of operating expenses over $10.00 per square foot of rentable
area. We are assuming that all rental or lease information provided verbally by
the current owners is true and accurate. The appraiser emphatically makes no
representation or warranties as to the accuracy of any information presented
verbally. If it is subsequently discovered that any of the information is
materially different than reported, the appraiser reserves the right to
re-analyze the data and adjust the value if necessary.
Presented on the following page is a presentation Rent Roll Tenant Summary
as of the date of valuation, generated by the Argus Software Program which
outlines the existing lease terms on a tenant by tenant basis.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
Software :ARGUS Ver. 7.0.01 Date : 6/2/97
File :ALISON Time : 11:43 AM
Property Type :Office & Retail Ref# : ASM
Portfolio : Page : 1
Alison building
1805-09 Walnut Street
Philadelphia, Pa/ 19103
PRESENTATION RENT ROLL & CURRENT TERM TENANT SUMMARY
As of May-1997 for 58,192 Square Feet
<TABLE>
<CAPTION>
DESCRIPTION AREA BASE RENT RENT ADJUSTMENTS & CATEGORIES ABATEMENTS REIMBURSEMENT
Tenant Name Floor Rate & Amount CPI & Current Months Pcnt Description of
Type & Suite Number SqFt per Year Changes Changes Porters' Wage to to Operating Expense
Lease Dates & Term Bldg Share per Month on to Miscellaneous Abate Abate Reimbursements
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Barnes & Noble $18.94 Mar-1998 $23.03 - - - See method:
Retail, Suite: 1,2,3 24,420 $462,500 Mar-2002 $25.34 barnes
Mar-1997 to Feb-2017 41.96% $1.58 Mar-2007 $27.87 reimbursement.
240 Months $38,542 Mar-2012 $30.66
Urban Outfitters $14.06 Jun-2001 $15.75 - - - See method:
Office, Suite: 5,6,7, 26,314 $370,000 Jun-2006 $17.64 urban
Jun-1996 to May-2011 45.22% $1.17 reimbursement.
180 Months $30,833
Urban Outfitters $13.79 - - - - - See method:
Office, Suite: 4 4,126 $56,900 urban
Jun-1996 to Dec-2001 7.09% $1.15 reimbursement.
67 Months $4,742
Eberlein Design $14,000 - - - - - See method:
Office, Suite: 4 2,100 $29,400 office
Mar-1997 to Feb-2002 3.61% $1.17 reimbursement.
60 Months $2,450
Realty co $13.80 Jun-1998 $14.21 - - - See method:
Office, Suite: 4 1,232 $17,000 Jun-2000 $14.64 office
Jun-1997 to Dec-2001 2.12% $1.15 reimbursement.
55 Months $1,417
Urban Outfitters $15.00 Feb-2008 $16.00 - - - See method:
Office, Suite: 4 2,100 $31,500 urban
Feb-2002 to May 2011 3.61% $1.25 reimbursement.
112 Months $2,625
Urban Outfitters $15.00 Feb-2008 $16.00 - - - See method:
Office, Suite: 4 1,232 $18,480 urban
Dec-2001 to May-2011 2.12% $1.25 reimbursement.
114 Months $1,540
Urban Outfitters $15.00 Feb-2008 $16.00 - - - See method:
Office, Suite: 4 4,126 $61,890 urban
Dec-2001 to May-2011 7.09% $1.25 reimbursement.
114 Months $5,158
<CAPTION>
DESCRIPTION A LEASING COSTS RETAIL UPON EXPIRATION
Tenant Name Imprvmnts Commssns Sales Assumption about
Type & Suite Number Rate Rate Breakpoint subsequent terms
Lease Dates & Term B Amount Amount Overage % for this tenant
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barnes & Noble - - - Renew
Retail, Suite: 1,2,3 See
Mar-1997 to Feb-2017 assumption
240 Months barnes
Urban Outfitters - - - Market
Office, Suite: 5,6,7, See
Jun-1996 to May-2011 assumption
180 Months urban
Urban Outfitters - - - ReAbsorb
Office, Suite: 4 See
Jun-1996 to Dec-2001 assumption
67 Months Ic1
Eberlein Design - - - ReAbsorb
Office, Suite: 4 See
Mar-1997 to Feb-2002 assumption
60 Months office
Realty co - - - ReAbsorb
Office, Suite: 4 See
Jun-1997 to Dec-2001 assumption
55 Months office
Urban Outfitters - - - Market
Office, Suite: 4 See
Feb-2002 to May 2011 assumption
112 Months urban
Urban Outfitters - - - Market
Office, Suite: 4 See
Dec-2001 to May-2011 assumption
114 Months urban
Urban Outfitters - - - Market
Office, Suite: 4 See
Dec-2001 to May-2011 assumption
114 Months urban
</TABLE>
<PAGE>
[GRAPHIC OMITTED]
FLOOD PLAIN MAP
<PAGE>
-34-
ASSESSMENT AND TAXES
According to the Philadelphia Real Estate Directory, the property was
assessed as follows:
Land $ 831,760
Improvements $ 480,240
---------
Total $1,312,000
The 1997 tax rate for the City of Philadelphia is $82.64 per $1,000 of
assessed value. Apply the current tax rate to the subject's current assessment
produces an annual tax liability of $108,423.68.
FLOOD PLAIN INFORMATION
I have examined published Flood and Insurance Maps supplied by the Federal
Emergency Management Administration of the Department of Housing and Urban
Development. After reviewing Map No. 420757-0183F dated August 2, 1996, it
appeared that the subject property is not situated within the limits of the 100
year flood plain.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
[GRAPHIC OMITTED]
ZONING MAP
<PAGE>
-35-
ZONING
The current zoning is C-5 Commercial. This is a General Business District
permitting retail sales, offices and personal and business services in enclosed
buildings. The requirements of this district allow an intensity of use of
maximum floor area ratio of 1200% of total lot area, 100% lot coverage and no
front, rear or side yard requirement. The subject property is also subject to
special controls for the Center City commercial as set forth by the Philadelphia
Zoning Code Section 14-1607. These controls, excerpted from the code may be
found in the Addendum.
As improved, the subject appears to be in compliance with the requirements
of the C-5 Zoning District.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-36-
HIGHEST AND BEST USE
In the most recent edition of The Appraisal of Real Estate, the Appraisal
Institute defines highest and best use as:
"The reasonably probable and legal use of vacant land or an improved
property, which is physically possible, appropriately supported,
financially feasible, and that results in the highest value."
To estimate highest and best use, four elements are considered:
1. Legally Permissible - What uses of the site are permitted under
current zoning or deed restrictions?
2. Physically Possible - What legally permissible uses are physically
possible given the size and shape of the subject site and the
utilities available?
3. Financially Feasible - Of the legally permissible and physically
possible uses of the site, which uses will produce a positive return
to the investor?
4. Maximally Productive - Of the financially feasible uses of the site,
which use will produce the highest net return or the highest present
value to the investor?
The following tests must be met in estimating highest and best use. The
use must be legal and probable, not speculative or conjectural. A demand for the
use must exist and it must yield the highest net return to the land for the
longest period. These tests are applied to the property as if it was vacant and
available for development at the time of the appraisal, and as it is presently
improved.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-37-
HIGHEST & BEST USE ASSUMING THE SITE WAS VACANT AND AVAILABLE
Legally Permissible
As mentioned in the Zoning section, the subject is situated within the
boundaries of the C-5 Commercial Zoning District, which allows development of a
site for commercial purposes. No known private restrictions affect property
title.
Physically Possible
The subject site contains 12,314 +/- square feet with 69.25' of frontage
along Walnut Street and 25.25' of frontage along Sansom Street. The topography
of the site is generally level and at grade with abutting streets and all
municipal utilities including sewer, water, gas, and electric services are
available. Therefore given the subject's physical characteristics (size, shape,
road frontage and topography) and availability of municipal utilities,
commercial development of the site appears to be physically possible.
Financially Feasible
After determining which uses of the subject are both legally permissible
and physically possible, further analysis must be made to determine whether
these uses are financially feasible. If the revenue generated from the legally
permissible and physically possible uses, is sufficient to satisfy the required
rate of return on the investment, the use is considered to be a financially
feasible use.
As mentioned in the Market Analysis section, the market appears to have
stabilized over the past 48-60 months. According to several Center City real
estate brokers, sales and leasing of commercial real estate in the Central
Business District currently appear to be brisk. Therefore, it is our opinion
that commercial development would be financially feasible at this time.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-38-
Maximally Productive
Of the uses of the subject property which meet the first three criteria,
namely legally permissible, physically possible and financially feasible, it is
that use, which indicates the highest rate of return or highest net present
value which is considered to be the Highest and Best Use of the site. Regarding
the alternative development options for the subject site, it is our opinion,
based on market evidence, that the most productive use of the site, or its
highest and best use assuming it was vacant and available for development as of
the date of the appraisal would be for construction of either single story or
multi-level commercial/retail building, consistent with that permitted under
current zoning. Such use was considered to represent that use which will reflect
the highest net present value as of the date of this appraisal.
HIGHEST AND BEST USE AS IMPROVED
Legally Permissible
As mentioned previously, the subject is situated within the boundaries of
the C-5 Commercial Zoning District, which allows development with commercial
type uses. No known private restrictions affect property title.
Physically Possible
The subject site contains 12,314 square feet with ample frontage along
Walnut Street. The topography of the site is generally level and at grade with
adjacent streets and all municipal utilities including sewer, water, gas and
electric services are available. Given the subject's physical characteristics
(size, shape, road frontage, and topography) and availability of municipal
utilities, development of an eight story commercial/retail building is
physically possible.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-39-
Financially Feasible
After determining which uses of the subject are both legally permissible
and physically possible, further analysis must be made to determine whether
these uses are financially feasible. If the revenue generated from the legally
permissible and physically possible uses, is sufficient to satisfy the required
rate of return on the investment, the use is considered to be a financially
feasible use.
Since 1991, the market has become increasingly stable. At the present time
it appears as though the commercial retail sector is making a comeback charting
sales and leases of commercial facilities in the Central Business District.
Therefore, given the subject's location along heavily travelled and commercially
built-up Walnut Street, it is our opinion that the subject could realize a
relatively high level occupancy in the future, and thus indicate a positive
return on investment.
Maximally Productive
Given that the existing improvements meet the first three criteria; namely
legally permissible, physically possible and financially feasible, a
rehabilitated multi-occupant commercial/retail building was considered to
represent the Highest and Best Use of the property as improved, on the date of
this appraisal.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-40-
VALUATION ANALYSIS
There are three broad approaches available to the appraiser in the
valuation of improved real property that are advocated by the profession:
1. The Sales Comparison Approach: that which is predicated on
comparable sales data which tend to reflect what willing and
knowledgeable, but uncoerced, sellers and buyers would agree upon as
the price at which a property should exchange.
2. The Income Capitalization Approach: where the foundation of value is
based on the income from property and which derives a present worth
estimate from a capitalization of such income.
3. The Cost Approach: that which is predicated on the concept that the
total value of improved property is equivalent to the market value
of the land plus the cost of the improvements, less depreciation
from physical, functional and/or economic deficiencies.
Direct Market Comparison estimates market value through the analysis of
considerations paid for substitute properties possessing the same apparent
utility as the subject property. This approach attempts to derive a market
valuation of a property as measured by the sales of comparable properties within
the same general locality. Typically, sales of properties sharing similar
characteristics in terms of utility, age and being similarly affected by
external influences are analyzed and compared to the subject, leading to a
conclusion at which price the subject may be expected to sell given its
pertinent physical, functional and economic characteristics. In order for the
Sales Comparison Approach to be effectively employed a quantity of directly
comparable or reasonably competitive properties that have sold are required. The
use of the subject as an office/retail facility is fairly typical for Center
City especially
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-41-
along Walnut Street, where a number of sales of similar buildings have occurred
over the past several years. However, most of these properties were a fraction
of the subject's floor area. As a result, our search of comparable properties
was expanded to include sales of commercial buildings of similar size in
suburban Philadelphia. Although geographically removed, the sales considered
were felt to be influenced by similar economic conditions, thereby providing a
reasonable basis of competitiveness with which to derive a value estimate for
the subject.
The Income Capitalization Approach views the property from an investment
standpoint. Real estate of this type is often bought and sold on the basis of
ability to produce a return on invested capital. This return is affected by
several major elements including: ability to produce income, expense of
operation, available mortgage financing and growth in the equity position
resulting from amortization and changes in property value. In the application of
the Income Capitalization Approach, these elements can be measured through
actual decision-making produced by competitive investments, thus, making the
approach a highly reliable and valid indicator of market value for the subject
property. The Income Capitalization Approach will render an estimate of value
based upon the present worth of the potential future benefits to the most
probable investor. This approach was felt to provide the most reliable
indication of market value for the subject property in as much as the property
is 100% leased on a long term basis with a creditworthy national tenant
occupying a large portion of the building.
The Cost Approach renders an estimate of market value based upon the price
of obtaining a site and constructing improvements which represent the highest
and best use of the land. In the instant analysis, it was felt that the Cost
Approach had several shortcomings. The contributory value of the improvements is
somewhat subjective due to the need to estimate depreciation from all causes on
this older commercial building, coupled with the fact that offers to purchase
would not be based on reproduction cost, the Cost Approach was not deemed useful
as a factual determinant of market value.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-42-
INCOME CAPITALIZATION APPROACH
In the Income Capitalization Approach, the property was valued using a
Discounted Cash Flow Analysis, which considers the present worth of the
property's estimated future income. Two principal tasks are required to use this
approach; forecast the income and expenses of the property based on an analysis
of the current leases and market trends; and obtain capitalization or discount
rates from the market to convert the financial forecasts into a value estimate.
A fifteen year income and expense forecast was made for the Discounted Cash Flow
Analysis, given the structure of the long term leases currently in effect.
Discounted Cash Flow Analysis is the process of estimating the present
worth of the future cash flows over a forecast period and adding to that the
present worth of the reversionary value of the property at the end of the
forecasted holding period. We have forecasted a fifteen year holding period
which reflects the extended lease terms of several of the tenants in the
building. The estimated future cash flows include the annual throw-off to equity
and potential gain on resale. The present worth of these cash flows is estimated
using an equity yield rate obtained from the market.
Potential gross income was projected by comparison with lease data among
competitive retail and office space within the general market area of the
subject. In this regard, large blocks of retail space are in short supply and,
in developing an opinion of economic rent, it became necessary to consider
transactions that might otherwise appear dated. The net income stream was
estimated after allowance for vacancy and turnover and expenses normally borne
by the lessor. Expenses were estimated based on a review of actual expenses
provided by ownership, our experience in appraising similar type properties, as
well as reference to expense reporting publications.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-43-
<TABLE>
<CAPTION>
===========================================================================================================================
SUMMARY OF COMPARABLE RETAIL LEASES
- ---------------------------------------------------------------------------------------------------------------------------
+ Tenant
Lease Base Free Expenses Lease
Name/Location Rentable/SF Area Data Rent/SF Rent Escalations ($/SF) Term
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Borders Bookstore 16,700 1st and 2nd 8/90 8/90 - $21.09 N/A N/A Pro rata 10 years
1725-27 Walnut Floor 8/93 - $25.30 share
Street 8/95 - $27.72
Philadelphia, PA 8/98 - $31.08
- ---------------------------------------------------------------------------------------------------------------------------
Talbots 4,000 1st Floor 5/90 5/90 - $46.04 N/A N/A All 12 Years
1729 Walnut 5/94 - $51.15
Street 5/97 - $56.27
Philadelphia, PA 5/00 - $61.38
- ---------------------------------------------------------------------------------------------------------------------------
HMV Records 25,000 1st and 2nd 3/96 Yr. 1-5 - $22.00 N/A 17% Increase Net Lease 20 Years
1508-10 Walnut Floor Yr. 6-10 - $25.30 each 5 yrs. 9 yrs. of
Street Yr. 11-15 - $29.10 options
Philadelphia, PA Yr. 16-20 - $33.46
- ---------------------------------------------------------------------------------------------------------------------------
Loehmanns 5,078 1st Floor 1995 Yr. 1 - 5 - $26.57 N/A N/A All 15 Years
1708 Walnut Front Yr. 6-10 -$31.35
Street 12,920 2nd Floor Yr. 11-15 - $36.99
Philadelphia, PA
- ---------------------------------------------------------------------------------------------------------------------------
1424 Chestnut 10,000 1st Floor Pending $25.00 5 months Not Disclosed All 10 years
Street
Philadelphia, PA
- ---------------------------------------------------------------------------------------------------------------------------
Ann Taylor 2,400 1st Floor 11/93 $25.00- Yr. 1 N/A $2.50/SF All 14 years
1713 Walnut $37.50 - Yrs. 2-3 per year utilities
Street plus real
Philadelphia, PA estate tax
and
Insurance
premiums
- ---------------------------------------------------------------------------------------------------------------------------
Wawa, Inc. 2,900 1st Floor 11/93 $32.90 - Yrs. 1-5 Tenant 30 Years
1600 Walnut $36.68 - Yrs. 6-10 pays
Street $41.62 - Yrs. 11-15 utilities
Philadelphia, PA $46.74 - Yrs. 16-30 only.
- ---------------------------------------------------------------------------------------------------------------------------
CVS, Inc. 12,658 1st Floor 1994 $30.97 - Yrs. 1-5 Lease 20 Years
1826-30 Chestnut $34.07 - Yrs. 6-10 written
Street $37.48 - Yrs. 11-20 on a net
Philadelphia, PA basis.
===========================================================================================================================
</TABLE>
===============================
Typical
Tenant
Name/Location Allowances
- -------------------------------
Borders Bookstore None
1725-27 Walnut
Street
Philadelphia, PA
- -------------------------------
Talbots None
1729 Walnut
Street
Philadelphia, PA
- -------------------------------
HMV Records None
1508-10 Walnut
Street
Philadelphia, PA
- -------------------------------
Loehmanns N/A
1708 Walnut
Street
Philadelphia, PA
- -------------------------------
1424 Chestnut None
Street
Philadelphia, PA
- -------------------------------
Ann Taylor N/A
1713 Walnut
Street
Philadelphia, PA
- -------------------------------
Wawa, Inc. None
1600 Walnut
Street
Philadelphia, PA
- -------------------------------
CVS, Inc. Tenant
1826-30 Chestnut responsible
Street for all fit
Philadelphia, PA out
===============================
<PAGE>
-44-
<TABLE>
<CAPTION>
==============================================================================================================================
SUMMARY OF OFFICE LEASES
- ------------------------------------------------------------------------------------------------------------------------------
Lessee Current
No. Location Lessee Area Term Rental Remarks
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 100 N. 20th Street PA Horticultural 26,992 SF 123 months Yrs. 1-3 $14.00 Tenant pays their own electricity,
Philadelphia, PA Society commencing Yrs. 4-5 $14.45 as well as a pro rata share of CAM
4/96 Yrs. 6-7 $14.85 and taxes over base year amounts.
Yrs. 8-10 $15.45 Free rent for the first 3 months
(outside the lease term). Tenant
received a $30.00 fitout allowance.
Tenant occupies 29.3% of the
building on three separate floors.
One 5 year renewal option. Net
effective rent is $11.41/SF.
- ------------------------------------------------------------------------------------------------------------------------------
2 1911 Arch Street Riverside Medical 51,565 SF 120 months Yrs. 1-5 $6.27 Lease is triple net. Operating
Philadelphia, PA commencing Yrs. 6-10 $7.49 expenses and real estate taxes
1/94 estimated at $7.56 in the first year.
Tenant occupies entire premises.
Tenant reportedly received a
$25.00 per square foot fit out
allowance and has spent their own
additional funds on building
renovations.
- ------------------------------------------------------------------------------------------------------------------------------
3 834 Chestnut Thomas Jefferson 10,490 SF 10 years $15.35/SF Annual increases of $.40/SF.
Street University commencing Tenant pays electricity and CAM.
Philadelphia, PA 6/96 $20.00/SF TI allowance.
- ------------------------------------------------------------------------------------------------------------------------------
4 229 S. 18th Street Medical 20,000 SF 10 years $13.75/SF Rent steps $1.00/SF in years 4 and
Philadelphia, PA Broadcasting Co. 4/96 8. Tenant pays electricity and
CAM and taxes over base year.
$20.00/SF TI allowance.
- ------------------------------------------------------------------------------------------------------------------------------
5 1302 Race Street Hahnemann 14,500 SF 5 years $10.00/SF Sub tenant; gross lease. Landlord
Philadelphia, PA Medical College commencing expenses equate to $1.68/SF.
4/95
- ------------------------------------------------------------------------------------------------------------------------------
6 1424-26 Chestnut Community Legal 25,800 SF 10 years $13.00/SF Semi-gross lease, tenant pays
Street Services commencing electric. $5.00/SF in expenses
Philadelphia, PA 10/94 paid by landlord.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-45-
<TABLE>
<CAPTION>
==============================================================================================================================
SUMMARY OF OFFICE LEASES
- ------------------------------------------------------------------------------------------------------------------------------
Lessee Current
No. Location Lessee Area Term Rental Remarks
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
7 2300 Chestnut Office lease 5,843 SF 5 years $13.50/SF Full service lease for five years,
Street commencing with tenant responsible for
Philadelphia, PA 6/94 increases in expenses over the
base year. Standard tenant fitout,
estimated at $12.00/SF, was
provided.
- ------------------------------------------------------------------------------------------------------------------------------
8 1429 Walnut Reiff Morrisey 4,776 SF 3 years $12.56/SF Tenants pays a pro rata share of
Street commencing real estate taxes and CAM over
Philadelphia, PA 4/95 base year amounts. Tenant
received an approximate $4.50/SF
fitout allowance.
- ------------------------------------------------------------------------------------------------------------------------------
9 1429 Walnut Robert Wise 3,344 SF 3 years $13.25/SF Tenant pays a pro rata share of
Street Management Co. commencing real estate taxes and CAM over
Philadelphia, PA 1/95 base year amounts. This is a
lease extension for an existing
tenant, with a nominal $2.50/SF
fitout allowance (i.e., painting,
carpet cleaning, etc.)
==============================================================================================================================
</TABLE>
<PAGE>
-46-
CORRELATION OF MARKET DATA
The preceding commercial rental data was utilized in estimating the
current economic rental for the retail space as well as the upper floor offices.
Based on the foregoing comparable rental data it was concluded that the contract
rents at the subject property were essentially at market levels. Therefore, we
have utilized the contract rents as reported in our Discounted Cash Flow model.
The Barnes & Noble lease term is 20 years which extends past the
projection period. Urban Outfitters lease term is for 15 years which is
consistent with the forecasted holding period.
Regarding Urban Outfitters, we have assumed a 50% probability that they
would renew this contract at then market rates. We have forecasted a current
market rent of $15.00 per square foot, increased annually by CPI. Upon
expiration of the two smaller office tenants on the fourth floor it has been
reported that Urban Outfitters would absorb their space at a predetermined
rental rate of $15.00 per square foot under the same terms and conditions
governing the existing lease for the 5th, 6th, 7th and 8th floors.
The economic rentals, as well as expenses, were assumed to increase at a
rate of 3% throughout the holding period. The 3% change was found to be
reasonable when considering market rent change and expense rates reported by the
Korpacz Investor Survey for the National CBD office market (1st Quarter 1997),
which indicated an average of 3.25% and 3.69%, respectively. Additionally, the
average change in the Consumer Price Index (CPI on U.S. City average), over the
past 5 years has been 2.97%.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-47-
POTENTIAL GROSS REVENUE
Potential Gross Revenue at the subject property consists of the income
from the existing contracts, plus the estimated economic rent forecasted for
Urban Outfitters at lease expiration 15 years hence, adjusted for absorption and
turnover and expenses normally associated with this class of real estate
including tenant fitout and leasing commissions.
SCHEDULED BASE REVENUE
The scheduled base revenue, which reflects the rental income less any
absorption and turnover vacancy, was estimated at $951,050 in Year 1. It was
assumed that Urban Outfitters would renew their contract at a renewal
probability factor of 50% with a six month lag time at lease expiration. At that
time they and Barnes & Noble would be the only tenants in the building.
Supporting Schedules which outline the base rental revenue, absorption and
turnover vacancy throughout the holding period are provided in the Addendum.
EXPENSE REIMBURSEMENT
It is typical in this marketplace for retail leases along Walnut Street to
be written on a triple net basis with the tenant responsible for its pro-rata
share of real estate taxes, insurance and common area charges. This is
consistent with the terms of the Barnes & Noble retail lease. Generally office
rents for Class B/C buildings are negotiated on a gross to full service basis.
The smaller office tenants on the fourth floor are written on a full service
basis plus electric while Urban Outfitters pays the increases in operating
expenses over a square foot stop.
The owner has provided an income/expense pro forma which we have utilized
as the basis of our forecast. A supporting schedule which outlines each tenant's
contribution throughout the holding period is provided in the Addendum.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-48-
ABSORPTION AND TURNOVER VACANCY
The absorption and turnover vacancy adjusts the potential base rental
revenue for shortfalls in revenue due to tenant turnover.
OPERATING EXPENSES
Expenses
Operating expenses included common area charges, structural reserves,
insurance premiums, utilities and a real estate management fee. Following is a
breakdown of each expense category.
Common Area Charges - This expense category, which is a reimbursable expense,
include all common area charges such as security, management, common area
utilities, cleaning, alarm monitoring, service contracts, trash removal, repairs
and maintenance and parking expense. Based upon the income/expense projection
provided, CAM was reported at $2.30 per square foot of rentable area. CAM
expense excludes real estate tax, insurance premiums and utilities.
Real Estate Taxes Calculated utilizing the 1997 assessment for the
property multiplied by the tax rate for the City of
Philadelphia. Included in this amount was the Center
City District tax of $6,706. Total real estate tax
was $115,106.
