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As filed with the Securities and Exchange Commission on June 5, 1998.
Registration No. 333-53067
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
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(Exact name of registrant as specified in its governing instruments)
1845 Walnut Street, 10th Floor, Philadelphia, PA 19103
(215) 861-7900
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(Address, including zip code, and telephone number, including area code, of
registrant's principal executive officers)
Jay J. Eisner
President and Chief Operating Officer
Resource Asset Investment Trust
1845 Walnut Street, 10th Floor
Philadelphia, PA 19103
(215) 861-7900
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
J. Baur Whittlesey, Esquire Thurston R. Moore, Esquire
Ledgewood Law Firm, P.C. Hunton & Williams
1521 Locust Street, 8th Floor 951 East Byrd Street
Philadelphia, PA 19102 Richmond, VA 23219
(215) 735-0663 (804) 788-8200
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 this Form is a post-effective amendment filed pursuant to Rule 462(d) 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.
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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 JUNE 5, 1998
PROSPECTUS
[GRAPHIC OMITTED]
2,800,000 Shares
Resource Asset Investment Trust
Common Shares
------------------
Resource Asset Investment Trust ("RAIT" and, together with its
subsidiaries, the "Company") is a Maryland real estate investment trust formed
in August 1997 that, through its subsidiaries, owns a portfolio of commercial
real estate mortgage loans, interests in commercial real estate mortgage loans
and interests in real properties. The Company seeks to acquire or provide
commercial mortgage loans and other commercial debt financing in situations
that, generally, do not conform to the underwriting standards of institutional
lenders or sources that provide financing through securitization. To a lesser
extent, the Company may also acquire real property or interests in real
property. RAS will elect to be taxed as a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended (the "Code") for its
taxable year ending December 31, 1998.
All of the 2,800,000 common shares of beneficial interest of the Company
(the "Common Shares") offered pursuant to this Prospectus (the "Offering") are
being offered by the Company. The Common Shares are listed for trading on the
American Stock Exchange ("Amex") under the symbol "RAS." On June 4, 1998, the
last reported sales price of the Common Shares was $17.875 per share. See "Price
Range of Common Shares and Distribution Policy."
See "Risk Factors" beginning on page 13 for certain factors relevant to an
investment in the Common Shares including, among others:
o The Company provides mortgage and debt financing in situations that,
generally, do not conform to the underwriting standards of institutional
lenders or sources that provide financing through securitization, and
emphasizes junior lien loans and other forms of subordinate financing,
including wraparound loans. Financing provided by the Company,
accordingly, is subject to greater risks than institutional and senior
lien financing.
o As of March 31, 1998, nine of the loans in the Company's portfolio and the
loans underlying two of the Company's participation interests were, and
future loans (or loans underlying participation interests) acquired by the
Company may be, in default under their terms as originally underwritten.
Ten of the eleven loans are, and any such loans acquired in the future
typically will be, subject to forbearance agreements postponing exercise
of default remedies so long as certain payment and other conditions are
met. The eleventh loan is subject to a confirmed plan of reorganization
that provides remedies similar to those of a forbearance agreement in
favor of the holder. Such loans may be subject to high rates of default
following expiration of the forbearance arrangements.
o The loan-to-value ratio (including senior debt) of the Company's loans
typically will be in excess of 80%, increasing the risk of loss on the
Company's loans in the event of default.
o The Company has broad discretion to acquire real properties or interests
in real properties.
o The Company's investments will be sensitive to many economic factors
over which the Company has no control.
o The Company's senior management has limited experience in managing a
REIT.
o The Company's investment policies may be revised by the Company's
Board of Trustees without shareholder approval or prior notice.
o The Company may incur debt in furtherance of its business activities 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 the
Company's sponsor, Resource America, Inc. ("RAI"), which may own up to 15%
of the Common Shares) is limited to 8.3% of the outstanding Common Shares,
which may deter third parties from seeking control of, or seeking to
acquire, the Company.
o As a result of relationships among the Company, RAI, Brandywine
Construction & Management, Inc. ("Brandywine") and their affiliates,
conflicts of interest may arise in the acquisition of investments or the
provision of services to the Company by RAI, Brandywine and their
affiliates.
o The Company will be taxed as a regular corporation if it fails to
qualify as a REIT.