Insurance Premiums Reported at $15,300 on an annual basis.
Utilities Electric reported at $90,000 for the entire building.
Steam heat was indicated as $25,000 while water/sewer
was reported at $7,200 on an annual basis.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-49-
Structural Reserves - This expense item is often a hidden expense which is not
typically found on an annual expense statement. However, ownership estimates a
first year expenditure of $12,000 which sets aside the necessary monies to
replace short-lived items, such as HVAC components and the roof, etc. Typically,
the tenant does not contribute to this reserve, however, the leases indicated
this expense as a reimbursable item. The structural reserve was equivalent to
$.21/SF of leasable area.
Manaaement - Whether this service is contracted to a real estate professional or
provided by the owner of the property, charges for management are appropriate
expenses of operation. Management expense is typically expressed as a percentage
of Effective Gross Income and reflects the local practice for such charges.
Management expense has been reported by the owner at $36,292 in year one, which
is equivalent to 3.2% of Effective Gross Income which was considered reasonable
when considering the tenantry and the fact that management would essentially
represent collection of rent only.
RE-LEASING AND CAPITAL COSTS
TENANT IMPROVEMENTS
Barnes & Noble is responsible for all of the interior fitout for their
space with their initial lease term extending beyond the holding period of 15
years. As a result, tenant improvements were not a factor for this tenant. The
two smaller office tenants on the fourth floor were in occupancy as of the
effective date of this appraisal with no expenditure reported by the current
owner for fitout. Urban Outfitters, which will eventually occupy all of the
upper floor office space, required no fitout during this lease term. However,
due to the unique interior fitout of their space, in that the desired look
resembles an open construction motif, it was anticipated that the space
consisting of Floors 4, 5, 6, 7 and 8 (33,772+/- SF) would require fitout of
$15.00/SF today, increased by 3% per year in order to project the future
expenditure needed to modernize the offices in the event that Urban Outfitters
would not renew their contract and in anticipation of procuring a new tenant.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-50-
The estimate of $15.00 increased by 3% compounded annually results in an
expenditure of $22.69 per square foot or $766,245 in year 15 of the Discounted
Cash Flow analysis. We have utilized a 50% renewal probability factor this
tenant which effectively reduces the tenant fitout to $383,123 in the year
2012.
LEASING COMMISSIONS
Leasing commissions related to Urban Outfitters as they would be the only
tenant expiring during the holding period. Leasing commissions on this space
were based on a five year lease term paid in at an average rate of 4.2% which
reflects a combined rate of 21 % over the term of the lease.
Once again, a renewal probability of 50% was projected at the time of
expiration for Urban Outfitters.
It should be noted that several of the leases indicated that leasing
commissions were payable to specific real estate brokers for procuring tenants
in the building. However, according to Hal Wheeler, a principal of
Alison/Rittenhouse Associates, all leasing commissions due and payable will be
funded from the proceeds at loan settlement. This also applies to any capital
expenditures such as sprinkler fire protection installation or tenant fitout in
the Urban Outfitters space.
Additionally, it is noted that the current owners of the subject property,
have negotiated a buyout of the former tenants which occupied the first floor
retail space. The buyout totalled $375,000 of which $200,000 has already been
paid. According to Mr. Hal Wheeler, the remaining $175,000 will be funded from
the proceeds at loan closing. As a result, none of the above had any effect on
income as projected in the Discounted Cash Flow Analysis.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-51-
COMMENTS ON DISCOUNTED CASH FLOW ANALYSIS
The first year's stabilized income and expenses and future years income
and expenses were projected based upon the foregoing income and expense
forecasts based on stabilized occupancy. Projections of Net Operating Income
reflected the impact of factors affecting individual components of the
income/expense statement. The resulting cash flow pattern and installments were
then discounted individually and totalled to derive a present worth estimate of
the projected income stream.
In fifteen years it was projected that the property would command an
approximate value of $12,331,633 by capitalizing the sixteenth year's Net
Operating Income at an overall capitalization rate of 8.75%. The property's
proceeds from resale reflect a 7% charge for selling expenses and "net out" at
$11,468,419. By current market standards, 8.75% is an acceptable rate of return
on an investment like the subject reflective of the fact that a national
creditworthy tenant occupies approximately 42% of the building and a 7% selling
expense was typical for this type of property.
In selecting the equity yield rate of 10.5% employed in the cash flow
model, consideration was given to current interest rates on alternative
investment mediums, with adjustment made to the concluded basic rate for the
risk of liquidity and burden of management. Following are the adjustments made
to the basic rate for liquidity and management.
Basic Rate 8%
Liquidity Risk 1.5%
Management Burden 1.0%
----
Equity Yield Rate 10.5%
The yield rate of 10.5% was developed utilizing Corporate Baa Bonds as a
basic rate. These are issues which are neither highly protected nor poorly
secured
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-52-
and believed to relate well to the real estate market. According to information
published by the Federal Reserve Bank of St. Louis, Corporate Baa Bonds have
averaged 825% from (March 7,1997 to May 9, 1997).
In justifying the concluded terminal capitalization rate of 8.75%, and
discount or yield rate of 10.5%, the following investor survey was reviewed.
Korpacz National Investor Survey - 1st Quarter 1997
---------------------------------------------------
National CBD Office Market
--------------------------
Range Average
----- -------
Free & Clear Equity IRR 10.00% - 15.00% 11.74%
Free & Clear Equity Cap Rate 7.50% - 12.00% 9.3%
Residual Cap Rate 8.25% - 12.00% 9.63%
Given the quality of the existing improvements reflecting the considerable
sum of money expended for retrofit coupled with the quality and durability of
the tenantry in addition to the subject's location on historic and prestigious
Rittenhouse Square, the concluded terminal capitalization rate and discount
rate, were thought to be reasonable.
Following is the Discounted Cash Flow Analysis incorporating the preceding
projections and assumptions.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
Software :ARGUS Ver. 7.0.01 Date : 6/2/97
File :ALISON Time : 10:20 am
Property Type :Office & Retail Ref# : ASM
Portfolio : Page : 1
Alison building
1805-09 Walnut Street
Philadelphia, Pa. 19103
SCHEDULE OF PROSPECTIVE CASH FLOW
In Inflated Dollars for the Fiscal Year beginning 5/1/1997
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
For the Years Ending Apr-1998 Apr-1999 Apr-2000 Apr-2001 Apr-2002 Apr-2003 Apr-2004
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
POTENTIAL GROSS REVENUE
Base Rental Revenue $ 951,050 $1,036,267 $1,036,310 $1,036,791 $1,098,394 $1,145,020 $1,145,020
Absorption & Turnover Vacancy ---------- ---------- ---------- ---------- ---------- ---------- ----------
Scheduled Base Rental Revenue 951,050 1,036,267 1,036,310 1,036,791 1,098,394 1,145,020 1,145,020
Expense Reimbursement Revenue
CAM 20,000 20,600 21,218 21,855 22,510 23,185 23,881
Real estate tax 48,304 49,753 51,245 52,783 54,366 55,997 57,677
Insurance 6,421 6,613 6,812 7,016 7,226 7,443 7,667
electric 89,841 92,700 95,481 98,345 102,378 104,335 107,465
steam 10,491 10,806 11,130 11,464 11,808 12,162 12,527
water/steam 3,021 3,112 3,205 3,302 3,401 3,503 3,608
Management
structural
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Reimbursement Revenue 178,078 183,584 189,091 194,765 201,689 206,625 212,825
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL POTENTIAL GROSS REVENUE 1,129,128 1,219,851 1,225,401 1,231,556 1,300,083 1,351,645 1,357,845
Collection Loss (5,240) (5,276) (5,292) (5,314) (5,864) (5,868) (5,886)
---------- ---------- ---------- ---------- ---------- ---------- ----------
EFFECTIVE GROSS REVENUE 1,123,888 1,214,575 1,220,109 1,226,242 1,294,219 1,345,777 1,351,959
---------- ---------- ---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
CAM 133,689 137,700 141,831 146,086 150,468 154,982 159,632
Real estate tax 115,106 118,559 122,116 125,779 129,553 133,439 137,443
Insurance 15,300 15,759 16,232 16,719 17,220 17,737 18,269
electric 90,000 92,700 95,481 98,345 101,295 104,335 107,465
steam 25,000 25,750 26,523 27,318 28,138 28,982 29,851
water/steam 7,200 7,416 7,638 7,868 8,104 8,347 8,597
Management 36,292 37,381 38,502 39,657 40,847 42,072 43,335
structural 12,000 12,360 12,731 13,113 13,506 13,911 14,329
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 434,587 447,625 461,054 474,885 489,132 503,805 518,921
---------- ---------- ---------- ---------- ---------- ---------- ----------
NET OPERATING INCOME 689,301 766,950 759,055 751,357 805,087 841,972 833,038
---------- ---------- ---------- ---------- ---------- ---------- ----------
LEASING AND CAPITAL COSTS
Tenant Improvements
Leasing Commissions
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL LEASING & CAPITAL COSTS
---------- ---------- ---------- ---------- ---------- ---------- ----------
CASH FLOW BEFORE DEBT SERVICE $ 689,301 $ 766,950 $ 759,055 $ 751,357 $ 805,087 $ 841,972 $ 833,038
& INCOME TAX ========== ========== ========== ========== ========== ========== ==========
<CAPTION>
Year 8 Year 9 Year 10 Year 11 Year 12 Year 13
For the Years Ending Apr-2005 Apr-2006 Apr-2007 Apr-2008 Apr-2009 Apr-2010
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
POTENTIAL GROSS REVENUE
Base Rental Revenue $1,145,020 $1,145,020 $1,200,917 $1,258,487 $1,264,081 $1,264,081
Absorption & Turnover Vacancy ---------- ---------- ---------- ---------- ---------- ----------
Scheduled Base Rental Revenue 1,145,020 1,145,020 1,200,917 1,258,487 1,264,081 1,264,081
Expense Reimbursement Revenue
CAM 24,597 25,335 26,095 26,878 27,685 28,515
Real estate tax 59,407 61,190 63,025 64,916 66,864 68,870
Insurance 7,896 8,133 8,377 8,629 8,888 9,154
electric 110,688 114,009 117,430 120,953 124,582 128,319
steam 12,903 13,290 13,689 14,099 14,522 14,958
water/steam 3,716 3,827 3,942 4,061 4,182 4,308
Management structural
---------- ---------- ---------- ---------- ---------- ----------
Total Reimbursement Revenue 219,207 225,784 232,558 239,536 248,723 254,124
---------- ---------- ---------- ---------- ---------- ----------
TOTAL POTENTIAL GROSS REVENUE 1,364,227 1,370,804 1,433,475 1,498,023 1,510,804 1,518,205
Collection Loss (5,905) (5,924) (6,400) (6,481) (6,558) (6,579)
---------- ---------- ---------- ---------- ---------- ----------
EFFECTIVE GROSS REVENUE 1,358,322 1,364,880 1,427,075 1,491,542 1,504,246 1,511,626
---------- ---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
CAM 164,421 169,353 174,434 179,667 185,057 190,609
Real estate tax 141,566 145,813 150,187 154,693 159,334 164,114
Insurance 18,817 19,382 19,963 20,562 21,179 21,814
electric 110,689 114,009 117,430 120,952 124,581 128,318
steam 30,747 31,669 32,619 33,598 34,606 35,644
water/steam 8,855 9,121 9,394 9,676 9,966 10,265
Management 44,635 45,974 47,353 48,773 50,237 51,744
structural 14,758 15,201 15,657 16,127 16,611 17,109
---------- ---------- ---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 534,488 550,522 567,037 584,048 601,571 619,617
---------- ---------- ---------- ---------- ---------- ----------
NET OPERATING INCOME 823,834 814,358 860,038 907,494 902,675 892,009
---------- ---------- ---------- ---------- ---------- ----------
LEASING AND CAPITAL COSTS
Tenant Improvements
Leasing Commissions
---------- ---------- ---------- ---------- ---------- ----------
TOTAL LEASING & CAPITAL COSTS
---------- ---------- ---------- ---------- ---------- ----------
CASH FLOW BEFORE DEBT SERVICE $ 823,834 $ 814,358 $ 860,038 $ 907,494 $ 902,675 $ 892,009
& INCOME TAX ========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
Software :ARGUS Ver. 7.0.01 Date : 6/2/97
File :ALISON Time : 10:23 am
Property Type :Office & Retail Ref# : ASM
Portfolio : Page : 1
Alison building
1805-09 Walnut Street
Philadelphia, Pa. 19103
SCHEDULE OF PROSPECTIVE CASH FLOW
In Inflated Dollars for the Fiscal Year beginning 5/1/1997
Year 14 Year 15 Year 16
For the Years Ending Apr-2011 Apr-2012 Apr-2013
---------- ---------- ----------
POTENTIAL GROSS REVENUE
Base Rental Revenue $1,264,081 $1,442,985 $1,514,935
Absorption & Turnover Vacancy (191,563)
---------- ---------- ----------
Scheduled Base Rental Revenue 1,264,081 1,251,422 1,514,935
Expense Reimbursement Revenue
CAM 29,371 30,252 31,159
Real estate tax 70,936 73,064 75,256
Insurance 9,429 9,712 10,003
electric 132,168 116,383 140,217
steam 15,407 15,869 16,345
water/sewer 4,437 4,570 4,707
Management
structural
---------- ---------- ----------
Total Reimbursement Revenue 261,748 249,860 277,687
---------- ---------- ----------
TOTAL POTENTIAL GROSS REVENUE 1,525,829 1,501,272 1,792,622
Collection Loss (6,602) (6,187) (8,476)
---------- ---------- ----------
EFFECTIVE GROSS REVENUE 1,519,227 1,495,085 1,784,146
---------- ---------- ----------
OPERATING EXPENSES
CAM 196,327 202,217 208,283
Real estate tax 169,037 174,108 179,331
Insurance 22,469 23,143 23,837
electric 132,168 136,133 140,217
steam 36,713 37,815 38,949
water/sewer 10,573 10,891 11,217
Management 53,296 54,895 56,542
structural 17,622 18,151 18,696
---------- ---------- ----------
TOTAL OPERATING EXPENSES 638,205 657,353 677,072
---------- ---------- ----------
NET OPERATING INCOME 881,022 837,732 1,107,074
---------- ---------- ----------
LEASING & CAPITAL COSTS
Tenant Improvements 383,123
Leasing Commissions 21,455 32,182
---------- ---------- ----------
TOTAL LEASING & CAPITAL COSTS 404,578 32,182
---------- ---------- ----------
CASH FLOW BEFORE DEBT SERVICE
& INCOME TAX $ 881,022 $ 433,154 $1,074,892
========== ========== ==========
<PAGE>
Software :ARGUS Ver. 7.0.01 Date : 6/2/97
File :ALISON Time : 10:26 am
Property Type :Office & Retail Ref# : ASM
Portfolio : Page : 1
Alison building
1805-09 Walnut Street
Philadelphia, Pa. 19103
PROSPECTIVE PRESENT VALUE
Cash Flow Before Debt Service plus Property Resale
Discounted Annually (End-point on Cash Flow & Resale) over a 15-Year Period
For the P.V. of
Analysis Year Annual Cash Flow
Period Ending Cash Flow @ 10.50%
- -------- -------- ----------- ----------
Year 1 Apr-1998 $ 689,301 $ 623,802
Year 2 Apr-1999 766,950 628,120
Year 3 Apr-2000 759,055 562,582
Year 4 Apr-2001 751,357 503,962
Year 5 Apr-2002 805,087 488,687
Year 6 Apr-2003 841,972 462,513
Year 7 Apr-2004 833,038 414,123
Year 8 Apr-2005 823,834 370,631
Year 9 Apr-2006 814,358 331,554
Year 10 Apr-2007 860,038 316,880
Year 11 Apr-2008 907,494 302,593
Year 12 Apr-2009 902,675 272,386
Year 13 Apr-2010 892,009 243,590
Year 14 Apr-2011 881,022 217,728
Year 15 Apr-2012 433,154 96,874
----------- ----------
Total Cash Flow 11,961,344 5,836,025
Property Resale @ 8.75% Cap 11,468,419 2,564,894
----------
Total Property Present Value $8,400,919
==========
Rounded to Thousands $8,401,000
==========
Per SqFt 144.37
PERCENTAGE VALUE DISTRIBUTION
Assured Income 67.54%
Prospective Income 1.93%
Prospective Property Resale 30.53%
==========
100.00%
<PAGE>
-56-
The sum of the present worth of the income stream of $5,836,025 when added
to the present worth of the reversion of $2,564,894 results in an estimated
value for the property by the Income Capitalization Approach of $8,400,919 which
has been rounded to:
EIGHT MILLION FOUR HUNDRED THOUSAND DOLLARS
($8,400,000,00)
The preceding Discounted Cash Flow Analysis utilized Argus for Windows, a
comprehensive software program that analyzes on a lease by lease basis the
effect each tenant's lease terms as well as the absorption pattern at the
commencement of the holding period, and the loss in income due to tenant
turnover during the holding period, have on the overall property value. The
assumptions presented on pages 42 to 55 were compiled and presented in a single
schedule of the aggregate Income and Expenses to display Net Present Value via
the Income Capitalization Approach.
INCOME CAPITALIZATION APPROACH VIA DIRECT CAPITALIZATION
In addition to valuing the property using a Discounted Cash Flow Analysis
we have also utilized the Direct Capitalization method, per the instructions to
appraisers by Met Life Capital.
Direct Capitalization is a method used to covert an estimate of a single
years income expectancy into an indication of value in one direct step by
dividing the income estimate by an appropriate income rate. The income
expectancy considered is frequently the anticipated income for the following
year. The rate calculated represents the relationship between income and value
observed in the market and is derived through comparable sales analysis.
Unfortunately, after a thorough search of the market in which the subject
competes, which included interviews with real estate brokers from Cushman &
Wakefield Co. and Grubb and Ellis Co., no economic
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-57-
information from buildings of a similar class as the subject was disclosed from
which to conclusively derive actual capitalization rates.
Therefore, we have developed an overall capitalization rate utilizing the
Band of Investment Technique.
This capitalization technique takes into consideration that most real
estate is purchased with debt and equity capital and that the developed rate
should satisfy the market return requirements of both investment positions.
Lenders anticipate competitive mortgage interest rates commensurate with
the perceived risk of the investment and expect that the principal amount of the
mortgage be repaid through periodic amortization payments. The capitalization
rate for the debt portion of the overall capitalization rate (R(O)) is referred
to as the Mortgage Constant (R(M)), and represents the ratio of the annual debt
service to the principal amount of the mortgage. The Mortgage Constant is a
function of the market derived interest rate, frequency of amortization and loan
term.
The equity investor also requires a cash return. The rate utilized to
capitalize the equity position is referred to as the Equity Capitalization Rate
(R(E)), which reflects the annual pre-tax cash flow to the amount of equity
investment.
The overall capitalization rate (R(0)) which was developed by the Band of
Investment Technique, represents the weighted average of the mortgage constant
requirement of the lender and the pre-tax cash flow requirement of the equity
investor. The loan to value (M) represents the loan portion of the property
investment, while the equity portion of the investment is expressed as (1-M).
The formula utilized in developing the Overall Capitalization Rate (R(0)) by the
Band of Investment Technique is as follows:
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-58-
(M xR(M)) + ((1-M xR(E)) = R(O)
Conversations with local lenders indicate that properties similar to the
subject can be mortgaged at a loan to value ratio (M) of 70% to 75%. Assuming a
mortgage ratio of 70%, an equity (1-M) position of 30% is indicated. Based on
current market conditions, a mortgage interest rate of 9% is believed to be
obtainable for a 25 year term with a 10 year call. In determining whether the
interest rate of 9% was reasonable we have consulted Crittenden Income Property
Rates dated June 9, 1997 which indicated fixed rate commercial mortgages from
seven life companies averaging 7.94% to 8.4% for deal sizes beginning at
$2,000,000 to an unspecified maximum. Terms were 10 years with amortization
periods of 15 to 30 years. Immediate funding from commercial conduits ranged
from 8.28% to 9.6% with deal sizes beginning at $400,000 to a maximum of
$30,000,000. Terms were from 5 to 15 years with amortization periods of 25 to 30
years. An interest rate of 9% on the terms specified produces a mortgage
constant (R(M)) of .100704. An equity capitalization rate (R(E)) of 7% has been
estimated based upon expectations of investors in the current market for
investments commensurate with the risk inherent in real estate like the subject.
For appraisal purposes, a property's equity capitalization rate is the
anticipated return to the investor, usually for the first year of the holding
period. In estimating the equity capitalization rate of 7% we have taken into
consideration the subject's excellent location along prestigious Rittenhouse
Square, the fact that the subject is 100% occupied and is expected to remain so
throughout the forecasted holding period, coupled with the existence of a
nationally known creditworthy tenant committed to a long term lease.
In justifying the equity return rate of 7%, we have reviewed the financial
market as published by the Research and Public Information Division of the
Federal Reserve System for the week of May 1, 1997 which indicated one year
treasury bills averaging 5.5% over the past two months.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-59-
Considering the risk and the non-liquidity of the real estate market, the
7% equity dividend rate, or cash on cash return, is well supported. Based on the
preceding survey, an indicated 150+/- basis points risk factor over treasury
yields is deemed most reasonable.
Substituting the foregoing ratios and rates to the Band of Investment
formula, reflects an overall capitalization rate of .09143, derived as follows:
(.70 x .100704) + ((1 - .70) x .07) = R(O)
.070495 + .021 = R(O)
.091493 = R(O)
Utilizing the basic valuation,
Value = Income / Rate
and substituting for the equation,
$766,950 / .091493
A market value for the subject property by utilizing direct capitalization
of $8,382,171 develops, which has been rounded to $8,400,000.
Net Operating Income for the subject was projected at $689,301 in Year 1
of the Discounted Cash Flow Analysis. However, this income was reflective of a
rental abatement of $100,000 granted to Barnes & Noble for the first year of
their contract. As a result, we have utilized Net Operating Income for Year 2,
indicated as $766,950, which is indicative of stabilized income absent any
abatement or rental concessions.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-60-
SALES COMPARISON APPROACH
The Sales Comparison Approach obtains an estimate of value of a property
by comparing it with similar properties of the same type and class which have
been sold in the relatively recent past in the same or competing areas. The
comparative process utilized in determining the degree of comparability between
two properties involved judgement as to their similarity with respect to many
value factors including location, construction, age and condition and functional
utility, among other considerations.
An acknowledged limitation of this approach is that exactly similar
properties seldom exist in the open market. Commercial buildings share many
common characteristics but, at the same time, possess unique features that make
them difficult to compare on the basis of the whole property. Therefore, sales
data is better related when reduced to a common unit of comparison which, in the
instant analysis, was found to be price per square foot of gross building area
including land.
The subject property is the type of real estate commonly found along many
of the commercially oriented streets in Center City Philadelphia and especially
along Walnut Street. Many similar buildings that combine retail and office use
have recently conveyed west of Broad Street along Walnut and Chestnut Streets.
The major difference between these sale properties and the subject is that the
majority of these buildings were only a fraction of the subject's size making
direct comparison extremely difficult. To our knowledge there have been no sales
of larger commercial buildings which were 100% leased with the quality of
tenants found in the subject. Therefore, we have considered sales of commercial
buildings of similar size and appeal from a wider geographic area exhibiting
common economic influence. Our search for comparable buildings had led us to
consider areas such as Lower Montgomery County just across the Philadelphia City
boundary. Due to the lack of truly comparable sales data from within the subject
neighborhood we have concluded that the findings of the Sales Comparison
Approach were secondary in relevance to the
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-61-
primary approach to estimating the economic worth of the subject which was the
Income Capitalization Approach.
The following sales were considered the best available and most
representative of the subject's market value range.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-62-
COMPARABLE SALE NO. 1
Location: Lippincott Building
227-31 S. 6th Street
Philadelphia, Pennsylvania
Grantor: Independence Realty Philadelphia, L.P.
Grantee: Walter Kluwer Development Corporation
Date: February 20, 1992
Consideration: $7,301,500
Deed Reference: Book VCS 15, Page 87
Land Area: 13,604 square feet
Improvements: The improvements consist of a five story Class "B"
office building containing a net rentable area of
71,250 square feet.
Zoning: C-4 Commercial
Unit Rate: $102.48 per square foot of net rentable area.
Remarks: This is a five story and basement Class "B" office
building which was constructed in 1902 as a loft
type manufacturing building and completely
renovated in 1985. The building was 80% occupied
by the grantee. Approximately $2,000,000 was
expended on renovations to the building. The
property was not formally placed on the market for
sale. Purchased by the tenant in occupancy.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
COMPARABLE SALE NO. 2
100 Presidential Boulevard
Lower Merion Township
Montgomery County, Pennsylvania
<PAGE>
-63-
COMPARABLE SALE NO. 2
Location: 100 Presidential Boulevard
Lower Merion Township
Montgomery County, Pennsylvania
Tax Parcel No.: 40-1J-26
Grantor: Colonial Plaza Venture
Grantee: Pagoda 100
Date: December 1994
Consideration: $5,308,625
Deed Reference: Book 5098, Page 2099
Confirmation: Tim Mahoney - Seneca Roach
Land Area: 2.23 acres
Improvements: 5 story multi-tenant elevator served office
building which contains a gross building area of
52,152 square feet and a net rentable area of
50,000 square feet. The building was constructed
in 1965 and fully renovated in 1988.
Unit Rate: $106.17 per square foot of rentable building
area.
Remarks: This five story office building was acquired by a
small investor group, a partner of which has
occupied the vacant 10,000 SF which were available
at the time of sale. The building was reported to
be in average condition but will require a
sprinkler system and ADA requirement upgrades.
Parking for 175 cars. Rent at time of sale was
approximately $20.50 per square foot on a gross
basis with expenses of $8.25 per square foot.
Ownership reports the purchase price was somewhat
influenced by the existence of assumable, below
market rate financing and the ability to occupy
the vacant space without much interruption of
business.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
COMPARABLE SALE. NO. 3
280 King of Prussia Road
Radnor Township
Delaware County, Pennsylvania
<PAGE>
-64-
COMPARABLE SALE NO. 3
Location: 280 King of Prussia Road
Radnor Township
Delaware County, Pennsylvania
Tax Parcel No.: 15-026-000
Grantor: Radnor Blue Devils Assoc.
Grantee: Wyeth Laboratories, Inc.
Date: January 1996
Consideration: $8,400,000
Deed Reference: Book 1435, Page 320
Land Area: 6.70+/- acres
Improvements: 3 story, brick and steel frame office building
which contains a gross building area of 65,000+/-
square feet and a net rentable area of 65,000+/-
square feet. The building was constructed in 1981.
Surface parking for 262 cars.
Zoning: Office
Unit Rate: $129.23 per square foot of rentable building area.
Remarks: The building was considered in average condition
at the time of sale. The buyer, Wyeth
Laboratories, was a tenant in the building at the
time of sale.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
COMPARABLE SALE NO. 4
33 Rock Hill Road
Bala Cynwyd
Montgomery County, Pennsylvania
<PAGE>
-65-
COMPARABLE SALE NO. 4
Location: 33 Rock Hill Road
Bala Cynwyd
Montgomery County, Pennsylvania
Tax Parcel No.: Block 46, Lot 266
Grantor: MCIDA c/o The Conduit and Foundation Corp.
Grantee: Wynnewood Development Inc.
Date: July 1996
Consideration: $2,728,000
Deed Reference: Book 5597, Page 83
Land Area: 2.64+/- acres
Improvements: A three story elevator served office building
containing 31,400+/- square feet of gross building
area and 29,531+/- square feet of rentable area.
The property was in average condition at time of
sale.
Zoning: B Suburban
Unit Rate: $92.38 per square foot rentable area
Remarks: This transaction was reportedly arm's length,
however, the current owner retained a 10%
ownership stake in the property. The building was
only 60% occupied at the time of agreement, but
the buyer intended to occupy all of the vacant
space. The building is situated in a former
industrial area that is witnessing changing land
use patterns to a more intensive use of the land
to include office buildings.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-66-
================================================================================
SUMMARY OF MARKET DATA
- --------------------------------------------------------------------------------
Rentable
Sale Bldg. Sale
No. Location Date Consideration Area/SF Price/SF
- --------------------------------------------------------------------------------
1 227-31 S. 6th Street 2/92 $7,301,500 71,250 $102.48
Philadelphia, PA
- --------------------------------------------------------------------------------
2 100 Presidential Boulevard 12/94 $5,308,625 50,000 $106.17
Lwr. Merion Township
Montgomery county, PA
- --------------------------------------------------------------------------------
3 280 King of Prussia Road 1/96 $8,400,000 65,000 $129.23
Radnor Township
Delaware County, PA
- --------------------------------------------------------------------------------
4 33 Rock Hill Road 7/96 $2,728,000 29,531 $ 92.38
Bala Cynwyd
Montgomery county, PA
================================================================================
CORRELATION OF MARKET DATA
Due to a lack of truly comparable sales data for the subject, sales of
office building were used in comparison to the subject one being located in
Philadelphia with the remaining sales located in nearby Montgomery and Delaware
Counties. The preceding sales were similar to the subject in terms of size,
utility and the fact that the potential rental income was similar to the
subject. The sales, which occurred over the past five years, indicate an
unadjusted price range of $92.38 to $129.23 per square foot of rentable building
area. Each sale was analyzed and compared to the subject property and
adjustments were made where appropriate for property rights conveyed, financing
terms, conditions of sale, market conditions, location, building size, condition
and other characteristics.
In the Sales Comparison Approach, adjustments are made to the comparable
sales and not the subject. When a characteristic of comparable sale is superior
to that of the subject property, a downward (negative) adjustment is made to the
comparable sale. Conversely, when a characteristic of a comparable sale is
inferior to that of the subject property, an upward (positive) adjustment is
made to the
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-67-
comparable sale. When a comparable sale and the subject exhibit similar
characteristics, then no adjustment is implied.
The analysis which follows is intended to assist the reader in
understanding our thought process with the ultimate result being a reasonable
market value conclusion. Since the trading of real estate occurs in a very
imperfect market, the use of paired sales to derive quantifiable adjustments,
though acceptable in theory, is not always realistic in practice. Even under the
best of circumstances, the quality and uniformity of data are insufficient to
produce accurate results. No two properties are exactly alike and emotion does
come to bear in some form in almost every transaction. Therefore, the reader is
cautioned to note that the adjustments set forth herein are not to be construed
as absolutes, but are provided as a visual aid in demonstrating the logic of our
conclusion.
Property Rights Conveyed - With regard to property rights, fee simple interest
was conveyed in each transaction. Therefore, no adjustment was necessary.
Financing Terms - Each transaction was reported to be all cash to the seller
with financing terms reported to be market oriented. Therefore, no adjustment
for financing terms was necessary.
Conditions of Sale - An adjustment for conditions of sale is usually made to
reflect the motivations of the participants in a transaction. There appeared to
be no extraordinary motivation to purchase these properties, therefore, no
adjustment was necessary.
Market Conditions - The general market within the subject's neighborhood has
experienced a general stabilization with modest increases in selected markets
over the past 48-60 months. Thus, no adjustment was considered necessary in that
each sale
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-68-
occurred over the past three years and considered representative of current
market conditions.
Location - Regarding the suburban sales, no adjustment was made for location as
we recognize the economic influences to which the subject is exposed due to its
location along Walnut Street in the Rittenhouse Square area of Center City
Philadelphia. None of the comparable sales include this type of retail exposure.
However, Sale No. 1, being located in an urban setting, was adjusted upward for
its inferior commercial location as compared to the subject's high profile
location along Walnut Street.
Building Size - The market typically reflects an inverse relationship between
size of building and the resultant price paid per square foot. Sale No. 1 was
larger in floor area than the subject requiring an upward adjustment. Sale Nos.
2 and 3 were competitive with the subject requiring no adjustment and finally
Sale No. 4 was a smaller facility requiring a downward adjustment.
Condition - Due to the fact that the commercial space on the first three floors
is being completely renovated all of the sales were considered inferior in this
regard. A slight upward adjustment was warranted.
Other Characteristics - Sale Nos. 1, 2, and 4 were only partially occupied at
time of sale as opposed to the 100% occupancy of the subject. Upward adjustment
was applied. Sale No. 2 required a sprinkler system and ADA upgrades. This sale
was further adjusted upward.
Although there is a significant difference in land size between the
suburban comparables and the subject, no adjustment was made since Center City
land values are significantly higher on a square foot basis such that
contributory value in both instances was considered equal.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-69-
The following grid outlines the foregoing narrative discussion.
ADJUSTMENT GRID
Sale #1 Sale #2 Sale #3 Sale #4
------- ------- ------- -------
UNADJUSTED UNIT RATE $102.48 $106.17 $129.23 $ 92.38
PROPERTY RIGHTS CONVEYED 0.0% 0.0% 0.0% 0.0%
PROPERTY RIGHTS ADJ. RATE $102.48 $106.17 $129.23 $ 92.38
FINANCING TERMS 0.0% 0.0% 0.0% 0.0%
FINANCING ADJUSTED RATE $102.48 $106.17 $129.23 $92.38
CONDITIONS OF SALE 0.0% 0.0% 0.0% 0.0%
CONDITIONS ADJUSTED RATE $102.48 $106.17 $129.23 $ 92.38
MARKET CONDITIONS 0.0% 0.0% 0.0% 0.0%
TIME ADJUSTED UNIT RATE $102A8 $106.17 $129.23 $ 92.38
LOCATION +20.0% 0.0% 0.0% 0.0%
BUILDING SIZE +5.0% 0.0% 0.0% -5.0%
CONDITION +20.0% +20.0% +20.0% +20.0%
OTHER CHARACTERISTICS +5.0% +15.0% 0.0% +5.0%
TOTAL % ADJUSTMENT +50.0% +35.0% +20.0% +20.0%
ADJUSTED UNIT RATE $153.72 $143.33 $155.08 $110.86
MEAN ADJUSTED UNIT RATE $140.73
Based on the foregoing adjustment grid which reflects adjusted unit rates
ranging from $110.86 to $155.08 per square foot of rentable building area the
market value of the subject property subject to existing leases as of April 29,
1997 was:
EIGHT MILLION THREE HUNDRED THOUSAND DOLLARS
($8,300,000.00)
Which is equivalent to approximately $142.63 per square foot of rentable
building area including land.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-70-
RECONCILIATION OF VALUE ESTIMATES
The indications of value by the methods employed are as follows:
Income Capitalization Approach $8,400,000
Sales Comparison Approach $8,300,000
Cost Approach Not Applicable
After examining all the facts and considering all of the information
presented in the foregoing analysis, it was felt that the Income Capitalization
Approach provided the most valid support of market value considering the
investment characteristics of the property influenced by the quality of tenants
in occupancy and that it would most likely exchange on the strength of its
income potential. The Sales Comparison Approach was utilized primarily as
secondary support of the Income Capitalization Approach as it shows that the
value of the property on the basis of price per square foot of gross building
area is in line with market behavior. Finally, the Cost Approach was not
utilized in this valuation in that it is our opinion that the market would not
recognize this approach as a reliable indicator of Market Value for the subject
property.
As a result of this analysis, it is my opinion that the Market Value of
the leased fee interest in the subject property, as of April 29, 1997, assuming
a reasonable time is allowed for exposure on the open market, was:
EIGHT MILLION FOUR HUNDRED THOUSAND DOLLARS
($8,400,000.00)
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-71-
MARKETING PERIOD
Normal marketing period is the amount of time necessary to expose a
property to the open market in order to achieve a sale. Implicit in this
definition are the following characteristics:
1. The property will be actively exposed and aggressively marketed to
potential purchasers through marketing channels commonly used by
sellers of similar type properties.
2. The property will be offered at a price reflecting the most probable
mark-up over Market Value used by sellers of similar type
properties.
3. A sale will be consummated under the terms and conditions of the
definition of Market Value cited herein.
In analyzing and estimating a reasonable marketing period in light of the
property's characteristics, we have examined the actual marketing time of the
more recent sales used in direct comparison in the belief that these historical
events tend to index future market conditions since supply and demand
relationships are not expected to differ greatly over those of the recent past.
Toward this end we have analyzed the market for competing properties currently
available and have interviewed real estate brokers active in this market to gain
insight on current market conditions.
Based on this analysis, our conclusion is that a marketing period of
approximately 12 months will be required to effect a sale.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-72-
EXPOSURE TIME
Exposure time is most different from marketing time in that exposure time
is always assumed to precede the effective date of the appraisal. Exposure time
can best be defined as the estimated length of time the subject property would
have been offered on the market prior to a hypothetical sale at market value on
the effective date of the appraisal; a retrospective estimate based upon an
analysis of past events assuming a competitive and open market.
The overall concept of reasonable exposure encompasses not only adequately
sufficient and reasonable time but also adequately sufficient and reasonable
effort that would be required to sell this property at the appraised value. This
forecast is the result of statistical information gleaned from published surveys
and firsthand knowledge of market transactions obtained through diligent
interview with market participants in the normal course of sales and rental
verification that is part of the appraisal process.
Utilizing these sources, it appears that the most probable exposure time
linked to the subject's appraised value under recent market conditions was
approximately 9 to 12 months.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-73-
CERTIFICATE OF APPRAISAL
I, certify that, to the best of my knowledge and belief,
1. The statements of fact contained in this report are true and correct.
2. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are my personal,
unbiased professional analyses, opinions and conclusions.
3. I have no present or prospective interest in the property that is the
subject of this report, and I have no personal interest or bias with
respect to the parties involved.
4. My compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the
amount of the value estimate, the attainment of a stipulated result, or
the occurrence of a subsequent event.
5. My analyses, opinions and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice.
6. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
7. As of the date of this report, I, Louis A. Iatarola, have completed the
requirements under the continuing education program of the Appraisal
Institute.
8. Louis A. Iatarola and James J. Onesti have made a personal inspection of
the property that is the subject of this report.
9. James J. Onesti provided significant professional assistance to the person
signing this report.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
-74-
CERTIFICATE OF APPRAISAL
10. This appraisal assignment was not based on a requested minimum valuation,
a specific valuation, or the approval of a loan.
11. By reasons of my investigation, I have formed the opinion that the Market
Value of the leased fee interest in the subject property, subject to the
Assumptions and Limiting Conditions recited in this report, as of April
29, 1997, was:
EIGHT MILLION FOUR HUNDRED THOUSAND DOLLARS
($8,400,000.00)
/s/ Louis A. Iatarola
------------------------------------------
Louis A. Iatarola, MAI, SRA
PA Certified General Real Estate Appraiser
Certificate No. GA000l76L
LAI/hmi
Rev. 6/7/93
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
ADDENDUM
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
This valuation assignment was made subject to the following Assumptions
and Limiting Conditions, in addition to any special assumptions or limiting
conditions cited in the appraisal, and incorporated herein by reference:
1. The Appraiser(s) assume no responsibility for matters legal in nature, nor
do I render an opinion as to title, which is assumed to be marketable. The
property is appraised as though under responsible ownership and competent
management. The Appraiser(s) is not qualified to render an "opinion of
title", no responsibility is assumed or accepted for matters of a legal
nature affecting the property being appraised. No formal investigation of
legal title was made, and we render no opinion as to ownership of the
property or condition of the title.
2. The Appraiser(s) have made no survey of the property. Plans furnished the
appraiser or obtained from the public record are assumed to be correct and
square foot areas or acreage reported herein are the appraiser's best
judgment. No responsibility, however, can be assumed for their accuracy.
The legal description of the appraised property, if exhibited in the
report, is assumed correct.
3. It is assumed that the utilization of the land and improvements is within
the boundaries or property lines of the property described and that there
are no encroachments, easements, trespass, etc., unless noted within the
report. The Appraiser(s) has not made a survey of the property and no
responsibility is assumed in connection with any matter that may be
disclosed by a proper survey. If a subsequent survey should reflect a
differing land area and/or frontages, we reserve the right to review our
final value estimate(s).
4. All maps, plats, building diagrams, site plans, floor plans, photographs,
etc. incorporated into the appraisal are for illustrative purposes only,
to assist the reader in visualizing the property. They are believed to
accurately represent the property, but are not guaranteed to be exact.
Dimensions and descriptions are based on public records and/or information
furnished by others and are not meant to be used as a reference in legal
matters or matters of survey.
5. The Appraiser(s) herein, by reason of the report, is not required to give
testimony or be in attendance at any court or administrative proceeding
with reference to the property appraised unless additional compensation is
agreed to and prior written arrangements have been made.
6. To the best of our knowledge and belief, the statements of fact contained
in the appraisal report, upon which the analyses, opinions and conclusions
expressed are based, are true and correct. Information, estimates and
opinions furnished to the Appraiser(s) and contained in the report or
utilized in the formation of the
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
value conclusion(s) were obtained from sources considered reliable and
believed to be true and correct. However, no representations, liability or
warranty for the accuracy of such items is assumed by or imposed on the
Appraiser(s), and is subject to corrections, errors, omissions and
withdrawal without notice.
7. This appraisal is to be used in whole and not in part. No part of it shall
be used in conjunction with any other appraisal.
8. All conclusions and opinions concerning the real estate that are set forth
in the appraisal report were prepared by the Appraiser(s) whose
signature(s) appears on the Certificate of Appraisal and Certification.
9. Neither all nor any part of the contents of this report, or copy thereof,
shall be used for any purpose by any but the client without the previous
written consent of the appraiser and/or of the client; nor shall it be
conveyed by any including the client to the public through advertising,
public relations, news, sales or other media, without the written consent
and approval of the author, particularly as to valuation conclusions, the
identity of the appraiser, or a firm with which he is connected, or any
reference to any professional society or institute or any initialed
designations conferred upon the appraiser. The appraisal report may not be
reproduced, in whole or in part, and the findings of the report may not be
utilized by a third party without the written consent of the Appraiser(s).
10. Disclosure of the contents of this appraisal report is governed by the
By-Laws and Regulations of the Appraisal Institute. Neither all nor any
part of the contents of this report, essentially any conclusions as to
value, the identity of the appraiser or the firm with which he is
connected, or any reference to the Appraisal Institute or to the MAI or
SRA designations shall be disseminated to the public through advertising
media, public relations media, news media, or any other public means of
communication without the prior written consent and approval of the
appraiser.
11. The appraisal report covering the subject property is limited to the
surface rights and does not include any inherent subsurface or mineral
rights.
12. No change of any items of the appraisal report shall be made by anyone
other than the Appraiser(s), and the Appraiser(s) shall have no
responsibility for any such unauthorized change.
13. The Appraiser(s) takes no responsibility for any events, conditions or
circumstances affecting the property's market value that take place
subsequent to either the date of value contained in this report, or the
date of our field inspection, whichever occurs first.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
The estimate(s) of value stated in the appraisal applies only to the
effective date of value stated in the report. Value is affected by many
related and unrelated economic conditions within a local, regional,
national and/or worldwide context, which might necessarily affect the
future value of the subject property. The Appraiser(s), therefore, assumes
no liability for an unforeseen precipitous change in the economy, subject
property, or project, if applicable.
14. Unless otherwise noted in the appraisal, it is assumed that there are no
encroachments, zoning, building, fire or safety code violations, or
restrictions of any type affecting the subject property. It is assumed
that the property is in full compliance with all applicable federal,
state, local and private codes, laws, consents, licenses and regulations,
and that all licenses, permits, certificates, franchises and so forth can
be freely renewed and/or transferred to a purchaser.
15. All mortgages, liens, encumbrances, leases and servitudes have been
disregarded unless specified within the report.
16. If the reader is making a fiduciary or individual investment decision and
has any questions concerning the material contained in this report, it is
recommended that the reader contact the appraiser.
17. In completing this appraisal, it is understood and agreed that the report
is not now intended, and will not be used in connection with a Real Estate
Syndication or Syndicates. The report and any liability or obligation on
the part of the appraiser is invalid if used in connection with
syndication.
18. A Real Estate Syndicate means a general or limited partnership, joint
venture, unincorporated association or similar organization formed for the
purpose of, and engaged in, investment or gain from an interest in real
property, including but not limited to sale, exchange, trade or
development of such real property, on behalf of other, or which is
required to be registered with the United States Securities and Exchange
Commission or any state regulatory agency which regulates investments made
as a public offering.
19. The prior written consent and approval of the review by the signatory(s)
of the appraisal report to ensure the accuracy and adequacy of any
references to the appraisal report is required.
20. Unless specifically so stated, the value conclusion(s) contained in the
appraisal apply to the real estate only, and do not include personal
property, machinery and equipment, trade fixtures, business value,
goodwill or other non-realty items. Income tax considerations have not
been included or valued unless so specified in the appraisal. The
Appraiser(s) makes no representations as to the value increment which may
be attributed to such considerations.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
21. The appraisal was not prepared for income tax purposes, and shall not be
used, in whole or in part, in regard to any matter involving the Internal
Revenue Service.
22. Any and all findings, projections, assumptions, conclusions and the like
contained in the appraisal report shall be the professional opinion of
Louis A. Iatarola Realty Appraisal Group and the individual Appraiser(s).
Realty Appraisal Group shall retain ownership of all reports and all
original documentation, field notes, memoranda, data and the like made or
assembled in or about the preparation of the report. No one other than the
client may rely on or utilize the report without the express written
consent of Louis A. Iatarola Realty Appraisal Group. The use of the report
is expressly prohibited unless all contractual obligations for payment
thereof have been completed.
23. Management is assumed to be competent, and the ownership to be in
responsible hands. The quality of property management can have a direct
effect on a property's economic viability and value. The financial
forecasts contained in the appraisal assume both responsible ownership and
competent management. Any variance from this assumption could have a
significant impact on the final value estimate(s).
24. The estimated operating results shown in this report are based upon an
evaluation of the present general level of the economy of the area, and
neither takes into account nor makes provision for the effect of any sharp
rise or decline in local or general economic conditions.
25. The Appraiser(s) assumes that there are no hidden or unapparent conditions
of the property, soil, subsoil or structures which would render it more or
less valuable. No responsibility is assumed for such conditions, or for
engineering which might be required to discover such factors. Detailed
soil studies were not made available to the Appraiser(s). Statements
regarding soil qualities, if made in the report, are not conclusive but
have been considered consistent with information available to the
Appraiser(s) and provided by others. In addition, unless stated otherwise
in the appraisal, the land and soil of the area under appraisement appears
firm and solid, but the appraisal does not warrant this condition.
26. The appraisal is made for valuation purposes only. It is not intended nor
to be construed to be an engineering report. The Appraiser(s) is not a
qualified structural engineer(s), therefore is not qualified to judge the
structural integrity of the improvements. Consequently, no warranty,
representations or liability are assumed for the structural soundness,
quality, adequacy or capacities of said improvements and utility services,
including the construction materials, particularly the roof, foundation,
and equipment, including the HVAC systems. Should there be any question
concerning same, it is strongly recommended that an
Engineering/Construction inspection be obtained. The value estimate(s)
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
stated in the appraisal is predicated on the assumption that all
improvements, equipment and building services are structurally sound and
suffer no concealed or latent defects or inadequacies other than those
noted in the appraisal.
27. Any proposed construction or rehabilitation referred to in the appraisal
report is assumed to be completed within a reasonable time and in a
workmanlike manner according to or exceeding currently accepted standards
of design and methods of construction.
28. Any areas or inaccessible portions of the property or improvements not
inspected are assumed to be as reported or similar to the areas which were
inspected.
29. Unless specifically stated in the report, the Appraiser(s) found no
obvious evidence of insect infestation or damage, dry or wet rot. Since a
thorough inspection by a competent inspector was not performed for the
Appraiser(s), the subject is assumed to be free of existing insect
infestation, wet rot, dry rot, and any structural damage which may have
been caused by pre-existing infestation or rot which was subsequently
treated.
30. In the appraisal assignment, the existence of potentially hazardous
material used in the construction or maintenance of the improvements, such
as the presence of urea formaldehyde foam insulation, asbestos, toxic
waste, radon and/or any other prohibited material or chemical which may or
may not be present on or in the property, was, unless specifically
indicated in the report, not observed by the Appraiser(s), nor does he
have any knowledge of the existence of such materials on or in the
property. The Appraiser(s), however, is not qualified to detect such
substances. The existence of these potentially hazardous materials may
have a significant effect on the value of the property. The client is
urged to retain an expert in this field, if desired. The value
conclusion(s) assumes the property is "clean" and free of any of these
adverse conditions unless notified to the contrary in writing.
31. No effort has been made to determine the possible effect, if any, on this
project of energy shortages or present or future federal, state or local
legislation, including any environmental or ecological matters or
interpretations thereof.
32. The Appraiser(s) believes that the underlying assumptions and current
conditions provide a reasonable basis for the value estimate(s) stated in
the appraisal. The Appraiser(s) assumes there will be no major changes in
current economic mortgage interest rates and/or terms or property
assessment; and/or major revisions in current state and/or federal tax or
regulatory laws in the foreseeable future. If significant changes would
occur, variations in the value estimate(s) stated in the report could
occur.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
33. The appraisal report is invalid unless the official seal of the MAI
signing the report is affixed to the signature pages.
34. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
35. The client(s) by receipt of the appraisal, shall indemnify and hold
harmless Louis A. Iatarola Realty Appraisal Group and/or its individual
staff members from and against all damages, expenses, claims, demands and
costs, including legal fees incurred in investigating and defending any
claims, arising from or in any way connected to the inclusion of the
aforesaid reference to Realty Appraisal Group and/or its individual staff
members for damages and expenses resulting from Realty Appraisal Group's
and/or its individual staff members' failure to render the opinion(s) of
value or produce the appraisal in a manner consistent with sound appraisal
practice.
In any event, the maximum damages recoverable from Realty Appraisal Group
or its employees relative to this engagement shall be the amount of the
monies actually collected by Realty Appraisal Group for this assignment
and under no circumstances shall any claim or consequential damages be
made. In addition, there is no accountability or liability to any third
party.
36. The Americans with Disabilities Act (ADA) became effective January 26,
1992. I (we) have not made a specific compliance survey and analysis of
this property to determine whether or not it is in conformity with the
various detailed requirements of the ADA. it is possible that a compliance
survey of the property together with a detailed analysis of the
requirements of the ADA could reveal that the property is not in
compliance with one or more of the requirements of the act. If so, this
fact could have a negative effect upon the value of the property. Since I
(we) have no direct evidence relating to this issue, I (we) did not
consider possible noncompliance with the requirements of ADA in estimating
the value of the property.
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
[GRAPHIC OMITTED]
SUBJECT PROPERTY FRONT ELEVATION
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
[GRAPHIC OMITTED]
FIRST FLOOR BARNES & NOBLE RETAIL SPACE UNDER CONSTRUCTION
[GRAPHIC OMITTED]
SECOND FLOOR BARNES & NOBLE RETAIL SPACE UNDER CONSTRUCTION
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
[GRAPHIC OMITTED]
URBAN OUTFITTERS - FIFTH FLOOR
[GRAPHIC OMITTED]
REALTY COMPANY - FOURTH FLOOR
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
[GRAPHIC OMITTED]
DESIGN COMPANY - FOURTH FLOOR - RECEPTION AREA
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
[GRAPHIC OMITTED]
DESIGN COMPANY FOURTH FLOOR
[GRAPHIC OMITTED]
ROLL-UP DOOR AT SANSOM STREET
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
[GRAPHIC OMITTED]
REAR YARD AREA
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
<PAGE>
[PHOTO OMITTED]
SUBJECT BUILDING REAR ELEVATION
<PAGE>
[PHOTO OMITTED]
SANSOM STREET
[PHOTO OMITTED]
WALNUT STREET EAST
<PAGE>
[PHOTO OMITTED]
WALNUT STREET WEST
<PAGE>
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The land referred to in this Commitment is described as follows:
PREMISES "A"
ALL THAT CERTAIN lot or piece of ground with the messuage or tenement thereon
erected.