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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 Proceeds to
Public Discount(1) Company(2)
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Per Share ......... $ $ $
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Total(3) .......... $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. In addition, in connection with the Company's initial public
offering in January 1998, the Company granted Friedman, Billings, Ramsey &
Co., Inc. ("FBR") a two year right to be first offered the right to act as
financial adviser to or lead underwriter for the Company with respect to
certain transactions, including sales of assets, equity or debt
securities, mergers, acquisitions and capital market transactions. See
"Underwriting."
(Cover page continued on following page)
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
PIPER JAFFRAY INC.
GRUNTAL & CO., L.L.C.
The date of this Prospectus is June __, 1998.
<PAGE>
(2) Before deducting expenses in connection with the Offering, estimated at
$625,000, which will be payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
420,000 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."
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 June __, 1998.
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."
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TABLE OF CONTENTS
Page
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AVAILABLE INFORMATION .............................................. 5
ADDITIONAL INFORMATION ............................................. 5
PROSPECTUS SUMMARY ................................................. 6
The Company ...................................................... 6
Recent Developments .............................................. 7
Risk Factors ..................................................... 8
Management of the Company ........................................ 10
Conflicts of Interest ............................................ 10
The Offering ..................................................... 11
Use of Proceeds .................................................. 11
Distribution Policy .............................................. 11
Tax Status of the Company ........................................ 11
STRUCTURE OF THE COMPANY ........................................... 12
RISK FACTORS ....................................................... 13
Investment Activity Risks ........................................ 13
Financing Considerations ...................................... 13
Value of Company's Loans Dependant on Conditions
Beyond Company's Control ................................. 13
Longer Term, Subordinate and Non-Conforming
Loans are Illiquid and Value May Decrease ................ 13
Lengthy Loan Commitment Periods May Reduce
Company's Returns ........................................ 13
Investment in Subordinate Loans May Involve
Increased Risk of Loss ................................... 13
Investment in Non-Conforming Loans May Involve
Increased Risk of Loss ................................... 14
Financing with High Loan-to-Value Ratios May
Involve Increased Risk of Loss ........................... 14
Interest Rate Changes May Adversely Affect
Company's Investments .................................... 14
Lack of Geographic Diversification Exposes
Company's Investments to Higher Risk of Loss Due
to Regional Economic Factors ............................. 15
Competition for Financing May Inhibit Company's
Ability to Achieve Objectives ............................ 15
Appreciation Interests May Reduce Interest Rates
Without Resulting in Additional Returns .................. 15
Loans Secured by Interests in Entities Owning Real
Property May Involve Increased Risk of Loss .............. 16
Usury Statutes May Impose Interest Ceilings and
Substantial Penalties for Violations ..................... 16
Discounted Loans May Have High Rates of Default ............. 16
Construction Financing May Increase Repayment Risk .......... 16
Real Property Considerations .................................. 17
Value of Company's Property Interests Dependent on
Conditions Beyond Company's Control ...................... 17
Property Interests Are Illiquid and Value May
Decrease ................................................. 17
Uninsured and Underinsured Losses May Affect Value
of, or Return from, Property Interests ................... 17
Investments in Joint Ventures, Partnerships or Other
Real Property Interests May Result in Less Control
by the Company ........................................... 17
Compliance with Americans with Disabilities Act and
Other Changes in Governmental Rules and
Regulations Will Decrease Returns on Property
Interests ................................................ 18
Increases in Property Taxes Decrease Returns on
Property Interests ....................................... 18
Real Properties with Environmental Problems May
Create Liability for the Company ......................... 18
Other Investment Activity Considerations ......................... 18
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Page
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Recently-Formed Entity; Limited REIT Management
Experience of Senior Management ............................. 18
Importance of Key Personnel ................................... 19
Leverage Can Reduce Income Available for Distribution
and Cause Losses ............................................ 19
Lack of Diversification in Investments Increases
Company's Dependence on Individual Investments .............. 19
Legal and Tax Risks .............................................. 19
Failure to Maintain REIT Status Would Result in
Company Being Taxed as a Regular Corporation ................ 19
"Phantom Income" May Require Company to Borrow or
Sell Assets to Meet REIT Distribution Requirements .......... 20
Origination Fees Which May Be Received by the
Company Will Not Be REIT Qualifying Income .................. 21
Income from Certain Loans May Not Be REIT
Qualifying Income ........................................... 21
Gain on Disposition of Assets Deemed Held for Sale in
Ordinary Course Subject to 100% Tax ......................... 21
Loss of Investment Company Act