SITUATE on the North side of Walnut Street at the distance of forty-four feet
Westward from the West side of Eighteenth Street in the Eighth Ward of the City
of Philadelphia.
CONTAINING in front or breadth on the said Walnut Street twenty-two feet and
extending of that width in length or depth Northward one hundred and forty-five
feet, bounded on the South by the said Walnut Street on the East by ground
formerly of James Harper on the West partly by ground now or late of Michael A.
Maloney, and partly by the head of a certain four feet wide alley leading
Westward and communicating at the Westernmost end thereof with a certain other
alley three feet seven and one-half inches wide which leads Northward into
Sansom Street and Northward by ground formerly of George Roberts Smith.
BEING Number 1805 Walnut Street. PLAN/PARCEL #: 1 S 23 - 45
TOGETHER with the free and common use, right, liberty and privilege of the
aforesaid alleys as and for passageways and watercourses at all times hereafter,
forever.
PREMISES "B"
ALL THAT CERTAIN four story brick messuage or tenement and lot or piece of
ground.
SITUATE on the Northerly side of Walnut Street at the distance of sixty-six feet
Westwardly from the Westerly side of Eighteenth Street in the Eighth Ward of the
City of Philadelphia.
CONTAINING in front or breadth on the said Walnut Street twenty-two feet and
extending in length or depth Northwardly of that width one hundred and forty-one
feet to a four feet wide alley laid out by Samuel Elliott Harlan leading
Westwardly into an alley three feet seven inches and a half wide which leads
Northwardly into Sansom Street at the distance of eighty-four feet West of
Eighteenth Street aforesaid, bounded on the South by the said Walnut Street on
the East by ground now or late of George R. Weikerl et ux al on the West by
ground now or late of James Harper and on the North by the said four feet wide
alley.
BEING Number 1807 Walnut Street. PLAN/PARCEL #: 1 S 23 - 77
<PAGE>
Commitment Number: P-2939
- --------------------------------------------------------------------------------
TOGETHER with the free and common use, right, liberty and privilege of the
aforesaid alleys as and for passageways and watercourses at all times hereafter
forever.
PREMISES "C"
ALL THAT CERTAIN lot or piece of ground situate on the North side of Walnut
Street at the distance of eighty-eight feet Westward from the West side of
Eighteenth Street in the Eighth Ward of the City of Philadelphia.
CONTAINING in front or breadth on the said side of Walnut Street twenty-five
feet three inches and extending in length or depth Northward two hundred and
thirty-five feet to Sansom Street (late George Street), bounded Northward by
said Sansom Street, Eastward and Westward by ground formerly of James Harper and
Southward by said Walnut Street.
BEING Number 1809 Walnut Street. PLAN/PARCEL #: 1 S 23 - 15
<PAGE>
EXHIBIT "B"
LEGAL DESCRIPTION
ALL THAT CERTAIN four story brick messuage or tenement and lot or piece of
ground.
SITUATE on the Northerly side of Walnut Street at the distance of sixty-six feet
Westwardly from the Westerly side of Eighteenth Street in the Eighth Ward of the
City of Philadelphia.
CONTAINING in front or breadth on the said Walnut Street twenty-two feet and
extending in length or depth Northwardly of that width one hundred and forty-one
feet to a four feet wide alley laid out by Samuel Elliott Harlan leading
Westwardly into an alley three feet seven inches and a half wide which leads
Northwardly into Sansom Street at the distance of eighty-four feet West of
Eighteenth Street aforesaid, bounded on the South by the said Walnut Street on
the East by ground now or late of George R. Weikel et ux et al on the West by
ground now or late of James Harper and on the North by the said four feet wide
alley.
BEING NUMBER 1807 Walnut Street.
ALL THAT CERTAIN lot or piece of ground situate on the North side of Walnut
Street at the distance of eighty-eight feet Westward from the West side of
Eighteenth Street in the Eighth Ward of the City of Philadelphia.
CONTAINING in front or breadth on the said side of Walnut Street twenty-five
feet three inches and extending in length or depth Northward two hundred and
thirty-five feet to Sansom Street (late George Street), bounded Northward by
said Sansom Street, Eastward and Westward by ground formerly of James Harper and
Southward by said Walnut Street.
BEING NUMBER 1809 Walnut Street.
<PAGE>
LEASE ABSTRACT BARNES AND NOBLE
Premises: 1805 Walnut Street Philadelphia,
PA 19103
Landlord: Alison/Rittenhouse Associates
Tenant: Barnes and Noble Superstores,
Inc.
Sq. Ft. Partial basement, 1st, 2nd & 3rd
floors
Lease Date: July 3, 1996
Lease Term: 20 years
Commencement Date: September 18, 19965
Rent Commencement Date: First to occur of I) 180 days
after delivery per Para. 5 or
ii) 31st day after opening.
Blackout period of Monday after
Thanksgiving to February 16.
Commencement date will be March
16, 1997.
Expiration Date:
Rent Increase Date:
Options: Two 5 year options not to exceed
30 years 21-25) 823,556.25
26-30) 905,911.87
Percentage Rent: None
Rent: 1-5) $562,500 6-10) $618,750
11-15) $680,625 16-20)
$748,687.50
Prorata Share: 44%
Cam, Taxes and Insurance: CAM $20,000 100% of taxes and
insurance
Trash: Tenant's responsibility
including dumpster
HVAC: Tenant's responsibility with
required inspections
Late Charge: No
Utilities: 100% of water/sewer, gas &
electric & maintenance paid by
Tenant. Non metered to be
reimbursed prorata to Landlord
Landlord's Obligations: Roof and structure
Security Deposit: None
Insurance Limits: 3 Million for both LL and Tenant
naming all & 30 days' notice
Permitted Use: Typical bookstore with cafe
Dark: 90 days we have the right to buy
them out Para. 7.2
Assign & Sublet: With prior consent and tenant
remains liable - not
unreasonable and affiliates
don't count
Indemnity: Yes
Subordination: Yes 15 days
Holdover: l.5X
Books and Records: No
Default: 1) No rent 10 days after notice
2) Other provisions after 30 days'
notice
Confession: No
Landlord's Lien: No
Estoppel: Yes - 15 days
SND & Attorn: Yes
Noncompete: No
Exclusive: No competing items as per Para.
7.5
Inspection: With notice
Termination: No
Notice: Barnes and Noble Superstores,
Inc. 122 5th Avenue NY, NY 10011
Att: V.P. Real Estate
Copy to: Accts. Payable Dept. 1400 Old
County Rd. Westbury, NY 11590
Att: Property Acctg.
Guaranty: Yes - Barnes and Noble
Construction Allowance: $1,000,000
Memorandum of Lease: Upon request & can be recorded
Arbitration: Yes
<PAGE>
LEASE ABSTRACT URBAN OUTFITTERS
Premises: 1809 Walnut Street Philadelphia,
PA 19103 - Floors 5-8
Landlord: Alison/Rittenhouse Associates,
successor to Quarry Office Park
Assoc.
Tenant: Urban Outfitters, Inc.
Sq. Ft. 6) 7583sf 7) 7550sf 8) 2479
Lease Date: 1/7/94
Lease Term: 5 Years
Effective Date: 1/7/94
Rent Commencement Date: 5/1/95
Expiration Date: 4/30/2004
Rent Increase Date: May 1, 1999
Options:
Percentage Rent: No
Rent: Years 1-5) $299,404 Years 6-10)
$334,628
Prorata Share: 17,612 total rentable square feet
Cam, Taxes and Insurance: Yes -Electric only if separately
metered
Trash: Landlord's responsibility
including dumpster
HVAC: Landlord's responsibility
Late Charge: 5 days after written notice & 18%
after 30 days
Utilities: Landlord to pay 100% of
water/sewer, gas, cleaning &
maintenance w/ S10/sf cap
Landlord's Obligations: All with a $10/sf cap
Security Deposit: None
Insurance Limits: 1 Million or as Landlord may
require naming all & 30 days'
notice
Permitted Use: General office
Dark: n/a
Assign & Sublet: Not to be unreasonably withheld
P. 20
Indemnity:
Subordination: Yes SND & attorn
Holdover: 1.5X
Books and Records: n/a
Estoppel: Yes - 15 days
SND & Attorn: Yes
Noncompete: n/a
Exclusive: n/a
Inspection: Reasonable notice
Termination: Yes LL as part of an overall
development
Notice: Urban Outfitters, Inc. 1801 Walnut
Street, Phila, PA 19103
w/copy to Harry S. Cherken, Esq.
Drinker, Biddle and Reath
1345 Chestnut St., Phila, PA
19107-3496
Guaranty: No
Construction Allowance: No
<PAGE>
URBAN OUTFITTERS LEASE AMENDMENT
AMENDMENT DATE: JUNE 1, 1996
TERM: EXTENDED TO MAY 31, 2011
RENT INCREASE DATE: JUNE 1, 2001 & 2006
DEMISED PREMISES: EXISTING FLOORS 6,7,8 PLUS FLOOR S AND 1500 SQUARE FEET IN
BASEMENT
RENT: 6/1/1996-5/31/2001 30,833.34
6/l/2001-5/31/2006 34,533.34
6/l/2006-5/31/2011 38,677.34
PRORATA SHARE: 45%
PARKING: LL TO PROVIDE 2 PARKING SPACES AT 1845 WALNUT ST.(OR SOME OTHER
REASONABLE LOCATION) AT LL'S EXPENSE.
SECURITY: 7 AM TO 11 PM MONDAY THRU FRIDAY
7 AM SATURDAY TO 12 AM MONDAY
RESPONSIBILITIES FROM RETAIL LEASE: TENANTS 50% PORTION OF THE ADA
REQUIREMENT
COURTYARD AND GARAGE: URBAN TO PAY PHILA. URBAN INVESTORS TAXES AND
INSURANCE AND WE REIMBURSE URBAN
EXPANSION OPTION: 1ST OPTION
A) 14 MONTHS NOTICE
B) OCCUPANCY TO COMMENCE 11/1/2001
C) RENT IS FAIR MARKET VALUE LESS VALUE OF IMPROVEMENTS - BUT NOT LESS
THAN THE RENT THEN BEING PAID
D) AS-IS CONDITION EXCEPT LEGAL REQUIREMENTS
E) AT OUR OPTION THEY MAY DO SPRINKLER WORK AND WE REIMBURSE
F) NO DEFAULT
EXPANSION OPTION #2
A) 9 MONTHS ADVANCE NOTICE
B) OCCUPANCY TO COMMENCE 6/1/2006
C-F) SAME AS ABOVE
RIGHT OF FIRST OFFER: PRIOR TO OFFERING SPACE ON THE FOURTH FLOOR WE MUST GIVE
THEM THE RIGHT OF FIRST OFFER PAGE 9 PARA. 16
4/11/97 Urban outfitter's has exercised an option to occupy approximately 2200
square feet of the fourth floor for 4.5 years. Additionally, they have committed
to take the entire floor after this time for the duration of their lease term.
There are two other tenants occupying the balance of the fourth floor.
<PAGE>
ss.14-1600 353
- --------------------------------------------------------------------------------
(.n) Potassium;
(.o) Sodium;
(.p) Sulphur and sulphur products;
(.q) Pesticides (including insecticides, fungicides, and
rodenticides;
(.r) Radioactive substances insofar as such substances are not
otherwise subject to regulation.
(c) Within the approximate One Hundred Year Flood boundary as defined by
the FBFY;
(.1) Development shall be permitted in accordance with
ss.14-1606(5)(b);
(.2) The Water Department shall determine the Regulatory Flood
Elevation in accordance with standard hydrologic and hydraulic engineering
methods;
(d) Prohibited Uses:
(.1) New structures or additions to existing structures containing
as the main use the following use classifications shall be prohibited within the
One Hundred Year Flood Plain as defined on the FBFY map:
(.a) Medical and surgical hospitals and medical centers and
sanitaria;
(.b) Rest, old age, nursing or convalescent homes and
nurseries;
(.c) Penal and correctional institutions;
(.d) Mobile homes;
(.2) A special permit for the uses set forth in (5)(d)(.1)(.a)
through (.d) above may be obtained from the Department of Licenses and
Inspections in accordance with the provisions of Act 166 of 1978, known as the
"Pennsylvania Flood Plain Management Act" and the regulations promulgated
thereunder, pertaining to the issuance of special permits. Special permits shall
not be issued unless the criteria in the Act and regulations for the issuance of
such permits have been met by the applicant and approved by the Department of
Community Affairs.
ss. 14-1607. Special Controls for the Center City Commercial Area.
(1) Legislative Findings. The Council finds that:
<PAGE>
354 ss.14-1600
- --------------------------------------------------------------------------------
(a) Major public and private investments have been made recently to create
and maintain aesthetic enhancement, economic viability and historic values
within the Center City Commercial Area. Public funding expenditures include
appropriations for improved access, street and sidewalk improvements, tree
plantings and street furniture.
(b) Within the said area there has been an increased number of certain
uses such as amusement arcades, surface parking lots and take-out restaurants.
Said uses while not necessarily offensive by themselves, when concentrated in an
area, tend to contribute to the deterioration of the aesthetics and economics of
that area. There are other uses and accessory uses such as outdoor vending
machines, retail sales windows, take-out windows, outdoor speakers, outdoor
advertising signs, and flashing and animated signs, among others, which also
tend to contribute to the deterioration of the character of an area.
(c) This area is important to the historic, cultural and commercial
vitality of Philadelphia and these types of uses could have a negative impact
upon the City's efforts to improve this area through planning and funding
programs of economic development and commercial revitalization,
(d) The pedestrian ambiance of Chestnut street and Walnut street would be
enhanced by insuring the continued penetration of sunlight and air to the
sidewalk areas of these streets by restricting building heights on the south
side of these streets in a manner that ensures this.
(e) A uniform scale of development would enhance the aesthetic character
of Chestnut street and Walnut street by maintaining a cornice line or height
line of a pedestrian scale along said streets.
(f) Therefore, special land use controls are needed to protect the
historic, aesthetic and economic viability of this area. These controls should
prohibit certain uses within the area, establish bulk and height controls along
both sides of Chestnut street and Walnut street, and establish facade and sign
controls for the area.
(g) Additionally, certain uses and accessory uses which contribute to the
deterioration of the historic, aesthetic and economic viability of this area,
while representing a small portion of the capital investment, existing on a
rental or lease basis rather than as permanent parts of the real property,
and/or having a short-term usable life, should be removed from said area.
(2) Center City Commercial Area.
(a) No building shall be erected or altered, or building or land used
abutting Chestnut street or Walnut street between Front street and the
<PAGE>
ss. 14-1600 355
- --------------------------------------------------------------------------------
Schuylkill River and Broad street between South Penn square and Washington
Avenue, unless there is compliance with all the applicable requirements of this
section.
(3) Prohibited Uses. In any building or upon any land abutting Chestnut
street or Walnut street between Front street and the Schuylkill River and Broad
street between South Penn square and Washington avenue, the following uses shall
be prohibited:
(a) Amusement arcades;
(b) Any use regulated by ss.14-1605, Regulated Uses;
(c) Carwash;
(d) Hand laundry;
(e) Non-accessory or outdoor advertising signs;
(f) Open air parking lots;
(g) Outdoor sales or storage including outdoor use of coin operated
machines which dispense food or drink, but not including open air cafes within
the property line;
(h) Parking as the sole use of a property;
(i) Repair of motor vehicles;
(j) Restaurants, cafes, coffee shops and other similar establishments for
the sale and consumption of food and/or beverages, with drive-in or takeout
service (sale of food and/or beverages to be consumed outside the confines of
the premises);
(k) Retail sales of products or food through a window or aperture which
opens directly onto the sidewalk, a public arcade, or public entranceway into a
building;
(l) Retail and wholesale sales of motor vehicles;
(m) Retail and wholesale sales of automotive parts and/or the installation
of automotive parts to include audio equipment in motor vehicles;
(n) Accessory parking with vehicular ingress and egress from Broad street;
and,
(o) Any accessory speaker or audio device that causes music or voices to
reach the sidewalk area, public arcade, or public entranceway to a building,
which is adjunct to any permitted retail use, used to advertise merchandise
sold, and/or used to call public attention to the use of the premises.
<PAGE>
356 ss. 14-1600
- --------------------------------------------------------------------------------
(4) Uses Prohibited on the Ground Floor. In any building or upon any land
abutting Chestnut street and Walnut street between Front street and the
Schuylkill River and Broad street between South Penn Square and Washington
avenue, the following uses shall be prohibited from occupying the ground floor:
(a) Blueprinting, duplicating, printing, publishing, photo processing and
kindred reproduction services;
(b) Laboratories for analytical, chemical and research purposes, assay
offices; and,
(c) Repair of household appliances and fixtures, musical instruments,
photographic equipment, radio and television equipment, shoes, dental or
prosthetic laboratories and optical lens grinding.
(5) Conditional Uses. In any building or upon any land abutting Chestnut
street and Walnut street between Seventh street and the Schuylkill River and
Broad street between South Penn Square and Washington avenue, the following uses
shall require a Zoning Board of Adjustment certificate:
(a) Airline ticket offices;
(b) Restaurants, cafe, coffee shops and other similar establishments for
the sale and consumption of food and/or beverages, without drive-in or take-out
service (service at tables or sit down counter facilities only); except for
restaurants within hotels and, except for restaurants accessory to an office
building (intended principally to serve the occupants of the building) provided
that there shall be no ingress or egress directly from any street (accessible
solely from the interior of the building) and there shall be no signage visible
from the street;
(c) Rental of bicycles, clothing and consumer goods;
(d) Retail sale of delicatessen goods as a main use;
(e) Retail sale of drugs and cosmetics as a main use;
(f) Retail sale and/or preparation of bakery items as a main use;
(g) Treatment and sale of pet birds and pet animals, including boarding of
pets;
(h) Water booster or sewer booster substations, electric transforming or
gas regulating substations.
(6) Prohibited Buildings. Upon any land abutting Chestnut street or Walnut
street between Front street and the Schuylkill River and Broad street
<PAGE>
ss.14-1600 357
- --------------------------------------------------------------------------------
between South Penn Square and Washington avenue, the following buildings shall
be prohibited:
(a) Kiosks, as defined in ss.14-102(46).
(7) Bulk and Height Controls.
(a) The main cornice line of any building erected on land abutting
Chestnut street or Walnut street shall not be less than 35 feet above the
average sidewalk level.
(b) No building shall be erected which is located at a point 25D feet
south of the south side of Chestnut street between Front street and a point 130
feet east of Broad street or 250 feet south of the south side of Chestnut street
between a point 130 feet west of Broad street and the Schuylkill River, or
within 250 feet south of the south side of Walnut street between Front street
and Eighth street and between Ninth street and a point 100 feet east of Broad
street, or 250 feet south of the south side of Walnut street between a point 220
feet west of Broad street and the Schuylkill River unless there is compliance
with the following height and bulk controls:
(.1) The main cornice line abutting the south side of Chestnut
street or Walnut street shall not exceed 50 feet in height above the average
sidewalk level; provided, that no portion of any building within 250 feet south
of the southerly property line of Chestnut street or 250 feet south of the
southerly property line of Walnut street shall exceed this 50 feet height
limitation unless the portion or portions above this 50 feet height limitation
recede from the plane of the cornice line a distance equal to or greater than
the distance it extends above the 50 feet height limit; provided, further, that
in no case shall any portion or portions of a building exceed 300 feet in
height.
(8) Facade Controls. No building shall be erected nor any facade altered
on any building or land fronting on Chestnut street or Walnut street between
Front street and the Schuylkill River and Broad street between South Penn Square
and Washington avenue unless plans of the facade have been approved by the
Planning Commission. The Planning Commission shall have 60 days to take action,
after which its approval shall be presumed.
(9) Sign Controls. No signs shall be erected or maintained on any building
or land fronting on or within 200 feet of Chestnut street, Walnut street or
Broad street if said sign is visible or intended to be visible from Chestnut
street or Walnut street between Front street and the Schuylkill River or from
Broad street between South Penn Square and Washington avenue unless approved by
the Art Commission, after consultation with the Planning Commission; provided
that, the Art Commission shall have 60 days to take action, after which its
approval shall be presumed; further provided,
<PAGE>
358 ss. 14-1600
- --------------------------------------------------------------------------------
that flashing signs, intermittent or flashing light sources, revolving signs,
animated signs, roof signs (excluding signs identifying the name or address of a
building), and projecting signs shall be prohibited.
(10) Discontinuance of Non-Conforming Uses.
(a) In all buildings and/or upon all land abutting Chestnut street or
Walnut street between Seventh street and the Schuylkill River or from Broad
street between South Penn Square and Washington avenue, the uses prohibited in
ss. 14-1607(3), relating to prohibited uses, subsections (g), relating to
outdoor sales and storage, and (o), relating to accessory speakers, shall be
discontinued immediately and shall not be resumed or maintained, provided, all
such material and devices shall be permanently removed within 90 days of the
effective date of this ordinance; further provided, that the uses prohibited in
subsection (k), relating to retail sales through a window, shall be discontinued
immediately and shall not be resumed, provided all such windows shall be
permanently removed within one year of the effective date of this ordinance;
further provided, that the uses in subsection (e), relating to outdoor
advertising, shall be discontinued and shall not be resumed or maintained at the
expiration of 2 years from the effective date of this ordinance.
(b) Nothing in this section shall imply or incur any obligation on the
part of the City to compensate any person for any financial loss attributed to
the discontinuance of a non-conforming use.
(11) Discontinuance of Operation. If in any building and/or upon any land
abutting Chestnut street or Walnut street between Front street and the
Schuylkill River and Broad street between South Penn Square and Washington
avenue any use prohibited in ss.14-1607(3)(a) through (o) above should cease or
discontinue for a period of 90 or more consecutive days, it may not resume, or
be replaced by any similar use unless it complies with all the requirements set
forth in this Chapter.
(12) Discontinuance of Non-Conforming Buildings.
(a) Upon all land abutting Chestnut street or Walnut street between Front
street and the Schuylkill River and Broad street between South Penn Square and
Washington avenue, the buildings prohibited in ss.14-1607(6), relating to
prohibited buildings, shall be permanently removed within 3 years of the
effective date of this subsection.
(b) Nothing in this section shall imply or incur any obligation on the
part of the City to compensate any person for any financial loss attributed to
the discontinuance of a non-conforming building.
<PAGE>
ss.14-1600 359
- --------------------------------------------------------------------------------
(13) With respect to non-conforming uses in buildings and/or upon land
abutting Chestnut street or Walnut street between Eighteenth street and the
Schuylkill River, the time periods referred to in subsection (10), concerning
Discontinuance of Non-Conforming Uses, shall relate to the effective date of
this subsection (13).
(14) With respect to non-conforming buildings and non-conforming uses in
buildings and/or upon land abutting Broad street between Pine street and
Washington avenue, the time periods referred to in subsection (10), concerning
Discontinuance of Non-Conforming Uses, and subsection (12), concerning
Discontinuance of Non-Conforming Buildings, shall relate (o the effective date
of this subsection.
(15) Conflicting Regulations. When the provisions of this section conflict
with the provisions of ss. 14-224, relating to the "RC-4" Residential District,
and/or the provisions of ss. 14-305, relating to the "C-4" and "C-5" Commercial
Districts, the more restrictive provisions shall control.
(16) Enforcement. No permits for any construction, alteration and/or
renovation of any building or upon any land shall be issued by the Department of
Licenses and Inspections unless there is compliance with all of the applicable
sections of this Chapter; provided, that within the specified time periods after
the enactment of this ordinance, the Department shall institute any appropriate
action or proceeding to enforce the requirements that all uses listed in
ss.14-1607(10), Discontinuance of Non-Conforming Uses, and all buildings listed
in ss.14-1607(12), Discontinuance of Non-Conforming Buildings, have been
removed; further provided, that any person aggrieved by any decision of any
officer, department, board or commission of the City acting under the authority
of this Chapter shall have the right to take an appeal of such decision by
requesting a variance from the Zoning Board of Adjustment.
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:30 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 1
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - DETAILED LEASE EXPIRATION SCHEDULE (FIRST TERM ONLY)
<TABLE>
<CAPTION>
Market Base Rent/ Expiration Square Percent
No. Tenant Suite Leasing SqFt/Yr Date Feet of Total
- ---- ------------------ ------- --------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
3. Urban Outfitters 4 lc1 9.19 12/01 4,126 7.1
4. Realty co 4 office 9.76 12/01 1,232 2.1
5. Eberlein Design 4 office 11.67 2/02 2,100 3.6
====== ====
Total for Year Ending Apr-2002 7,458 12.8%
2. Urban Outfitters 5,6,7 urban 16.60 5/11 26,314 45.2
6. Urban Outfitters 4 urban 16.46 5/11 2,100 3.6
7. Urban Outfitters 4 urban 16.46 5/11 1,232 2.1
8. Urban Outfitters 4 urban 16.46 5/11 4,126 7.1
====== ====
Total for Year Ending Apr-2002 33,772 58.0%
Building Total 41,230 70.9%
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:30 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 2
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - SQUARE FEET EXPIRING - (ALL TERMS)
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
For the Years Ending Apr-1998 Apr-1999 Apr-2000 Apr-2001 Apr-2002 Apr-2003 Apr-2004 Apr-2005 Apr-2006
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Urban Outfitters 4 4,126
Realty co 4 1,232
Eberlein Design 4 2,100
Urban Outfitters 5,6,7,
Urban Outfitters 4
Urban Outfitters 4
Urban Outfitters 4
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL SQUARE FEET EXPIRING 7,458
======== ======== ======== ======== ======== ======== ======== ======== ========
PERCENT OF TOTAL EXPIRING 12.8%
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:30 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 3
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - SQUARE FEET EXPIRING - (ALL TERMS)
<TABLE>
<CAPTION>
Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16
For the Years Ending Apr-2007 Apr-2008 Apr-2009 Apr-2010 Apr-2011 Apr-2012 Apr-2013
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Urban Outfitters 4
Realty co 4
Eberlein Design 4
Urban Outfitters 5,6,7, 26,314
Urban Outfitters 4 2,100
Urban Outfitters 4 1,232
Urban Outfitters 4 4,126
-------- -------- -------- -------- -------- -------- --------
TOTAL SQUARE FEET EXPIRING 33,772
======== ======== ======== ======== ======== ======== ========
PERCENT OF TOTAL EXPIRING 58.0%
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:31 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 4
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - OCCUPANCY & ABSORPTION RATES
Physical Occupancy Based on Absorption & Turnover Vacancy Assumptions
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
For the Years Ending Apr-1998 Apr-1999 Apr-2000 Apr-2001 Apr-2002 Apr-2003 Apr-2004 Apr-2005 Apr-2006
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SQFT OCCUPIED
May 56,960 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192
June 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192
July 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192
August 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192
September 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192
October 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192
November 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192
December 58,192 58,192 58,192 58,192 63,550 58,192 58,192 58,192 58,192
January 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192
February 58,192 58,192 58,192 58,192 60,292 58,192 58,192 58,192 58,192
March 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192
April 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192 58,192
-------- -------- -------- -------- -------- -------- -------- -------- --------
AVERAGE OCCUPIED FOR THE YEAR 58,089 58,192 58,192 58,192 58,814 58,192 58,192 58,192 58,192
======== ======== ======== ======== ======== ======== ======== ======== ========
NET ABSORBTION
Annual Square Feet Absorbed 1,232
Average Monthly Absorption 103
======== ======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
For the Years Ending Apr-1998 Apr-1999 Apr-2000 Apr-2001 Apr-2002 Apr-2003 Apr-2004 Apr-2005 Apr-2006
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OCCUPANCY
May 97.88% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
June 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
July 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
August 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
September 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
October 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
November 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
December 100.00% 100.00% 100.00% 100.00% 109.21% 100.00% 100.00% 100.00% 100.00%
January 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
February 100.00% 100.00% 100.00% 100.00% 103.61% 100.00% 100.00% 100.00% 100.00%
March 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
April 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
-------- -------- -------- -------- -------- -------- -------- -------- --------
AVERAGE OCCUPANCY FOR THE YEAR 99.82% 100.00% 100.00% 100.00% 101.07% 100.00% 100.00% 100.00% 100.00%
======== ======== ======== ======== ======== ======== ======== ======== ========
NET ABSORBTION
Annual Percentage Absorbed 2.12%
Average Monthly Percentage 0.18%
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:31 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 5
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - OCCUPANCY & ABSORPTION RATES
Physical Occupancy Based on Absorption & Turnover Vacancy Assumptions
<TABLE>
<CAPTION>
Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16
For the Years Ending Apr-2007 Apr-2008 Apr-2009 Apr-2010 Apr-2011 Apr-2012 Apr-2013
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SQFT OCCUPIED
May 58,192 58,192 58,192 58,192 58,192 58,192 58,192
June 58,192 58,192 58,192 58,192 58,192 58,192 58,192
July 58,192 58,192 58,192 58,192 58,192 58,192 58,192
August 58,192 58,192 58,192 58,192 58,192 58,192 58,192
September 58,192 58,192 58,192 58,192 58,192 58,192 58,192
October 58,192 58,192 58,192 58,192 58,192 58,192 58,192
November 58,192 58,192 58,192 58,192 58,192 58,192 58,192
December 58,192 58,192 58,192 58,192 58,192 58,192 58,192
January 58,192 58,192 58,192 58,192 58,192 58,192 58,192
February 58,192 58,192 58,192 58,192 58,192 58,192 58,192
March 58,192 58,192 58,192 58,192 58,192 58,192 58,192
April 58,192 58,192 58,192 58,192 58,192 58,192 58,192
-------- -------- -------- -------- -------- -------- --------
AVERAGE OCCUPIED FOR THE YEAR 58,192 58,192 58,192 58,192 58,192 58,192 58,192
======== ======== ======== ======== ======== ======== ========
NET ABSORBTION
Annual Square Feet Absorbed
Average Monthly Absorption
======== ======== ======== ======== ======== ======== ========
<CAPTION>
Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16
For the Years Ending Apr-2007 Apr-2008 Apr-2009 Apr-2010 Apr-2011 Apr-2012 Apr-2013
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OCCUPANCY
May 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
June 100.00% 100.00% 100.00% 100.00% 100.00% 41.96% 100.00%
July 100.00% 100.00% 100.00% 100.00% 100.00% 41.96% 100.00%
August 100.00% 100.00% 100.00% 100.00% 100.00% 41.96% 100.00%
September 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
October 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
November 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
December 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
January 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
February 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
March 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
April 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
-------- -------- -------- -------- -------- -------- --------
AVERAGE OCCUPANCY FOR THE YEAR 100.00% 100.00% 100.00% 100.00% 100.00% 85.49% 100.00%
======== ======== ======== ======== ======== ======== ========
NET ABSORBTION
Annual Percentage Absorbed
Average Monthly Percentage
======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:31 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 6
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - AVERAGE SQUARE FEET OCCUPANCY
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
For the Years Ending Apr-1998 Apr-1999 Apr-2000 Apr-2001 Apr-2002 Apr-2003 Apr-2004 Apr-2005 Apr-2006
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3 24,420 24,420 24,420 24,420 24,420 24,420 24,420 24,420 24,420
Urban Outfitters 5,6,7, 26,314 26,314 26,314 26,314 26,314 26,314 26,314 26,314 26,314
Urban Outfitters 4 4,126 4,126 4,126 4,126 2,751
Eberlein Design 4 2,100 2,100 2,100 2,100 1,750
Realty co 4 1,129 1,232 1,232 1,232 821
Urban Outfitters 4 525 2,100 2,100 2,100 2,100
Urban Outfitters 4 513 1,232 1,232 1,232 1,232
Urban Outfitters 4 1,719 4,126 4,126 4,126 4,126
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL AMOUNT PER YEAR 58,089 58,192 58,192 58,192 58,814 58,192 58,192 58,192 58,192
======== ======== ======== ======== ======== ======== ======== ======== ========
AVERAGE PERCENTAGE OCCUPANCY 99.82% 100.00% 100.00% 100.00% 101.07% 100.00% 100.00% 100.00% 100.00%
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:31 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 7
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - AVERAGE SQUARE FEET OCCUPANCY
<TABLE>
<CAPTION>
Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16
For the Years Ending Apr-2007 Apr-2008 Apr-2009 Apr-2010 Apr-2011 Apr-2012 Apr-2013
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3 24,420 24,420 24,420 24,420 24,420 24,420 24,420
Urban Outfitters 5,6,7, 26,314 26,314 26,314 26,314 26,314 19,736 26,314
Urban Outfitters 4
Eberlein Design 4
Realty co 4
Urban Outfitters 4 2,100 2,100 2,100 2,100 2,100 1,575 2,100
Urban Outfitters 4 1,232 1,232 1,232 1,232 1,232 924 1,232
Urban Outfitters 4 4,126 4,126 4,126 4,126 4,126 3,095 4,126
-------- -------- -------- -------- -------- -------- --------
TOTAL AMOUNT PER YEAR 58,192 58,192 58,192 58,192 58,192 49,749 58,192
======== ======== ======== ======== ======== ======== ========
AVERAGE PERCENTAGE OCCUPANCY 100.00% 100.00% 100.00% 100.00% 100.00% 85.49% 100.00%
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:31 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 8
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - PREVAILING MARKET RATE PER SQFT
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
For the Years Ending Apr-1998 Apr-1999 Apr-2000 Apr-2001 Apr-2002 Apr-2003 Apr-2004 Apr-2005 Apr-2006
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3
Urban Outfitters 5,6,7, 15.00 15.45 15.91 16.39 16.88 17.39 17.91 18.45 19.00
Urban Outfitters 4 15.00 15.45 15.91 16.39 16.88
Eberlein Design 4 15.00 15.45 15.91 16.39 16.88
Realty co 4 15.00 15.45 15.91 16.39 16.88
Urban Outfitters 4 16.88 17.39 17.91 18.45 19.00
Urban Outfitters 4 16.88 17.39 17.91 18.45 19.00
Urban Outfitters 4 16.88 17.39 17.91 18.45 19.00
-------- -------- -------- -------- -------- -------- -------- -------- --------
WEIGHTED AVERAGE PER SqFt 8.69 8.97 9.24 9.51 9.87 10.09 10.39 10.71 11.03
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:31 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 9
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - PREVAILING MARKET RATE PER SQFT
<TABLE>
<CAPTION>
Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16
For the Years Ending Apr-2007 Apr-2008 Apr-2009 Apr-2010 Apr-2011 Apr-2012 Apr-2013
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3
Urban Outfitters 5,6,7, 19.57 20.16 20.76 21.39 22.03 22.69 23.37
Urban Outfitters 4
Eberlein Design 4
Realty co 4
Urban Outfitters 4 19.57 20.16 20.76 21.39 22.03 22.69 23.37
Urban Outfitters 4 19.57 20.16 20.76 21.39 22.03 22.69 23.37
Urban Outfitters 4 19.57 20.16 20.76 21.39 22.03 22.69 23.37
-------- -------- -------- -------- -------- -------- --------
WEIGHTED AVERAGE PER SqFt 11.36 11.70 12.05 12.41 12.78 13.17 13.56
======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:31 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 10
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - SCHEDULE BASE RENT PER SQFT
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
For the Years Ending Apr-1998 Apr-1999 Apr-2000 Apr-2001 Apr-2002 Apr-2003 Apr-2004 Apr-2005 Apr-2006
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3 19.62 23.03 23.03 23.03 23.42 25.34 25.34 25.34 25.34
Urban Outfitters 5,6,7, 14.06 14.06 14.06 14.06 15.61 15.75 15.75 15.75 15.75
Urban Outfitters 4 13.79 13.79 13.79 13.79 9.19
Eberlein Design 4 14.00 14.00 14.00 14.00 11.67
Realty co 4 12.65 14.18 14.21 14.60 9.76
Urban Outfitters 4 3.75 15.00 15.00 15.00 15.00
Urban Outfitters 4 6.25 15.00 15.00 15.00 15.00
Urban Outfitters 4 6.25 15.00 15.00 15.00 15.00
WEIGHTED AVERAGE PER SqFt 16.34 17.81 17.81 17.82 18.88 19.68 19.68 19.68 19.68
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:31 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 11
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - SCHEDULED BASE RENT PER SQFT
<TABLE>
<CAPTION>
Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16
For the Years Ending Apr-2007 Apr-2008 Apr-2009 Apr-2010 Apr-2011 Apr-2012 Apr-2013
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3 25.76 27.87 27.87 27.87 27.87 28.34 30.66
Urban Outfitters 5,6,7, 17.48 17.64 17.64 17.64 17.64 16.60 22.69
Urban Outfitters 4
Eberlein Design 4
Realty co 4
Urban Outfitters 4 15.00 15.25 16.00 16.00 16.00 16.46 22.69
Urban Outfitters 4 15.00 15.25 16.00 16.00 16.00 16.46 22.69
Urban Outfitters 4 15.00 15.25 16.00 16.00 16.00 16.46 22.69
-------- -------- -------- -------- -------- -------- --------
WEIGHTED AVERAGE PER SqFt 20.64 21.63 21.72 21.72 21.72 21.51 26.03
======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:32 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 12
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - SCHEDULED BASE RENTAL REVENUE
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
For the Years Ending Apr-1998 Apr-1999 Apr-2000 Apr-2001 Apr-2002 Apr-2003 Apr-2004 Apr-2005 Apr-2006
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3 479,167 562,500 562,500 562,500 571,875 618,750 618,750 618,750 618,750
Urban Outfitters 5,6,7, 370,000 370,000 370,000 370,000 410,700 414,400 414,400 414,400 414,400
Urban Outfitters 4 56,900 56,900 56,900 56,900 37,933
Eberlein Design 4 29,400 29,400 29,400 29,400 24,500
Realty co 4 15,583 17,467 17,510 17,991 12,023
Urban Outfitters 4 7,875 31,500 31,500 31,500 31,500
Urban Outfitters 4 7,700 18,480 18,480 18,480 18,480
Urban Outfitters 4 25,788 61,890 61,890 61,890 61,890
-------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL AMOUNT PER YEAR 951,050 1,036,267 1,036,310 1,036,791 1,098,394 1,145,020 1,145,020 1,145,020 1,145,020
======== ========= ========= ========= ========= ========= ========= ========= =========
WEIGHTED AVERAGE PER SqFt 16.34 17.81 17.81 17.82 18.88 19.68 19.68 19.68 19.68
======== ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:32 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 13
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - SCHEDULED BASE RENTAL REVENUE
<TABLE>
<CAPTION>
Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16
For the Years Ending Apr-2007 Apr-2008 Apr-2009 Apr-2010 Apr-2011 Apr-2012 Apr-2013
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3 629,063 680,625 680,625 680,625 680,625 691,969 748,687
Urban Outfitters 5,6,7, 459,984 464,128 464,128 464,128 464,128 436,700 597,034
Urban Outfitters 4
Eberlein Design 4
Realty co 4
Urban Outfitters 4 31,500 32,025 33,600 33,600 33,600 34,564 47,647
Urban Outfitters 4 18,480 18,788 19,712 19,712 19,712 20,278 27,953
Urban Outfitters 4 61,890 62,921 66,016 66,016 66,016 67,911 93,614
--------- --------- --------- --------- --------- --------- ---------
TOTAL AMOUNT PER YEAR 1,200,917 1,258,487 1,264,081 1,264,081 1,264,081 1,251,422 1,514,935
========= ========= ========= ========= ========= ========= =========
WEIGHTED AVERAGE PER SqFt 20.64 21.63 21.72 21.72 21.72 21.51 26.03
========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:32 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 14
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - ABSORPTION & TURNOVER VACANCY
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
For the Years Ending Apr-1998 Apr-1999 Apr-2000 Apr-2001 Apr-2002 Apr-2003 Apr-2004 Apr-2005 Apr-2006
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3
Urban Outfitters 5,6,7,
Urban Outfitters 4
Eberlein Design 4
Realty co 4
Urban Outfitters 4
Urban Outfitters 4
Urban Outfitters 4
-------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL AMOUNT PER YEAR
======== ========= ========= ========= ========= ========= ========= ========= =========
WEIGHTED AVERAGE PER SqFt
======== ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:32 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 15
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - ABSORPTION & TURNOVER VACANCY
<TABLE>
<CAPTION>
Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16
For the Years Ending Apr-2007 Apr-2008 Apr-2009 Apr-2010 Apr-2011 Apr-2012 Apr-2013
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3
Urban Outfitters 5,6,7, 149,259
Urban Outfitters 4
Eberlein Design 4
Realty co 4
Urban Outfitters 4 11,912
Urban Outfitters 4 6,988
Urban Outfitters 4 23,404
--------- --------- --------- --------- --------- --------- ---------
TOTAL AMOUNT PER YEAR 191,563
========= ========= ========= ========= ========= ========= =========
WEIGHTED AVERAGE PER SqFt 3.29
========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:32 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 16
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - EXPENSE REIMBURSEMENT REVENUE
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
For the Years Ending Apr-1998 Apr-1999 Apr-2000 Apr-2001 Apr-2002 Apr-2003 Apr-2004 Apr-2005 Apr-2006
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3 126,005 129,785 133,678 137,690 141,819 146,074 150,457 154,969 159,618
Urban Outfitters 5,6,7, 40,697 41,918 43,176 44,471 45,805 47,179 48,595 50,053 51,554
Urban Outfitters 4 6,381 6,573 6,770 6,973 4,788
Eberlein Design 4 3,248 3,345 3,446 3,549 3,046
Realty co 4 1,747 1,963 2,021 2,082 1,430
Urban Outfitters 4 914 3,765 3,878 3,994 4,114
Urban Outfitters 4 894 2,209 2,275 2,343 2,414
Urban Outfitters 4 2,993 7,398 7,620 7,848 8,084
-------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL AMOUNT PER YEAR 178,078 183,584 189,091 194,765 201,689 206,625 212,825 219,207 225,784
======== ========= ========= ========= ========= ========= ========= ========= =========
WEIGHTED AVERAGE PER SqFt 3.06 3.15 3.25 3.35 3.47 3.55 3.66 3.77 3.88
======== ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:32 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 17
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - EXPENSE REIMBURSEMENT REVENUE
<TABLE>
<CAPTION>
Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16
For the Years Ending Apr-2007 Apr-2008 Apr-2009 Apr-2010 Apr-2011 Apr-2012 Apr-2013
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3 164,407 169,340 174,421 179,653 185,044 190,595 196,311
Urban Outfitters 5,6,7, 53,101 54,694 56,335 58,025 59,765 46,169 63,405
Urban Outfitters 4
Eberlein Design 4
Realty co 4
Urban Outfitters 4 4,238 4,365 4,496 4,631 4,770 3,685 5,060
Urban Outfitters 4 2,486 2,561 2,638 2,717 2,798 2,162 2,969
Urban Outfitters 4 8,326 8,576 8,833 9,098 9,371 7,239 9,942
--------- --------- --------- --------- --------- --------- ---------
TOTAL AMOUNT PER YEAR 232,558 239,536 246,723 254,124 261,748 249,850 277,687
========= ========= ========= ========= ========= ========= =========
WEIGHTED AVERAGE PER SqFt 4.00 4.12 4.24 4.37 4.50 4.29 4.77
========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:32 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 18
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - TENANT IMPROVEMENTS
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
For the Years Ending Apr-1998 Apr-1999 Apr-2000 Apr-2001 Apr-2002 Apr-2003 Apr-2004 Apr-2005 Apr-2006
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3
Urban Outfitters 5,6,7,
Urban Outfitters 4
Eberlein Design 4
Realty co 4
Urban Outfitters 4
Urban Outfitters 4
Urban Outfitters 4
-------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL AMOUNT PER YEAR
======== ========= ========= ========= ========= ========= ========= ========= =========
WEIGHTED AVERAGE PER SqFt
======== ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:32 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 19
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - TENANT IMPROVEMENTS
<TABLE>
<CAPTION>
Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16
For the Years Ending Apr-2007 Apr-2008 Apr-2009 Apr-2010 Apr-2011 Apr-2012 Apr-2013
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3
Urban Outfitters 5,6,7, 298,517
Urban Outfitters 4
Eberlein Design 4
Realty co 4
Urban Outfitters 4 23,823
Urban Outfitters 4 13,976
Urban Outfitters 4 46,807
--------- --------- --------- --------- --------- --------- ---------
TOTAL AMOUNT PER YEAR 383,123
========= ========= ========= ========= ========= ========= =========
WEIGHTED AVERAGE PER SqFt 6.58
========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:33 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 20
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - LEASING COMMISSIONS
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
For the Years Ending Apr-1998 Apr-1999 Apr-2000 Apr-2001 Apr-2002 Apr-2003 Apr-2004 Apr-2005 Apr-2006
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3
Urban Outfitters 5,6,7,
Urban Outfitters 4
Eberlein Design 4
Realty co 4
Urban Outfitters 4
Urban Outfitters 4
Urban Outfitters 4
-------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL AMOUNT PER YEAR
======== ========= ========= ========= ========= ========= ========= ========= =========
WEIGHTED AVERAGE PER SqFt
======== ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Software : ARGUS Ver. 7.0.01 Date : 5/22/97
File : ALISON Time : 5:32 pm
Property Type: Office & Retail Ref# : ASM
Portfolio : Alison building Page : 21
1805-09 Walnut Street
Philadelphia, Pa. 19103
SUPPORTING SCHEDULE - LEASING COMMISSIONS
<TABLE>
<CAPTION>
Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16
For the Years Ending Apr-2007 Apr-2008 Apr-2009 Apr-2010 Apr-2011 Apr-2012 Apr-2013
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
TENANT SUITE
Barnes & Noble 1,2,3
Urban Outfitters 5,6,7, 16,717 25,075
Urban Outfitters 4
Eberlein Design 4
Realty co 4
Urban Outfitters 4 1,334 2,001
Urban Outfitters 4 783 1,174
Urban Outfitters 4 2,621 3,932
--------- --------- --------- --------- --------- --------- ---------
TOTAL AMOUNT PER YEAR 21,455 32,182
========= ========= ========= ========= ========= ========= =========
WEIGHTED AVERAGE PER SqFt 0.37 0.55
========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Walnut Street
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Total Project Walnut Street Square Feet 1997 1998 1999 2000 2001
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME
- -------------------------------------------------------------------------------------------------------------------------------
1809 Walnut Street 58192
- -------------------------------------------------------------------------------------------------------------------------------
Barnes and Noble* 562,500 24420 562,500 562,500 562,500 562,500 562,500
- -------------------------------------------------------------------------------------------------------------------------------
4th Floor 104,412 7458 104,412 104,412 107,544 107,544 107,544
- -------------------------------------------------------------------------------------------------------------------------------
Urban Outfitters 370,000 26314 370,000 370,000 370,000 370,000 414,400
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Total Base Income 1,036,912 1,036,912 1,036,912 1,040,044 1,040,044 1,084,444
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Add Reimbursements 181,060.52 181,061 186,492 192,087 197,850 203,785
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Total Income 1,217,972.52 1,217,973 1,223,404 1,232,132 1,237,894 1,288,229
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES
- -------------------------------------------------------------------------------------------------------------------------------
1809 Walnut Street
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Security 51,000 51,000 52,530 54,106 55,729 57,401
- -------------------------------------------------------------------------------------------------------------------------------
Management 36,292 36,292 37,381 38,502 39,657 40,847
- -------------------------------------------------------------------------------------------------------------------------------
Steam 25,000 30,000 30,900 31,827 32,782 33,765
- -------------------------------------------------------------------------------------------------------------------------------
Electricity 90,000 90,000 92,700 95,481 98,345 101,296
- -------------------------------------------------------------------------------------------------------------------------------
Common Area Electricity 25,000 25,000 25,750 26,523 27,318 28,138
- -------------------------------------------------------------------------------------------------------------------------------
Cleaning Contract 23,000 19,000 19,570 20,157 20,762 21,385
- -------------------------------------------------------------------------------------------------------------------------------
Alarm Monitoring 600 1,800 1,854 1,910 1,967 2,026
- -------------------------------------------------------------------------------------------------------------------------------
Water and Sewer 7,200 7,200 7,416 7,638 7,868 8,104
- -------------------------------------------------------------------------------------------------------------------------------
HVAC Svce. Contract 4,500 4,500 4,635 4,774 4,917 5,065
- -------------------------------------------------------------------------------------------------------------------------------
Elevator Service Contract 10,689 10,689 11,009 11,340 11,680 12,030
- -------------------------------------------------------------------------------------------------------------------------------
Exterminator 780 780 803 828 852 878
- -------------------------------------------------------------------------------------------------------------------------------
Trash 12,000 12,000 12,360 12,731 13,113 13,506
- -------------------------------------------------------------------------------------------------------------------------------
Real Estate Taxes 108,000 108,000 108,000 108,000 111,240 114,577
- -------------------------------------------------------------------------------------------------------------------------------
Special Service Dist. 6,706 6,706 6,907 7,114 7,328 7,548
- -------------------------------------------------------------------------------------------------------------------------------
Insurance 15,300 17,300 17,819 18,354 18,904 19,471
- -------------------------------------------------------------------------------------------------------------------------------
Repairs & Maintenance 12,000 18,000 18,540 19,096 19,669 20,259
- -------------------------------------------------------------------------------------------------------------------------------
Parking 6,120 6,120 6,304 6,493 6,687 6,888
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Total Expenses 434,187 444,387 454,478 464,873 478,819 493,183
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
NOI 783,785.77 773,586 768,926 767,259 759,075 795,046
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
* 1997 Income represents an annualized rent and does not reflect actual rent received that year
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Reimbursement Walnut St.
- -------------------------------------------------------------------------------------------------------------------------------
Totals CAM Taxes Insurance
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Barnes and Noble 125,620.52 71,324.00 48,176.52 6,120.00
- -------------------------------------------------------------------------------------------------------------------------------
Urban Outfitters 43,740.00 43,740.00
- -------------------------------------------------------------------------------------------------------------------------------
Office 11,700.00 11,700.00
- -------------------------------------------------------------------------------------------------------------------------------
Subtotal Walnut St. Reimb. 181,060.52 126,764.00 48,176.52 6,120.00
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Total Reimbursement 181,060.52
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Total Project 2002 2003 2004 2005 2006 2007
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME
- -----------------------------------------------------------------------------------------------------------------
1809 Walnut Street
- -----------------------------------------------------------------------------------------------------------------
Barnes and Noble* 618,750 618,750 618,750 618,750 618,750 680,625
- -----------------------------------------------------------------------------------------------------------------
4th Floor 111,870 111,870 111,870 111,870 111,870 111,870
- -----------------------------------------------------------------------------------------------------------------
Urban Outfitters 414,400 414,400 414,400 414,400 464,128 464,128
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Total base Income 1,145,020 1,145,020 1,145,020 1,145,020 1,194,748 1,256,623
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Add Reimbursements 219,070 255,642 232,411 239,383 246,565 253,962
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Total Income 1,364,090 1,370,662 1,377,431 1,384,404 1,441,313 1,510,585
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
EXPENSES
- -----------------------------------------------------------------------------------------------------------------
1809 Walnut Street
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Security 59,123 60,897 62,724 64,605 66,543 68,540
- -----------------------------------------------------------------------------------------------------------------
Management 42,072 43,334 44,634 45,974 47,353 48,773
- -----------------------------------------------------------------------------------------------------------------
Steam 34,778 35,822 36,896 38,003 39,143 40,317
- -----------------------------------------------------------------------------------------------------------------
Electricity 104,335 107,465 110,689 114,009 117,430 120,952
- -----------------------------------------------------------------------------------------------------------------
Common Area Electricity 28,982 29,851 30,747 31,669 32,619 33,598
- -----------------------------------------------------------------------------------------------------------------
Cleaning Contract 22,026 22,687 23,368 24,069 24,791 25,534
- -----------------------------------------------------------------------------------------------------------------
Alarm Monitoring 2,087 2,149 2,214 2,280 2,349 2,419
- -----------------------------------------------------------------------------------------------------------------
Water and Sewer 8,347 8,597 8,855 9,121 9,394 9,676
- -----------------------------------------------------------------------------------------------------------------
HVAC Svce. Contract 5,217 5,373 5,534 5,700 5,871 6,048
- -----------------------------------------------------------------------------------------------------------------
Elevator Service Contract 12,391 12,763 13,146 13,540 13,947 14,365
- -----------------------------------------------------------------------------------------------------------------
Exterminator 904 931 959 988 1,018 1,048
- -----------------------------------------------------------------------------------------------------------------
Trash 13,911 14,329 14,758 15,201 15,657 16,127
- -----------------------------------------------------------------------------------------------------------------
Real Estate Taxes 118,015 121,555 125,202 128,958 132,826 136,811
- -----------------------------------------------------------------------------------------------------------------
Special Service Dist. 7,774 8,007 8,248 8,495 8,750 9,012
- -----------------------------------------------------------------------------------------------------------------
Insurance 20,055 20,657 21,277 21,915 22,573 23,250
- -----------------------------------------------------------------------------------------------------------------
Repairs & Maintenance 20,867 21,493 22,138 22,208 23,486 24,190
- -----------------------------------------------------------------------------------------------------------------
Parking 7,095 7,308 7,527 7,753 7,985 8,225
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Total Expenses 507,979 523,218 538,915 555,082 571,735 588,887
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
NOI 856,111 847,444 838,516 829,321 869,578 921,698
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
QUALIFICATIONS
LOUIS A. IATAROLA, MAI, SRA
PROFESSIONAL AFFILIATIONS
MAI Member, Appraisal Institute Certificate #4896
President - 1985 - Metropolitan Philadelphia Chapter #9
American Institute of Real Estate Appraisers
SRA Senior Residential Appraiser
President - 1978 - 1979 Philadelphia Chapter #2 Society of Real
Estate Appraisers
AR/WA Member American Right of Way Association
Pennsylvania Certified General Appraiser #GA-O00176-L. Expiration 6-30-97
Real Estate Appraisal Section - National Association of Realtors
New Jersey Certified General Appraiser #RG-00821, Expiration 12-31-97
Philadelphia Board of Realtors - Member
Pennsylvania Real Estate Broker's License #21248
EXPERIENCE
Real Estate Anoraiser and Consultant - Self-employed.
Specializing in the administration of appraisal services to private clients,
governmental agencies and financial institutions since 1976.
Redevelopment Authority of the City of Philadelphia
Employed from 1973 to 1975 as Director, Real Estate Valuation specializing in
the appraisal of real property for Eminent Domain.
Albert M. Greenfield & Co., Inc.
Employed from 1969 to 1973 in the Appraisal Department. Diversified activity in
the appraisal of industrial, commercial and special purpose real estate.
Redevelopment Authority of City of Philadelphia
Employed from 1967 to 1969 with chief duties in the performance of reviewing
appraisal reports submitted by independent appraisers for real estate in Urban
Renewal Areas.
Real Estate Brokerage
Employed from 1961 to 1967 as an Associate Salesman and Broker specializing in
the sale and leasing of residential and commercial real estate.
<PAGE>
COURT TESTIMONY
Qualified as Expert Witness before the Board of View of the City of
Philadelphia, Court of Common Pleas, City of Philadelphia and U.S. Federal
District Court.
EDUCATIONAL BACKGROUND
Father Judge High School, Philadelphia, Pennsylvania - 1960
Real Estate Law and Conveyanclng - 1964
Appraisal Course #1, AIREA Philadelphia Board of Realtors - 1966-1967
Appraisal Course #2, AIREA Philadelphia Board of Realtors - 1967-1968
Appraisal Course #8, AIREA Villanova University - 1970
Appraisal Course #101, SREA Villanova University - 1969-1970
Appraisal Course #201, SREA Villanova University - 1973
Active participation in continuing education through attendance at seminars
and conferences pursuant to the professional education certification
program of the Appraisal Institute. I am currently certified under this
program.
TEACHING ASSIGNMENTS AND RELATED ACTIVITIES
Instructor - Course 101 - An Introduction to Appraising Real Property
SREA - Villanova University
Instructor - Appraisal I - Manor Junior College
Jenkintown, PA
Instructor's Clinic - Society of Real Estate of Appraisers
University of Indiana - 1973
<PAGE>
QUALIFICATIONS
JAMES J. ONESTI
BUSINESS EXPERIENCE
Present - Louis A. Iatarola
Realty Appraisal Group, Ltd.
Fee Appraiser involved with the appraisal of various types
of commercial and industrial properties
1987-1988 MKM Appraisal Associates, Inc.
Fee Appraiser specializing in all types of residential real
estate
1986-1988 Property Appraisal Associates
Fee Appraiser specializing in all types of residential real
estate
EDUCATION
1969-1971 Community College of Philadelphia
1971-1973 Philadelphia College of Textiles & Science
1979-1986 Temple University Real Estate Institute
Real Estate Fundamentals I & I
Real Estate Law
Real Estate Investment Analysis
Real Estate Financing
1987-1990 American Institute of Real Estate Appraisers
Principles of Appraisals
Residential Valuation
Basic Valuation Procedures
Capitalization Theory & Techniques Part A
Capitalization Theory & Techniques Part B
1992 Standards of Professional Appraisal Practice and Ethics
PROFESSIONAL AFFILIATIONS
Pennsylvania Real Estate Broker
(License #RB-046086-L)
Pennsylvania Certified General Appraiser #GA-000823-L
<PAGE>
================================================================================
RESOURCE ASSET INVESTMENT TRUST
and
-----------------------
as Warrant Agent
-----------------------
WARRANT AGREEMENT
Dated as of ______________, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
----
PARTIES .................................................................................................1
RECITALS 1
ARTICLE I ISSUANCE, EXECUTION, EXPIRATION AND TRANSFER OF WARRANT CERTIFICATES............................2
1.01. Form of Warrant Certificates...............................................................2
1.02. Execution of Warrant Certificates..........................................................2
1.03. Issuance, Delivery and Registration of Warrant Certificates................................3
1.04. Exercise of and Adjustments to the Optional Warrants.......................................3
1.05. Transfer and Exchange of Warrant Certificates..............................................4
ARTICLE II COMMON SHARES ISSUABLE, EXERCISE PRICE, EXPIRATION DATE AND EXERCISE OF WARRANTS...............4
2.01. Warrant Shares Issuable; Exercise Price; Expiration Date...................................4
2.02. Exercise of Warrants.......................................................................5
2.03. No Fractional Shares to Be Issued..........................................................7
2.04. Cancellation of Warrants...................................................................7
ARTICLE III ADJUSTMENT OF EXERCISE PRICE; MERGER, ACQUISITION, ETC.; RESERVATION OF COMMON SHARES;
PAYMENT OF TAXES.....................................................................7
3.01. Adjustment of Exercise Price and Number of Warrant Shares..................................7
3.02. Exercise Price Adjustment Formula..........................................................8
3.03. Constructive Issuance of Shares............................................................8
3.04. Stock Dividends...........................................................................11
3.05. Extraordinary Dividends and Distributions.................................................11
3.06. Stock Splits and Reverse Stock Splits.....................................................12
3.07. Reorganizations and Asset Sales...........................................................12
3.08. Covenant to Reserve Shares for Issuance on Exercise.......................................13
3.09. Warrant Agent Not Responsible for Validity of Shares......................................13
3.10. Statements on Warrants....................................................................14
3.11. Notice of Change in Securities Issuable, etc..............................................14
3.12. References to Common Shares...............................................................14
i
<PAGE>
ARTICLE IV OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS....................................15
4.01. No Rights as Shareholders.................................................................15
4.02. Mutilated or Missing Warrant Certificates.................................................15
4.03. Liquidation, Merger, etc.; Notice to Warrantholders.......................................16
ARTICLE V CONCERNING THE WARRANT AGENT...................................................................17
5.01. Change of Warrant Agent...................................................................17
5.02. Compensation; Further Assurances..........................................................19
5.03. Reliance on Counsel.......................................................................19
5.04. Proof of Actions Taken....................................................................19
5.05. Correctness of Statements.................................................................20
5.06. Validity of Agreement.....................................................................20
5.07. Use of Agents.............................................................................20
5.08. Liability of Warrant Agent................................................................20
5.09. Legal Proceedings.........................................................................21
5.10. Other Transactions in Shares of the Company...............................................21
5.11. Actions as Agent..........................................................................21
5.12. Appointment and Acceptance of Agency......................................................21
ARTICLE VI MISCELLANEOUS.................................................................................22
6.01. Reservation of Shares.....................................................................22
6.02. Registration of Warrant Shares............................................................22
6.03. Enforcement of Warrant Rights.............................................................23
6.04. Negotiability and Ownership...............................................................24
6.05. Warrant Legend............................................................................24
6.06. Supplements and Amendments................................................................25
6.07. Covenant as to Status as a Real Estate Investment Trust...................................26
6.08. Successors and Assigns....................................................................26
6.09. Notices 26
6.10. Applicable Law............................................................................27
6.11. Benefits of this Agreement................................................................27
6.12. Registered Warrantholders.................................................................27
6.13. Inspection of Agreement...................................................................28
6.14. Headings 28
6.15. Counterparts..............................................................................28
SIGNATURE AND SEALS......................................................................................26
EXHIBIT A. FORM OF FIRM WARRANT CERTIFICATE.............................................................A-1
EXHIBIT B. FORM OF OPTIONAL WARRANT CERTIFICATE.........................................................B-1
</TABLE>
ii
<PAGE>
WARRANT AGREEMENT
This Agreement is made as of _______________, 1997 between
Resource Asset Investment Trust, a Maryland real estate investment trust, (the
"Company"), and ______________________ (the "Warrant Agent").
RECITALS
A. The Company proposes to sell, pursuant to an
Underwriting Agreement dated _____________, 1997 between the Company and
Friedman, Billings, Ramsey & Co., Inc. ("FBR")(the "Underwriting Agreement"),
10,000,000 shares (the "Initial Shares") of beneficial interest, par value $.01
per share, of the Company (the "Common Shares"), to certain underwriters, for
which FBR is acting as representative (the "Underwriters") and up to 1,500,000
shares (the "Option Shares") of Common Shares, to cover over-allotments, if any.
B. The Company deems it advisable, in consideration for
the services rendered to the Company by FBR in connection with the offering of
the Common Shares, to issue to FBR warrants (the "Firm Warrants") entitling the
holders thereof to purchase an aggregate of 500,000 Common Shares. The Company
also deems it advisable, for the same consideration, to issue to FBR certain
additional warrants (the "Optional Warrants") entitling the holders thereof to
purchase an aggregate of 75,000 Common Shares, subject to certain adjustments as
provided for in Section 1.04. (The Firm Warrants and the Optional Warrants shall
together be referred to as the "Warrants".) The Common Shares issued upon
exercise of the Warrants are referred to as the "Warrant Shares".
C. The Company desires to enter into this Agreement to
set forth the terms and conditions of the Warrants and the rights of the holders
thereof.
D. The Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to act in connection
with the issuance, exchange, transfer, substitution and exercise of Warrants;
NOW, THEREFORE, in consideration of the foregoing and the
mutual agreements herein contained, the parties hereto agree as follows:
1
<PAGE>
ARTICLE I
ISSUANCE, EXECUTION, EXPIRATION AND TRANSFER OF
WARRANT CERTIFICATES
SECTION 1.01. Form of Warrant Certificates. The Warrants shall
be evidenced by certificates in temporary or definitive fully registered form
(the "Warrant Certificates") substantially in the form of Exhibit A in the case
of the Firm Warrants or, in the case of the Optional Warrants, in the form of
Exhibit B, and may have such letters, numbers or other marks of identification
and such legends or endorsements placed thereon as may be required to comply
with any law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any securities exchange, or to conform to usage, or as
consistently herewith may be determined by the officers executing such Warrant
Certificates, as evidenced by their execution of the Warrant Certificates. Each
Warrant Certificate shall evidence the right, subject to the provisions of this
Agreement and of the Warrant Certificate, to purchase the number of Common
Shares stated therein, adjusted as provided for in Article III, upon payment of
the Exercise Price (as defined in Section 2.01).
SECTION 1.02. Execution of Warrant Certificates. Each Warrant
Certificate, whenever issued, shall be dated as of the date of countersignature
thereof by the Warrant Agent either upon initial issuance or upon exchange,
substitution or transfer, shall be signed manually by, or bear the facsimile
signature of, the Chairman of the Board or the President or a Vice President and
the Secretary or Assistant Secretary of the Company, shall have the Company's
seal or a facsimile thereof affixed or imprinted thereon and shall be attested
by the manual or facsimile signature of the Secretary or an Assistant Secretary
of the Company. In case any officer of the Company whose manual or facsimile
signature has been placed upon any Warrant Certificate shall have ceased to be
such before such Warrant Certificate is issued, it may be issued with the same
effect as if such officer had not ceased to be such at the date of issuance.
Warrant Certificates shall be countersigned manually by the Warrant Agent (or
successor Warrant Agent) and shall not be valid for any purpose unless so
countersigned. Warrant Certificates may be countersigned by the Warrant Agent(or
successor Warrant Agent), however, notwithstanding that the persons whose manual
or facsimile signatures appear thereon as proper officers of the Company shall
have ceased to be such officers at the time of such countersignature, issuance
or delivery. Any Warrant Certificate may be signed on behalf of the Company by
any person who, at the actual date of the execution of such Warrant Certificate,
shall be a proper officer of the Company to sign such Warrant Certificate,
although at the date of the execution of this Agreement any such person was not
such an officer.
2
<PAGE>
SECTION 1.01. Issuance, Delivery and Registration of Warrant
Certificates. Upon receipt of written instructions from the Company, the Warrant
Agent shall issue and deliver, at the closing of the sale of the Initial Shares
to the Underwriters as provided in the Underwriting Agreement, to FBR or its
designees: (a) a Warrant Certificate representing the Firm Warrants, in
substantially the form of Exhibit A, and (b) a Warrant Certificate representing
the Optional Warrants, substantially in the form of Exhibit B. Additionally, the
Warrant Agent shall countersign and deliver Warrant Certificates upon exchange,
transfer or substitution for one or more previously countersigned Warrant
Certificates as hereinafter provided. The Warrant Agent shall maintain books for
the registration of transfer and registration of Warrant Certificates (the
"Warrant Register").
SECTION 1.02. Exercise of and Adjustments to the Optional
Warrants. The Optional Warrants shall not be exercisable in whole or in part
until the Expiration Date, which shall be the day thirty days following the date
of the Underwriting Agreement between the Company and FBR. The number of Common
Shares which a holder of the Optional Warrants is entitled to receive upon the
exercise of the Optional Warrants is subject to certain adjustments. In the
event that FBR fails to exercise its right to purchase the total maximum number
of Option Shares provided for in the Underwriting Agreement, then the Optional
Warrants shall cease to be exercisable with respect to that number of Common
Shares equal to (i) 1,500,000, minus (ii) the total number of Option Shares
purchased by and delivered to FBR, multiplied by (iii) 0.05. In the event that
FBR does not purchase any Option Shares within thirty days following the date
hereof, the Optional Warrants will expire in their entirety. The Warrant Agent
may not deliver Warrant Shares unless and until the Warrant Agent receives
written notice signed by both the Company and FBR which sets out the number of
Common Shares which the holder of the Optional Warrants will be entitled to
receive upon exercise of the Optional Warrants, after making the adjustments
described in this Section 1.04.
3
<PAGE>
Section 1.03. Transfer and Exchange of Warrant Certificates.
The Warrant Agent, from time to time, shall register the transfer of any
outstanding Warrant Certificates in the Warrant Register upon surrender at the
office or agency maintained in The City of New York for such purpose or at the
principal office of the Warrant Agent (or successor Warrant Agent) of Warrant
Certificates accompanied by a written instrument or instruments of transfer, in
form satisfactory to the Company and the Warrant Agent, duly executed by the
Warrantholder or the Warrantholders' attorney duly authorized in writing, and
evidence, satisfactory to the Warrant Agent, of compliance with the provisions
of Section 6.04. Upon any such registration of transfer, a new Warrant
Certificate shall be countersigned by the Warrant Agent and issued to the
transferee and the surrendered Warrant Certificate shall be canceled by the
Warrant Agent. Warrant Certificates may be exchanged at the option of the holder
thereof, upon surrender, properly endorsed, at the office or agency maintained
in The City of New York for such purpose or at the principal office of the
Warrant Agent (or successor Warrant Agent), with written instructions, for other
Warrant Certificates countersigned by the Warrant Agent entitling the registered
holder thereof, subject to the provisions thereof and of this Agreement, to
purchase in the aggregate a like number of Common Shares as the Warrant
Certificate so surrendered. In the case of a Warrant Certificate representing
Optional Warrants, if such Warrant Certificate is exchanged for a new
certificate prior to the Expiration Date, the newly issued Warrant Certificate
shall also represent Optional Warrants. The Company or the Warrant Agent may
require the payment of a sum sufficient to cover any tax or governmental charge
that may be imposed in connection with any such exchange or transfer.
ARTICLE II
COMMON SHARES ISSUABLE, EXERCISE PRICE, EXPIRATION DATE AND
EXERCISE OF WARRANTS
SECTION 2.01. Warrant Shares Issuable; Exercise Price;
Expiration Date. Each Warrant Certificate shall entitle the registered holder
thereof, subject to the provisions thereof and of this Agreement, to purchase
from the Company at any time from the first anniversary of the effective date
(the "Effective Date") of the registration statement filed on Form S-11 under
the Securities Act of 1933, as amended (the "Securities Act") (or, in the case
of the Optional Warrants, at any time from the Expiration Date) to the close of
business on the fifth anniversary of such date (or, if such date is not a
Business Day (as defined below), the first following Business Day) the number of
Common Shares stated therein, adjusted as provided in Article III, upon payment
of $_________ per share (which price is equal to the initial public offering
price), adjusted as provided in Article III. Such price, as in effect from time
to time as provided in Article III, is referred to as the "Exercise Price". Each
Common Share issuable upon exercise of a Warrant is referred to as a "Warrant
Share". Each Warrant not exercised during the period set forth above shall
become void, and all rights thereunder and all rights in respect thereof under
this Agreement shall cease, at the end of such period. For purposes of this
Agreement, the term "Business Day" means any day of the week other than a
Saturday, Sunday or a day which in The City of New York or in the city in which
the principal office of the Warrant Agent is located shall be a legal holiday or
a day on which banking institutions are authorized or required by law to close.
4
<PAGE>
SECTION 2.02. Exercise of Warrants. (a) Warrants may be
exercised by surrendering the Warrant Certificate evidencing such Warrants at
the office or agency maintained in The City of New York for such purpose or at
the principal office of the Warrant Agent (or successor Warrant Agent), with the
Election to Exercise form set forth on the reverse of the Warrant Certificate
duly completed and signed, and by paying in full to the Warrant Agent for the
account of the Company (i) in cash, or (ii) by certified or official bank check,
or (iii) by any combination of the foregoing, the Exercise Price for each
Warrant Share as to which Warrants are exercised and any applicable taxes, other
than taxes that the Company is required to pay hereunder. A Warrantholder may
exercise such holder's Warrant for the full number of Warrant Shares issuable
upon exercise thereof or any lesser number of whole Warrants Shares.
(b).As soon as practicable after the exercise of any
Warrants and payment by the Warrantholder of the full Exercise Price for the
Warrant Shares as to which such Warrants are then being exercised, the Warrant
Agent shall requisition from the transfer agent of the Common Shares and deliver
to or upon the order of such Warrantholder a certificate or certificates for the
number of full Warrant Shares to which such Warrantholder is entitled,
registered in the name of such Warrantholder or as such Warrantholder shall
direct. Fractional Warrant Shares that otherwise would be issuable in respect of
such exercise shall be paid in cash as provided in Section 2.03, and the number
of Warrant Shares issuable to such Warrantholder shall be rounded down to the
next nearest whole number. If such Warrant Certificate shall not have been
exercised in full, the Warrant Agent on behalf of the Company will issue to such
Warrantholder a new Warrant Certificate exercisable for the number of Common
Shares as to which such Warrant shall not have been exercised. The Warrant Agent
on behalf of the Company will cancel all Warrants so surrendered.
5
<PAGE>
(c).Each person in whose name any such certificate for
Warrant Shares is issued shall for all purposes be deemed to have become the
holder of record of such Warrant Shares on the date on which the Warrant
Certificate was surrendered to the Warrant Agent and payment of the Exercise
Price and any applicable taxes was made to the Warrant Agent for the account of
the Company, irrespective of the date of delivery of such certificate for
Warrant Shares.
(d).All Warrant Shares will be duly authorized, validly
issued, fully paid and nonassessable. The Company will pay all documentary stamp
taxes attributable to the initial issuance of Warrant Shares. The Company will
not be required, however, to pay any tax imposed in connection with any transfer
involved in the issue of the Warrant Shares in a name other than that of the
Warrantholder. In such case, the Company will not be required to issue any
certificate for Warrant Shares until the person or persons requesting the same
shall have paid to the Company the amount of any such tax or shall have
established to the Company's satisfaction that the tax has been paid or that no
tax is due.
(e). Promptly after the Warrant Agent shall have taken the
action required in Section 2.02(b) or at such later time as may be mutually
agreeable to the Company and the Warrant Agent, the Warrant Agent shall account
to the Company with respect to any Warrants exercised and shall pay to the
Company the amount of money received by it upon the exercise of Warrants.
SECTION 2.03. No Fractional Shares to Be Issued. If more than
one Warrant Certificate shall be surrendered for exercise at one time by the
same holder, the number of full Warrant Shares which shall be issuable upon
exercise thereof shall be computed on the basis of the aggregate number of
Warrants so surrendered. The Warrantholders, by their acceptance of the Warrant
Certificates, expressly waive their right to receive any fraction of a Warrant
Share or a share certificate representing a fraction of a Warrant Share. In lieu
thereof, the Company will purchase such fractional interest for an amount in
cash equal to the current market value of such fractional interest, as
reasonably determined by the Board of Trustees of the Company.
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SECTION 2.04. Cancellation of Warrants. The Warrant Agent
shall cancel any Warrant Certificate delivered to it for exercise, in whole or
in part, or delivered to it for transfer, exchange or substitution, and no
Warrant Certificates shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Agreement. On request of the Company,
the Warrant Agent shall destroy canceled Warrant Certificates held by it and
shall deliver its certificates of destruction to the Company, subject to record
retention requirements applicable to the Warrant Agent pursuant to the
Securities Exchange Act of 1934 (the "Exchange Act"). If the Company shall
acquire any of the Warrants, such acquisition shall not operate as a redemption
or termination of the right represented by such Warrants unless and until the
Warrant Certificates evidencing such Warrants are surrendered to the Warrant
Agent for cancellation.
ARTICLE III
ADJUSTMENT OF EXERCISE PRICE; MERGER, ACQUISITION, ETC.;
RESERVATION OF COMMON SHARES; PAYMENT OF TAXES
SECTION 3.01. Adjustment of Exercise Price and Number of
Warrant Shares. (a) The Exercise Price shall be subject to adjustment from time
to time as provided in this Article III. After each adjustment of the Exercise
Price, each Warrantholder shall at any time thereafter be entitled to purchase,
at the Exercise Price resulting from such adjustment, the number of Warrant
Shares obtained by multiplying the Exercise Price in effect immediately prior to
such adjustment by the number of Warrant Shares purchasable pursuant to the
provisions of such Warrant immediately prior to such adjustment and dividing the
product thereof by the Exercise Price resulting from such adjustment.
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(b). For purposes of making adjustments of the Exercise
Price pursuant to this Article III, the "Current Market Price" shall be
determined as of the date of the issuance or sale giving rise to the adjustment
and shall be equal to the last sale price with respect to Common Shares as
reported on the Nasdaq Stock Market on such date. If there are no reported
transactions on the Nasdaq Stock Market on such date, the "Current Market Price"
shall be the average of the highest current independent bid and lowest current
independent offer for the shares.
SECTION 3.02. Exercise Price Adjustment Formula. If the
Company issues or sells any Common Shares for a price per share that is less
than the Current Market Price in effect at the time of such issuance or sale,
the Exercise Price immediately shall be adjusted by multiplying the Exercise
Price by (a) an amount equal to the sum of (i) the number of Common Shares
outstanding and deemed (in accordance with the provisions of Section 3.03) to be
outstanding immediately prior to such issuance and sale multiplied by the
Current Market Price at the time of such issuance or sale and (ii) the total
consideration received and deemed (in accordance with the provisions of Section
3.03) to be received by the Company upon such issuance and sale and (b) dividing
the result by an amount equal to (i) the sum of (A) the amount determined in (a)
and (B) the product of the number of shares issued or sold multiplied by the
Current Market Price, minus (ii) the consideration received.
SECTION 3.03. Constructive Issuance of Shares. (a) If the
Company grants any rights, warrants or options (collectively referred to as
"Options") to subscribe for or purchase any Common Shares or any securities
(collectively referred to as "Convertible Securities") convertible into or
exchangeable for Common Shares, whether or not any such Options or the right to
convert or exchange any such Convertible Securities are immediately exercisable,
and the price per share for which Common Shares are issuable upon the exercise
of such Options or upon conversion or exchange of such Convertible Securities
(determined by dividing (i) the total consideration received or receivable by
the Company for the granting of such Options, plus any additional consideration
payable to the Company upon the exercise of such Options, plus in the case of
any such Options which relate to Convertible Securities, any additional
consideration payable to the Company upon the conversion or exchange thereof by
(ii) the maximum number of Common Shares issuable upon the exercise of such
Options or upon the conversion or exchange of such Convertible Securities) shall
be less than the Current Market Price in effect as of the time of granting such
Options, the maximum number of Common Shares issuable upon the exercise of such
Options or upon conversion or exchange of all Convertible Securities issuable
upon the exercise of such Options shall be deemed, upon the granting of such
Options, to be outstanding and to have been issued for such price per share.
Except as provided in Section 3.03(c), no further adjustment of the Exercise
Price shall be made upon the issue or sale of Common Shares upon the exercise of
such Options or the conversion or exchange of such Convertible Securities.
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(b). If the Company issues or sells any Convertible
Securities (other than securities referred to in Section 3.03(a)), whether or
not the right to convert or exchange any such Convertible Securities is
immediately exercisable, and the price per share for which the Common Shares are
issuable upon such conversion or exchange (determined by dividing (i) the total
consideration received or receivable by the Company for the issue or sale of
such Convertible Securities, plus any additional consideration payable to the
Company upon the conversion or exchange of such Convertible Securities by (ii)
the maximum number of Common Shares issuable upon the conversion or exchange of
such Convertible Securities) shall be less than the Current Market Price in
effect as of the time of such issue or sale, the maximum number of Common Shares
issuable upon conversion or exchange of all such Convertible Securities shall be
deemed, upon the issue or sale of such Convertible Securities, to be outstanding
and to have been issued for such price per share. Except as provided in Section
3.03(c), no further adjustment of the Exercise Price shall be made upon the
issue or sale of Common Shares upon conversion or exchange of any such
Convertible Securities.
(c)......If the exercise price provided for in any Option
referred to in Section 3.03(a), or the rate at which any Convertible Security
referred to in Section 3.03(a) or 3.03(b) is convertible into or exchangeable
for Common Shares, shall change or a different exercise price or rate shall
become effective at any time or from time to time, the Exercise Price
immediately shall be adjusted to the Exercise Price that would have obtained had
the adjustments made and required to be made under this Section 3.03 upon the
issuance or sale of such Options or such Convertible Securities been made upon
the basis of (i) the issuance of the number of Common Shares theretofore
delivered upon the exercise of such Options or upon the conversion or exchange
of such Convertible Securities and the total consideration received therefor,
(ii) the issuance of all Common Shares and all other Options or Convertible
Securities and the total consideration received therefor and (iii) the original
issuance at the time of such change of exercise price or rate of any such
Options or Convertible Securities then outstanding and the total consideration
received therefor. On the expiration of any such Option or the termination of
any such right to convert or exchange any such Convertible Securities, the
Exercise Price immediately shall be adjusted to the Exercise Price that would
have obtained (iv) had the adjustments made upon the issuance of such Options or
such Convertible Securities been made upon the issuance of only the number of
Common Shares actually delivered and the total consideration received therefor
upon the exercise of such Options or upon the conversion or exchange of such
Convertible Securities and (v) had adjustments been made on the basis of the
Exercise Price as adjusted under clause (iv) of this Section 3.03(c) for all
issues or sales of Common Shares, Options or Convertible Securities made after
the issuance of such Options or Convertible Securities. If the exercise price
provided for in any Option referred to in Section 3.03(a), or the rate at which
any Convertible Security referred to in Section 3.03(a) or 3.03(b) is
convertible or exchangeable for Common Shares, shall decrease at any time
pursuant to applicable provisions thereof designed to protect against dilution,
the Exercise Price immediately shall be decreased in the case of delivery of
Common Shares upon the exercise of any such Option or upon the conversion or
exchange of any such Convertible Securities, to the Exercise Price that would
have obtained had the adjustments made upon the issue or sale of such Option or
such Convertible Security been made upon the basis of the issuance of the Common
Shares so delivered and the total consideration received therefor.
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(d). If any Common Shares or any Convertible Securities or
any Option shall be issued or sold for cash, the consideration received by the
Company shall be deemed to be the amount payable to the Company therefor without
deduction of any expense incurred or any underwriting commission, concession or
discount paid or allowed by the Company in connection therewith. If any Common
Shares or any Convertible Securities or any Option shall be issued or sold for a
consideration other than cash, the consideration received by the Company shall
be deemed to be the fair value of such consideration as determined by the Board
of Trustees of the Company without deduction of any expense incurred or any
underwriting commission, concession or discount paid or allowed by the Company
in connection therewith. If any Common Shares or any Convertible Securities or
any Option shall be issued in connection with a merger of another corporation
into the Company, the consideration received by the Company shall be deemed to
be the fair value as determined by the Board of Trustees of the Company of such
portion of the assets of such merged corporation as the Board of Trustees shall
reasonably determine to be attributable to such Common Shares or such Option or
Convertible Securities, as the case may be.
SECTION 3.04. Stock Dividends. If the Company shall declare a
dividend or any other distribution upon any capital stock which is payable in
Common Shares, the Exercise Price shall be reduced to the quotient obtained by
dividing (i) the number of Common Shares outstanding and deemed (in accordance
with the provisions of Section 3.03(c)) to be outstanding immediately prior to
such declaration multiplied by the then effective Exercise Price by (ii) the
total number of Common Shares outstanding and deemed (in accordance with the
provisions of Section 3.03(c)) to be outstanding immediately after such
declaration. All Common Shares and all Convertible Securities issuable in
payment of any dividend or other distribution upon the capital stock of the
Company shall be deemed to have been issued or sold without consideration.
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SECTION 3.05. Extraordinary Dividends and Distributions. If
the Company shall declare a dividend or any other distribution upon the Common
Shares payable otherwise than out of current earnings, retained earnings or
earned surplus and otherwise than in Common Shares or Convertible Securities,
the Exercise Price shall be reduced by an amount equal, in the case of a
dividend or distribution in cash, to the amount thereof payable per Common Share
or, in the case of any other dividend or other distribution, to the fair value
thereof per Common Share at the time such dividend or other distribution was
declared, as reasonably determined by the Board of Trustees of the Company. A
dividend or distribution other than in cash shall be considered payable out of
current earnings, retained earnings or earned surplus only to the extent that
such current earnings, retained earnings or earned surplus are charged an amount
equal to the fair value of such dividend or distribution as reasonably
determined by the Board of Trustees of the Company.
SECTION 3.06. Stock Splits and Reverse Stock Splits. If the
Company shall subdivide its outstanding Common Shares into a greater number of
shares, the Exercise Price shall be proportionately reduced and the number of
Warrant Shares issuable upon exercise of each Warrant shall be proportionately
increased. If the Company shall combine the outstanding Common Shares into a
smaller number of shares, the Exercise Price shall be proportionately increased
and the number of Warrant Shares issuable upon exercise of each Warrant shall be
proportionately decreased.
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SECTION 3.07. Reorganizations and Asset Sales. If any capital
reorganization or reclassification of the Company, or any consolidation or
merger of the Company with another corporation, or the sale of all or
substantially all of the assets of the Company shall be effected in such a way
that the holders of the Common Shares shall be entitled to receive securities or
assets with respect to or in exchange for Common Shares, adequate provision
shall be made, prior to and as a condition of such reorganization,
reclassification, consolidation, merger or sale, whereby each Warrantholder
shall have the right to receive, upon the terms and conditions specified herein
and in lieu of the Warrant Shares otherwise receivable upon the exercise of such
Warrants, such securities or assets as may be issued or payable with respect to
or in exchange for the number of outstanding Common Shares equal to the number
of Warrant Shares otherwise receivable had such reorganization,
reclassification, consolidation, merger or sale not taken place. In any such
case, appropriate provision shall be made with respect to the rights and
interests of such Warrantholder so that the provisions of this Agreement shall
be applicable with respect to any securities or assets thereafter deliverable
upon exercise of the Warrants. The Company shall not effect any such
consolidation, merger or sale unless prior to or simultaneously with the
consummation thereof, the survivor or successor corporation resulting from such
consolidation or merger or the purchaser of such assets shall assume by written
instrument delivered to each holder of Warrants the obligation to deliver to
such holder such securities or assets as such holder may be entitled to receive.
SECTION 3.08. Covenant to Reserve Shares for Issuance on
Exercise. (a) The Company will cause an appropriate number of Common Shares to
be duly and validly authorized and reserved and will keep available out of its
authorized Common Shares, solely for the purpose of issue upon exercise of
Warrants as herein provided, the full number of Common Shares, if any, then
issuable if all outstanding Warrants then exercisable were to be exercised. The
Company covenants that all Common Shares that shall be so issuable shall be duly
and validly issued and, upon payment of the Exercise Price, fully paid and
non-assessable.
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(b). The Company hereby authorizes and directs its current
and future transfer agents for the Common Shares at all times to reserve such
number of authorized shares as shall be requisite for such purpose. The Warrant
Agent is hereby authorized to requisition from time to time from any such
transfer agents' share certificates required to honor outstanding Warrants upon
exercise thereof in accordance with the terms of this Agreement, and the Company
hereby authorizes and directs such transfer agents to comply with all such
requests of the Warrant Agent. The Company will supply such transfer agents with
duly executed stock certificates for such purposes. Promptly after the date of
expiration of the Warrants, the Warrant Agent shall certify to the Company the
aggregate number of Warrants then outstanding, and thereafter no shares shall be
reserved in respect of such Warrants.
SECTION 3.09. Warrant Agent Not Responsible for Validity of
Shares. The Warrant Agent shall not be accountable with respect to the validity
or value (or the kind or amount) of any Common Shares or of any securities or
property that at any time may be issued or delivered upon the exercise of any
Warrant or upon any adjustment pursuant to Article III, and it makes no
representation with respect thereto. The Warrant Agent shall not be responsible
for any failure of the Company to make any cash payment or to issue, transfer or
deliver any Common Shares or share certificates or other securities or property
upon the surrender of any Warrant for the purpose of exercise or upon any
adjustment pursuant to Article III, or to comply with any of the covenants of
the Company contained in this Article III.
SECTION 3.10. Statements on Warrants. The form of Warrant
Certificate need not be changed because of any adjustment made pursuant to this
Article III, and Warrant Certificates issued after such adjustment may state the
same Exercise Price and the same number of Common Shares as are stated in the
Warrant Certificates initially issued pursuant to this Agreement. The Company,
however, may at any time in its sole discretion (which shall be conclusive) make
any change in the form of Warrant Certificate that it may deem appropriate and
that does not affect the substance thereof; and any Warrant Certificates
thereafter issued or countersigned, whether in exchange or substitution for an
outstanding Warrant Certificate or otherwise, may be in the form as so changed.
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SECTION 3.11. Notice of Change in Securities Issuable, etc.
Whenever the securities issuable or deliverable in exchange for Warrants are
changed pursuant to this Article III, the Company promptly shall file with the
Warrant Agent a certificate executed by its chief financial officer, setting
forth in reasonable detail the facts requiring the change and specifying the
effective date of such change and the number or amount of, and describing the
shares or other securities issuable or deliverable in exchange for, each Warrant
as so changed. The Company also shall mail such a notice to each Warrantholder.
Failure to file such statement or to publish such notice, or any defect in such
statement or notice, shall not affect the legality or validity of any such
change.
SECTION 3.12. References to Common Shares. Unless the context
otherwise indicates, all references to Common Shares in this Agreement and in
the Warrant Certificates, in the event of a change under this Article III, shall
be deemed to refer also to any other securities issuable or deliverable in
exchange for Warrants pursuant to such change.
ARTICLE IV
OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS
SECTION 4.01. No Rights as Shareholders. Nothing contained in
this Agreement or in any Warrant Certificate shall be construed as conferring on
any Warrantholder any rights whatsoever as a shareholder of the Company,
including the right to vote at, or to receive notice of, any meeting of
shareholders of the Company; nor shall the consent of any such holder be
required with respect to any action or proceeding of the Company; nor shall any
such holder, by reason of the ownership or possession of a Warrant or the
Warrant Certificate representing the same, either at, before or after exercising
such Warrant, have any right to receive any cash dividends, stock dividends,
allotments or rights, or other distributions (except as specifically provided
herein), paid, allotted or distributed or distributable to the shareholders of
the Company prior to the date of the exercise of such Warrant, nor shall such
holder have any right not expressly conferred by such holder's Warrant or
Warrant Certificate.
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SECTION 4.02. Mutilated or Missing Warrant Certificates. If
any Warrant Certificate is lost, stolen, mutilated or destroyed, the Company in
its discretion may issue and the Warrant Agent may countersign, in exchange and
substitution for and upon cancellation of the mutilated Warrant Certificate, or
in lieu of and substitution for the Warrant Certificate lost, stolen or
destroyed, upon receipt of a proper affidavit or other evidence satisfactory to
the Company and the Warrant Agent (and surrender of any mutilated Warrant
Certificate) and bond of indemnity in form and amount and with corporate surety
satisfactory to the Company and the Warrant Agent in each instance protecting
the Company and the Warrant Agent, a new Warrant Certificate of like tenor and
exercisable for an equivalent number of Common Shares as the Warrant Certificate
so lost, stolen, mutilated or destroyed. Any such new Warrant Certificate shall
constitute an original contractual obligation of the Company, whether or not the
allegedly lost, stolen, mutilated or destroyed Warrant Certificate at any time
shall be enforceable by anyone. An applicant for such a substitute Warrant
Certificate also shall comply with such other reasonable regulations and pay
such other reasonable charges as the Company or the Warrant Agent may prescribe.
All Warrant Certificates shall be held and owned upon the express condition that
the foregoing provisions are exclusive with respect to the replacement of lost,
stolen, mutilated or destroyed Warrant Certificates, and shall preclude any and
all other rights or remedies notwithstanding any law or statute existing or
hereafter enacted to the contrary with respect to the replacement of negotiable
instruments or other securities without their surrender.
SECTION 4.03. Liquidation, Merger, etc.; Notice to
Warrantholders. If:
(a). the Company shall authorize the issuance to all holders
of Common Shares of rights or warrants to subscribe for or purchase capital
stock of the Company or of any other subscription rights or warrants; or
(b). the Company shall authorize the distribution to all
holders of Common Shares of evidences of its indebtedness or assets (other than
cash dividends or cash distributions payable out of current earnings, retained
earnings or earned surplus or dividends payable in Common Shares); or
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(c). there shall be proposed any consolidation or merger to
which the Company is to be a party and for which approval of the holders of
Common Shares is required, or the conveyance or transfer of the properties and
assets of the Company substantially as an entirety; or
(d). there shall be proposed the voluntary or involuntary
dissolution, liquidation or winding up of the Company; the Company shall cause
to be filed with the Warrant Agent and shall cause to be given to each
Warrantholder, by first-class mail, postage prepaid, a written notice stating
(i) the date as of which the holders of record of Common Shares to be entitled
to receive any such rights, warrants or distribution are to be determined or
(ii) the date on which any consolidation, merger, conveyance, transfer,
reorganization, reclassification, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of record of Common Shares shall be entitled to exchange the shares for
securities or other property, if any, deliverable upon the consolidation,
merger, conveyance, transfer, reorganization, reclassification, dissolution,
liquidation or winding up. Such notice shall be filed and mailed in the case of
a notice pursuant to (i) above, at least ten calendar days before the record
date specified and in the case of a notice pursuant to clause (ii) above, at
least 20 calendar days before the earlier of the dates specified. From the time
notice is required to be given pursuant to this Section 4.03, the holders of
Warrants shall be entitled to exercise such Warrants regardless of the
provisions of Section 2.01.
ARTICLE V
CONCERNING THE WARRANT AGENT
SECTION 5.01. Change of Warrant Agent. (a) The Warrant Agent,
or any successor to it hereafter appointed, may resign its duties and be
discharged from all further duties and liabilities hereunder after giving 60
days' notice in writing to the Company, except that such shorter notice may be
given as the Company, in writing, shall accept as sufficient. If the office of
the Warrant Agent becomes vacant by resignation or incapacity to act or
otherwise, the Company shall appoint a successor Warrant Agent in place of the
Warrant Agent. If the Company shall fail to make such appointment within a
period of 60 days after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or by any holder of
Warrants (who, with such notice, shall submit such holder's Warrant Certificate
for inspection by the Company), then the holder of any Warrants may apply to any
court of competent jurisdiction for the appointment of a successor Warrant
Agent.
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(b). The Warrant Agent may be removed by the Company at
any time upon 30 days' written notice to the Warrant Agent; provided, however,
that the Company shall not remove the Warrant Agent until a successor Warrant
Agent meeting the requirements hereof shall have been appointed.
(c). Any successor Warrant Agent, whether appointed by the
Company or by a court of competent jurisdiction, shall be a corporation or
association (including the Company) organized, in good standing and doing
business under the laws of the United States of America or any state thereof or
the District of Columbia. After appointment, any successor Warrant Agent shall
be vested with all the authority, powers, rights, immunities, duties and
obligations of its predecessor Warrant Agent with like effect as if originally
named as warrant Agent hereunder, without any further act or deed; but if for
any reason it becomes necessary or appropriate, the predecessor Warrant Agent
shall execute and deliver, at the expense of the Company, an instrument
transferring to such successor Warrant Agent all the authority, powers and
rights of such predecessor Warrant Agent hereunder; and upon request of any
successor Warrant Agent, the Company shall make, execute, acknowledge and
deliver any and all instruments in writing to more fully and effectually vest in
and confirm to such successor Warrant Agent all such authority, powers, rights,
immunities, duties and obligations. Upon assumption by a successor Warrant Agent
of the duties and responsibilities hereunder, the predecessor Warrant Agent
shall deliver and transfer, at the expense of the Company, to the successor
Warrant Agent any property at the time held by it hereunder. As soon as
practicable after such appointment, the Company shall give notice thereof to the
predecessor Warrant Agent, the Warrantholders and each transfer agent for the
Common Shares. Failure to give such notice, or any defect therein, shall not
affect the validity of the appointment of the successor Warrant Agent.
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(d). Any corporation or association into which the Warrant
Agent may be merged or with which it may be consolidated, or any corporation or
association resulting from any merger or consolidation to which the Warrant
Agent shall be a party, shall be the successor Warrant Agent under this
Agreement without any further act. In case at the time such successor to the
Warrant Agent shall succeed to the agency created by this Agreement, any of the
Warrant Certificates shall have been countersigned but not delivered, any such
successor to the Warrant Agent may adopt the countersignature of the original
Warrant Agent and deliver such Warrant Certificates so countersigned, and in
case at that time any of the Warrant Certificates shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrant
Certificates either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant Agent; and in all such cases Warrant Certificates shall
have the full force provided in the Warrant Certificates and in this Agreement.
(e). In case at any time the name of the Warrant Agent
shall be changed and at such time any of the Warrant Certificates shall have
been countersigned but not delivered, the Warrant Agent may adopt the
countersignatures under its prior name and deliver such Warrant Certificates so
countersigned; and in case at that time any of the Warrant Certificates shall
not have been countersigned, the Warrant Agent may countersign such Warrant
Certificates either in its prior name or in its changed name; and in all such
cases such Warrant Certificates shall have the full force provided in the
Warrant Certificates and in this Agreement.
SECTION 5.02. Compensation; Further Assurances. The Company
agrees (i) that it will pay the Warrant Agent reasonable compensation for its
services as Warrant Agent hereunder and, except as otherwise expressly provided,
will pay or reimburse the Warrant Agent upon demand for all reasonable expenses,
disbursements and advances incurred or made by the Warrant Agent in accordance
with any of the provisions of this Agreement (including the reasonable
compensation, expenses and disbursements of its agents and counsel) except any
such expense, disbursement or advance as may arise from its or any of their
negligence or bad faith; and (ii) that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as reasonably may be required
by the Warrant Agent for the carrying out or performing of the provisions of
this Agreement.
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SECTION 5.03. Reliance on Counsel. The Warrant Agent may
consult with legal counsel (who may be legal counsel for the Company), and the
written opinion of such counsel or any advice of legal counsel subsequently
confirmed by a written opinion of such counsel shall be full and complete
authorization and protection to the Warrant Agent as to any action taken or
omitted by it in good faith and in accordance with such written opinion or
advice.
SECTION 5.04. Proof of Actions Taken. Whenever in the
performance of its duties under this Agreement the Warrant Agent shall deem it
necessary or desirable that any matter be proved or established by the Company
prior to taking or suffering or omitting any action hereunder, such matter
(unless other evidence in respect thereof be herein specifically prescribed), in
the absence of bad faith on the part of the Warrant Agent, may be deemed to be
conclusively proved and established by an Officers' Certificate delivered to the
Warrant Agent; and such Officers' Certificate, in the absence of bad faith on
the part of the Warrant Agent, shall be full warrant to the Warrant Agent for
any action taken, suffered or omitted in good faith by it under the provisions
of this Agreement in reliance upon such certificate; but in its discretion the
Warrant Agent in lieu thereof may accept other evidence of such fact or matter
or may require such further or additional evidence as to it may seem reasonable.
SECTION 5.05. Correctness of Statements. The Warrant Agent
shall not be liable for or by reason of any of the statements of fact or
recitals contained in this Agreement or in the Warrant Certificates (except its
countersignature thereon) or be required to verify the same, and all such
statements and recitals are and shall be deemed to have been made by the Company
only.
SECTION 5.06. Validity of Agreement. The Warrant Agent shall
not be under any responsibility in respect of the validity of this Agreement or
the execution and delivery hereof or in respect of the validity or execution of
any Warrant Certificates (except its countersignature thereon); nor shall it be
responsible for any breach by the Company of any covenant or condition contained
in this Agreement or in any Warrant Certificate; nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Common Shares to be issued pursuant to this
Agreement or any Warrants or as to whether any Common Shares, when issued, will
be validly issued and fully paid and nonassessable.
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SECTION 5.07. Use of Agents. The Warrant Agent may execute and
exercise any of the rights or powers hereby vested in it or perform any duty
hereunder either itself or by or through its attorneys or agents and the Warrant
Agent shall not be responsible for the misconduct or negligence of any agent or
attorney, provided due care had been exercised in the appointment and continued
employment thereof.
SECTION 5.08. Liability of Warrant Agent. The Warrant Agent
shall incur no liability or responsibility to the Company or to any holder of
Warrants for any action taken in reliance on any notice, resolution, waiver,
consent, order, certificate, or other paper, document or instrument believed by
it to be genuine and to have been signed, sent or presented by the proper party
or parties. The Company agrees to indemnify the Warrant Agent and save it
harmless against any and all liabilities, including judgments, costs and
reasonable counsel fees, for anything done or omitted in good faith by the
Warrant Agent in the execution of this Warrant Agreement, except as a result of
the Warrant Agent's gross negligence or willful misconduct or bad faith.
SECTION 5.09. Legal Proceedings. The Warrant Agent shall be
under no obligation to institute any action, suit or legal proceeding or to take
any other action likely to involve expense unless the Company or one or more
holders of Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses that may be incurred, but this provision
shall not affect the power of the Warrant Agent to take such action as the
Warrant Agent may consider proper, whether with or without any such security or
indemnity.
SECTION 5.10. Other Transactions in Shares of the Company. The
Warrant Agent in its individual or any other capacity may become the owner of
the Warrants or other securities of the Company, or become pecuniarily
interested in any transaction in which the Company may be interested, or
contract with or lend money to the Company or otherwise act as fully and freely
as though it were not the Warrant Agent under this Warrant Agreement. Nothing
herein shall preclude the Warrant Agent from acting in any other capacity for
the Company or for any other legal entity.
20
<PAGE>
SECTION 5.11. Actions as Agent. The Warrant Agent shall act
hereunder solely as agent and not in a ministerial capacity, and its duties
shall be determined solely by the provisions hereof. The Warrant Agent shall not
be liable for anything which it may do or refrain from doing in good faith in
connection with this Agreement except for its own negligence or willful
misconduct or bad faith.
SECTION 5.12. Appointment and Acceptance of Agency. The
Company hereby appoints the Warrant Agent to act as agent for the Company in
accordance with the instructions set forth in this Agreement, and the Warrant
Agent hereby accepts the agency established by this Agreement and agrees to
perform the same upon the terms and conditions herein set forth.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. Reservation of Shares. The Company at all times
shall reserve and keep available such number of shares of its authorized but
unissued Common Shares as from time to time shall be sufficient to permit the
exercise of all outstanding Warrants. If at any time the number of authorized
but unissued Common Shares shall not be sufficient for such purpose, the Company
will take such action as, in the opinion of its counsel, may be necessary to
increase its authorized but unissued Common Shares to such number of shares as
shall be sufficient for such purpose. Prior to the issuance of any Warrant
Shares, the Company shall secure the listing of such Warrant Shares upon any
securities exchange upon which Common Shares are then listed, if any.
SECTION 6.02. Registration of Warrant Shares. (a) The Company
shall cause the Warrant Shares to be registered under the Securities Act on the
date that they are issuable to FBR pursuant to the Underwriting Agreement and
will use its best efforts to keep such registration effective through the close
of business on the fifth anniversary of the Effective Date.
(b). If, at any time prior to the close of business on the
fifth anniversary of the Effective Date, there is no registration statement in
effect for the Warrant Shares, the Company, upon the written request of holders
of Warrants and of Warrant Shares representing an aggregate of 50% or more of
the Warrant Shares, will file with the Securities and Exchange Commission under
the Securities Act, such registration statements and amendments thereto and such
other filings as may be required to permit the public offering and sale of such
Warrant Shares in compliance with the Securities Act. The Company shall be
required to register Warrant Shares only once pursuant to this Section 6.02(b).
21
<PAGE>
(c). The Company will permit any Warrant Shares to be
included, at the request of the holders of such Warrant Shares, in any
registration of securities of the Company (other than Common Shares for an
employees' option or stock purchase plan) under a registration statement filed
by the Company under the Securities Act at any time prior to the close of
business on the seventh anniversary of the Effective Date. The Company shall
provide written notice to the record holders of all Warrants and Warrant Shares
at least 30 days prior to the filing of any such registration statement sent by
registered mail to the address of record of each such holder.
(d). Each such holder shall pay the underwriting discount
attributable to such holder's Warrant Shares, any transfer tax payable with
respect thereto and the fees and expenses of such holder's counsel. All other
expenses of registration under Section 6.02(a), Section 6.02(b) or Section
6.02(c) shall be borne by the Company.
(e). The Company will agree to indemnify the holders of
Warrant Shares that are included in a registration statement or amendments to
existing registration statements pursuant to this Section 6.02 substantially to
the same extent as the Company has agreed to indemnify the Underwriters in the
Underwriting Agreement and such holders will agree to indemnify the Company and
any underwriter with respect to information furnished by them in writing to the
Company for inclusion therein substantially to the same extent as the
Underwriters have indemnified the Company in the Underwriting Agreement.
(f). If the offering pursuant to any registration
statement provided for herein is made through underwriters, the Company will
enter into an underwriting agreement in customary form and indemnify, in
customary form, such underwriters and each person who controls any such
underwriter within the meaning of the Securities Act. Such underwriting
agreement shall contain provisions for the indemnification of the Company in
customary form, provided that the aggregate amount that may be recovered from
any such underwriter pursuant to such provisions may be limited to the total
price at which the Warrant Shares purchased by any such underwriter under such
underwriting agreement were offered to the public.
22
<PAGE>
SECTION 6.03. Enforcement of Warrant Rights. All rights of
action are vested in the respective Warrantholders. Any holder of any Warrant,
in his own behalf and for his own benefit, may enforce, and may institute and
maintain any suit, action or proceeding against the Company or the Warrant Agent
suitable to enforce, or otherwise in respect of, his right to exercise his
Warrant for the purchase of the number of Warrant Shares issuable or deliverable
in exchange therefor, in the manner provided in the Warrant Certificate and in
this Agreement.
SECTION 6.04. Negotiability and Ownership. The Warrants issued
hereunder shall not, for a period of one year following the Effective Date, be
sold, transferred, assigned, pledged or hypothecated by the holders thereof
except (a) to persons who are officers of FBR or (b) in the case of an
individual, pursuant to such individual's last will and testament or the laws of
descent and distribution and, in any case, only in compliance with the
Securities Act and Rule 2710 of the National Association of Securities Dealers,
Inc. Manual, or any successor rule. For the purposes of this Section 6.04, the
term "officers" shall refer to those persons who are officers of FBR or who
become officers of FBR at any time before the expiration of the Warrants
regardless of whether such persons are officers of FBR at the time they sell,
transfer, assign or hypothecate a Warrant. Any attempt to sell, transfer, assign
or hypothecate in contravention of this Section shall be null and void.
SECTION 6.05. Warrant Legend. (a) Each Warrant shall contain a
legend in substantially the following form:
23
<PAGE>
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON
EXERCISE OF THIS WARRANT ARE SUBJECT TO THE CONDITIONS SPECIFIED IN THE
AGREEMENT, DATED ______________, 1997, BETWEEN RESOURCE ASSET
INVESTMENT TRUST AND ____________ ____________________. ANY ATTEMPT TO
TRANSFER THIS WARRANT OR ANY COMMON SHARE ISSUED UPON EXERCISE OF THIS
WARRANT, PRIOR TO ______________, 1998, TO ANY UNAUTHORIZED TRANSFEREE,
SHALL BE NULL AND VOID. NO TRANSFER IN VIOLATION OF SAID AGREEMENT
SHALL BE EFFECTIVE. THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POST
EFFECTIVE AMENDMENT THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF
1933 (THE "ACT") OR AN APPLICABLE EXEMPTION UNDER THE ACT. THE COMMON
SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD OR
TRANSFERRED WITHOUT AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR
POST EFFECTIVE AMENDMENT THERETO FOR SUCH SHARES UNDER THE ACT OR AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER
THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT."
(b). Each certificate representing Warrant Shares, unless
registered pursuant to Section 6.02, shall contain a legend substantially in the
following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT
BE SOLD OR TRANSFERRED WITHOUT AN EFFECTIVE AND CURRENT REGISTRATION
STATEMENT OR POST EFFECTIVE AMENDMENT THERETO FOR SUCH SHARES UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") OR AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED
UNDER THE ACT. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO THE CONDITIONS SPECIFIED IN THE AGREEMENT, DATED ________________,
1997, BETWEEN RESOURCE ASSET INVESTMENT TRUST AND
_________________________________. ANY ATTEMPT TO TRANSFER THE SHARES
REPRESENTED BY THIS CERTIFICATE, PRIOR TO _______________, 1998, TO ANY
UNAUTHORIZED TRANSFEREE, SHALL BE NULL AND VOID. NO TRANSFER IN
VIOLATION OF SAID AGREEMENT SHALL BE EFFECTIVE."
24
<PAGE>
SECTION 6.06. Supplements and Amendments. (a) Notwithstanding
the provisions of Section 6.06(b), the Warrant Agent, without the consent or
concurrence of the registered holders of the Warrants, may enter into one or
more supplemental agreements or amendments with the Company for the purpose of
evidencing the rights of Warrantholders upon consolidation, merger, sale,
transfer or reclassification pursuant to Section 3.07, making any changes or
corrections in this Agreement that are required to cure any ambiguity, to
correct or supplement any provision contained herein that may be defective or
inconsistent with any other provision herein or any clerical omission or mistake
or manifest error herein contained, or making such other provisions in regard to
matters or questions arising under this Agreement as shall not adversely affect
the interests of the holders of the Warrants or be inconsistent with this
Agreement or any supplemental agreement or amendment.
(b). With the consent of the registered holders of at
least a majority in number of the Warrants at the time outstanding, the Company
and the Warrant Agent at any time and from time to time by supplemental
agreement or amendment may add any provisions to or change in any manner or
eliminate any of the provisions of this Agreement or of any supplemental
agreement or modify in any manner the rights and obligations of the
Warrantholders and of the Company; provided, however, that no such supplemental
agreement or amendment, without the consent of the registered holder of each
outstanding Warrant affected thereby, shall:
(1) alter the provisions of this Agreement so as to affect
adversely the terms upon which the Warrants are exercisable; or
(2) reduce the number of Warrants outstanding the consent of
whose holders is required for any such supplemental agreement or
amendment.
SECTION 6.07. Covenant as to Status as a Real Estate
Investment Trust. The Company shall use its best efforts, until the fifth
anniversary of the Expiration Date, to maintain its status as a "real estate
investment trust" within the meaning of the Internal Revenue Code of 1986, as
amended. Notwithstanding the foregoing, the Company may change the nature of its
business so as to cease to be, or to withdraw its election as, a real estate
investment trust with the approval of the board of trustees and a vote of
shareholders as required by the Company's Amended and Restated Declaration of
Trust.
SECTION 6.08. Successors and Assigns. All the covenants and
provisions of this Agreement by or for the benefit of the Company or the Warrant
Agent shall bind and inure to the benefit of their respective successors and
assigns hereunder.
25
<PAGE>
SECTION 6.09. Notices. Any notice or demand authorized by this
Agreement to be given or made by the Warrant Agent or by the holder of any
Warrant to or on the Company shall be sufficiently given or made if sent by mall
first-class, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent) as follows:
Resource Asset Investment Trust
1521 Locust Street, Sixth Floor
Philadelphia, Pennsylvania 19102
Attention: Mr. Jay J. Eisner
Any notice or demand authorized by this Agreement to be given
or made by the holder of any Warrant or by the Company to or on the Warrant
Agent shall be sufficiently given or made if sent by mail first-class, postage
prepaid, addressed (until another address is filed in writing by the Warrant
Agent with the Company), as follows:
Attention: __________________
Any notice or demand authorized by this Agreement to be given
or made to the holder of any Warrants shall be sufficiently given or made if
sent by first-class mail, postage prepaid to the last address of such holder as
it shall appear on the Warrant Register.
SECTION 6.10. Applicable Law. The validity, interpretation and
performance of this Agreement and of the Warrant Certificate shall be governed
by the law of the State of New York without giving effect to the principles of
conflicts of laws thereof.
SECTION 6.11. Benefits of this Agreement. Nothing in this
Agreement expressed and nothing that may be implied from any of the provisions
hereof is intended, or shall be construed, to confer upon, or give to, any
person or corporation other than the parties hereto and the holders of the
Warrants any right, remedy or claim under or by reason of this Agreement or of
any covenant, condition, stipulation, promise or agreement hereof, and all
covenants, conditions, stipulations, promises and agreements in this Agreement
contained shall be for the sole and exclusive benefit of the parties hereto and
their successors and of the holders of the Warrants.
26
<PAGE>
SECTION 6.12. Registered Warrantholders. Prior to due
presentment for registration of transfer, the Company and the Warrant Agent may
deem and treat the person in whose name any Warrants are registered in the
Warrant Register as the absolute owner thereof for all purposes whatever
(notwithstanding any notation of ownership or other writing thereon made by
anyone other than the Company or the Warrant Agent) and neither the Company nor
the Warrant Agent shall be affected by any notice to the contrary or be bound to
recognize any equitable or other claim to or interest in any Warrants on the
part of any other person and shall not be liable for any registration of
transfer of Warrants that are registered or to be registered in the name of a
fiduciary or the nominee of a fiduciary unless made with actual knowledge that a
fiduciary or nominee is committing a breach of trust in requesting such
registration of transfer or with such knowledge of such facts that its
participation therein amounts to bad faith. The terms "Warrantholder" and
"holder of any Warrants" and all other similar terms used herein shall mean such
person in whose name Warrants are registered in the Warrant Register.
SECTION 6.13. Inspection of Agreement. A copy of this
Agreement shall be available at all reasonable times for inspection by any
Warrantholder at the principal office of the Warrant Agent(or successor Warrant
Agent). The Warrant Agent may require any such Warrantholder to submit his
Warrant Certificate for inspection by it before allowing such Warrantholder to
inspect a copy of this Agreement.
SECTION 6.14. Headings. The Article and Section headings
herein are for convenience only and are not a part of this Agreement and shall
not affect the interpretation thereof.
SECTION 6.15. Counterparts. The Agreement may be executed in
any number of counterparts, each of which so executed shall be deemed to be an
original.
27
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by
the parties hereto under their respective seals as of the day and year first
above written.
RESOURCE ASSET INVESTMENT TRUST
[CORPORATE SEAL]
By:
------------------------------
Name:
Title:
Attest:
Name:
Title:
, as Warrant Agent
-------------------------
[CORPORATE SEAL]
By:
------------------------------
Name:
Title:
Attest:
Name:
Title:
<PAGE>
A-5
EXHIBIT A
Exhibit A
[FORM OF FIRM WARRANT CERTIFICATE]
NO. Warrants
----------- ----------
WARRANTS
TO PURCHASE COMMON SHARES OF
RESOURCE ASSET INVESTMENT TRUST
Resource Asset Investment Trust, a Maryland real estate
investment trust (the "Company"), for value received, hereby certifies that
----------------------------------------
or registered assigns, is the owner of the number of Firm
Warrants, set forth above, each of which represents the right, subject to the
terms and conditions hereof and of the Warrant Agreement hereafter referred to
(the "Warrant Agreement"), to purchase from the Company at any time or from time
to time, from the first anniversary of the date of original issuance of the Firm
Warrants to the close of business on the fifth anniversary of such date (or, if
such date is not a Business Day (as defined below), the first following Business
Day) (the "Exercise Period"), the number of common shares of beneficial
interest, par value $.01 per share, of the Company (the "Common Shares")
described in the Warrant Agreement (each Common Share issuable upon exercise of
a Firm Warrant is referred to as a "Warrant Share"). Subject to the terms and
conditions of the Warrant Agreement, the exercise price per Firm Warrant
represented by this Warrant Certificate shall be $_____ per share, adjusted as
provided in Article III of the Warrant Agreement, payable in full as to each
Firm Warrant exercised at the time of purchase. The term "Underwriting
Agreement" as used herein refers to the Underwriting Agreement dated
____________, 1997 between the Company and Friedman, Billings, Ramsey & Co.,
Inc. The term "Exercise Price" as used herein refers to the foregoing price per
share in effect at any time.
This Firm Warrant may be exercised in whole or in part at any
time or from time to time during the Exercise Period. The portion of any Firm
Warrant not exercised during the Exercise Period shall become void, and all
rights hereunder and all rights in respect hereof and under the Warrant
Agreement shall cease at the end of the Exercise Period.
<PAGE>
Each such purchase of Warrant Shares shall be made, and shall
be deemed effective for the purpose of determining the date of exercise, only
upon surrender hereof to the Company at the office or agency maintained for such
purpose in The City of New York or the principal office of [Name of Warrant
Agent], Warrant Agent (or any successor Warrant Agent), with the form of
Election to Exercise on the reverse hereof duly completed and signed, and upon
payment in full to the Warrant Agent for the account of the Company of the
Exercise Price (i) in cash or (ii) by certified or official bank check or (iii)
by any combination of the foregoing, all as provided in the Warrant Agreement
and upon compliance with and subject to the conditions set forth herein and in
the Warrant Agreement.
This Warrant Certificate is issued under and in accordance
with the Warrant Agreement dated as of __________, 1997 (the "Warrant
Agreement"), between the Company and the Warrant Agent and is subject to the
terms and provisions of the Warrant Agreement, which terms and provisions are
hereby incorporated by reference herein and made a part hereof. Copies of the
Warrant Agreement and of the Underwriting Agreement are available for inspection
by the registered holder at the principal office of the Warrant Agent (or
successor Warrant Agent).
The Company shall not be required upon the exercise of the
Firm Warrants represented hereby to issue fractions of Warrant Shares or to
distribute share certificates that evidence fractional Warrant Shares. Every
holder of this Warrant Certificate expressly waives its right to receive any
fraction of a Warrant Share or a share certificate representing a fraction of a
Warrant Share. Fractional Warrant Shares that otherwise would be issuable in
respect of such exercise shall be paid in cash as provided in the Warrant
Agreement, and the number of Warrant Shares issuable to such Warrantholder shall
be rounded down to the next nearest whole number. If such Warrant Certificate
shall not have been exercised in full, the Warrant Agent on behalf of the
Company will issue to such Warrantholder a new Warrant Certificate exercisable
for the number of Common Shares as to which such Firm Warrant shall not have
been exercised.
A-1
<PAGE>
This Warrant Certificate may be exchanged either separately or
in combination with other Warrant Certificates at the office or agency
maintained in The City of New York for such purpose or at the principal office
of the Warrant Agent (or successor Warrant Agent) for new Warrant Certificates
representing the same aggregate number of Firm Warrants as were evidenced by the
Warrant Certificate or Warrant Certificates exchanged, upon surrender of this
Warrant Certificate and upon compliance with and subject to the conditions set
forth herein and in the Warrant Agreement.
This Warrant Certificate is transferable (subject to
restrictions set forth in the Warrant Agreement) at the office or agency
maintained in The City of New York for such purpose or at the principal office
of the Warrant Agent (or successor Warrant Agent) by the registered holder
hereof in person or by his attorney duly authorized in writing, upon (i)
surrender of this warrant Certificate and (ii) upon compliance with and subject
to the conditions set forth herein and in the Warrant Agreement. Upon any such
transfer, a new Warrant Certificate or new Warrant Certificates of different
denominations, representing in the aggregate a like number of Firm Warrants,
will be issued to the transferee. Every holder of Firm Warrants, by accepting
this Warrant Certificate, consents and agrees with the Company, the Warrant
Agent and with every subsequent holder of this Warrant Certificate that until
due presentation for the registration of transfer of this Warrant Certificate on
the Warrant Register maintained by the Warrant Agent, the Company and the
Warrant Agent may deem and treat the person in whose name this Warrant
Certificate is registered as the absolute and lawful owner for all purposes
whatsoever and neither the Company nor the Warrant Agent shall be affected by
any notice to the contrary.
Nothing contained in the Warrant Agreement or in this Warrant
Certificate shall be construed as conferring on the holder of any Firm Warrants
or his transferee any rights whatsoever as a shareholder of the Company.
This Warrant Certificate shall not be valid unless
countersigned manually by the Warrant Agent.
A-2
<PAGE>
The Warrant Agreement and each Warrant Certificate, including
this Warrant Certificate, shall be deemed a contract made under the laws of the
State of New York and for all purposes shall be construed in accordance with the
laws of the State of New York without giving effect to the principles of
conflicts of law thereof.
A-3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated:
RESOURCE ASSET INVESTMENT TRUST
(CORPORATE SEAL) By:
------------------------
By:
------------------------
<PAGE>
ATTEST:
-------------------------
COUNTERSIGNED: [NAME OF WARRANT AGENT], as
Warrant Agent
By:
------------------------
Authorized Signature
A-5
<PAGE>
Exhibit B
[FORM OF OPTIONAL WARRANT CERTIFICATE]
NO. Warrants
----------- ----------
WARRANTS
TO PURCHASE COMMON SHARES OF
RESOURCE ASSET INVESTMENT TRUST
Resource Asset Investment Trust, a Maryland real estate
investment trust (the "Company"), for value received, hereby certifies that
----------------------------------------
or registered assigns, is the owner of the number of Optional
Warrants, set forth above, each of which represents the right, subject to the
terms and conditions hereof and of the Warrant Agreement hereafter referred to
(the "Warrant Agreement"), to purchase from the Company at any time, or from
time to time, from the first anniversary of the date of original issuance of
______ Warrants, as defined in the Warrant Agreement, to the close of business
on the fifth anniversary of such date (or, if such date is not a Business Day
(as defined below), the first following Business Day) (the "Exercise Period"),
the number of common shares of beneficial interest, par value $.01 per share, of
the Company (the "Common Shares") described in the Warrant Agreement (each
Common Share issuable upon exercise of an Optional Warrant is referred to as a
"Warrant Share"), subject to certain adjustments. Subject to the terms and
conditions of the Warrant Agreement, the exercise price per Optional Warrant
represented by this Warrant Certificate shall be $_____ per share, adjusted as
provided in Article III of the Warrant Agreement, payable in full as to each
Optional Warrant exercised at the time of purchase. The term "Underwriting
Agreement" as used herein refers to the Underwriting Agreement dated
___________, 1997 between the Company and Friedman, Billings, Ramsey & Co., Inc.
The term "Exercise Price" as used herein refers to the foregoing price per share
in effect at any time.
<PAGE>
Subject to the terms and conditions of the Warrant Agreement,
the number of Common Shares which the holder of this Warrant Certificate is
entitled to receive upon exercise of the Optional Warrants represented hereby is
subject to certain adjustments, as follows: in the event that FBR fails to
exercise its right to receive the total maximum number of Option Shares, then
the Optional Warrants shall cease to be exercisable with respect to that number
of Common Shares equal to (i) 1,500,000, minus (ii) the total number of Option
Shares purchased by and delivered to FBR, multiplied by (iii) 0.05. In the event
that FBR does not purchase any Option Shares within thirty days following the
date hereof, the Optional Warrants will expire in their entirety. The Warrant
Agent may not deliver Warrant Shares pursuant to this Optional Warrant unless
and until the Warrant Agent receives written notice signed by both the Company,
any and FBR which sets out the number of Common Shares which the holder of the
Optional Warrants will be entitled to receive.
This Optional Warrant may be exercised in whole or in part at
any time or from time to time during the Exercise Period. The portion of any
Optional Warrant not exercised during the Exercise Period shall become void, and
all rights hereunder and all rights in respect hereof and under the Warrant
Agreement shall cease at the end of the Exercise Period.
Each such purchase of Warrant Shares shall be made, and shall
be deemed effective for the purpose of determining the date of exercise, only
upon surrender hereof to the Company at the office or agency maintained for such
purpose in The City of New York or the principal office of [Name of Warrant
Agent], Warrant Agent (or any successor Warrant Agent), with the form of
Election to Exercise on the reverse hereof duly completed and signed, and upon
payment in full to the Warrant Agent for the account of the Company of the
Exercise Price (i) in cash or (ii) by certified or official bank check or (iii)
by any combination of the foregoing, all as provided in the Warrant Agreement
and upon compliance with and subject to the conditions set forth herein and in
the Warrant Agreement.
This Warrant Certificate is issued under and in accordance
with the Warrant Agreement dated as of __________, 1997 (the "Warrant
Agreement"), between the Company and the Warrant Agent and is subject to the
terms and provisions of the Warrant Agreement, which terms and provisions are
hereby incorporated by reference herein and made a part hereof. Copies of the
Warrant Agreement and of the Underwriting Agreement are available for inspection
by the registered holder at the principal office of the Warrant Agent (or
successor Warrant Agent).
B-2
<PAGE>
The Company shall not be required upon the exercise of the
Optional Warrants represented hereby to issue fractions of Warrant Shares or to
distribute share certificates that evidence fractional Warrant Shares. Every
holder of this Warrant Certificate expressly waives its right to receive any
fraction of a Warrant Share or a share certificate representing a fraction of a
Warrant Share. Fractional Warrant Shares that otherwise would be issuable in
respect of such exercise shall be paid in cash as provided in the Warrant
Agreement, and the number of Warrant Shares issuable to such Warrantholder shall
be rounded down to the next nearest whole number. If such Warrant Certificate
shall not have been exercised in full, the Warrant Agent on behalf of the
Company will issue to such Warrantholder a new Warrant Certificate exercisable
for the number of Common Shares as to which such Firm Warrant shall not have
been exercised.
This Warrant Certificate may be exchanged either separately or
in combination with other Warrant Certificates at the office or agency
maintained in The City of New York for such purpose or at the principal office
of the Warrant Agent (or successor Warrant Agent) for new Warrant Certificates
representing the same aggregate number of Optional Warrants as were evidenced by
the Warrant Certificate or Warrant Certificates exchanged, upon surrender of
this Warrant Certificate and upon compliance with and subject to the conditions
set forth herein and in the Warrant Agreement.
This Warrant Certificate is transferable (subject to
restrictions set forth in the Warrant Agreement) at the office or agency
maintained in The City of New York for such purpose or at the principal office
of the Warrant Agent (or successor Warrant Agent) by the registered holder
hereof in person or by his attorney duly authorized in writing, upon (i)
surrender of this Warrant Certificate and (ii) upon compliance with and subject
to the conditions set forth herein and in the Warrant Agreement. Upon any such
transfer, a new Warrant Certificate or new warrant Certificates of different
denominations, representing in the aggregate a like number of Optional Warrants,
will be issued to the transferee. Every holder of Optional Warrants, by
accepting this Warrant Certificate, consents and agrees with the Company, the
Warrant Agent and with every subsequent holder of this Warrant Certificate that
until due presentation for the registration of transfer of this Warrant
Certificate on the Warrant Register maintained by the Warrant Agent, the Company
and the Warrant Agent may deem and treat the person in whose name this Warrant
Certificate is registered as the absolute and lawful owner for all purposes
whatsoever and neither the Company nor the Warrant Agent shall be affected by
any notice to the contrary.
B-3
<PAGE>
Nothing contained in the Warrant Agreement or in this Warrant
Certificate shall be construed as conferring on the holder of any Optional
Warrants or his transferee any rights whatsoever as a shareholder of the
Company.
This Warrant Certificate shall not be valid unless
countersigned manually by the Warrant Agent.
The Warrant Agreement and each Warrant Certificate, including
this Warrant Certificate, shall be deemed a contract made under the laws of the
State of New York and for all purposes shall be construed in accordance with the
laws of the State of New York without giving effect to the principles of
conflicts of law thereof.
B-4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated:
RESOURCE ASSET INVESTMENT TRUST
(CORPORATE SEAL) By:
------------------------
By:
------------------------
<PAGE>
ATTEST:
-------------------------
COUNTERSIGNED: [NAME OF WARRANT AGENT], as
Warrant Agent
By:
------------------------
Authorized Signature
B-6
<PAGE>
ELECTION TO EXERCISE
(To be executed upon exercise of Warrant)
TO RESOURCE ASSET INVESTMENT TRUST:
The Undersigned hereby irrevocably elects to exercise the
right of purchase represented by the within Warrant Certificate for, and to
purchase thereunder, _________________ Common Shares, as provided for therein,
and tenders herewith payment of the purchase price in full in the form of cash
or a certified or official bank check (or combination thereof) in the amount of
$_________________________.
Please issue a certificate or certificates for such Common
Shares in the name of:
PLEASE INSERT SOCIAL SECURITY OR Name
OTHER IDENTIFYING NUMBER OF ------------------------------
ASSIGNEE
Address
- ----------------------------- -------------------------------
Signature
- ----------------------------- -------------------------------
-------------------------------
Note: The above signature should
correspond exactly with the
name on the face of this
Warrant Certificate or with
the name of assignee appearing
in the assignment form below.
Dated:
------------------
<PAGE>
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received, _________________________ hereby sells, assigns and transfer
unto ____________________________ the within Warrant Certificate, together with
all right, title and interest therein, and does hereby irrevocably constitute
and appoint ______________________ attorney, to transfer said Warrant
Certificate on the books of the within-named Company, with full power of
substitution in the premises.
Dated:
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Note: The above signature should
correspond exactly with the
name on the face of this
Warrant Certificate
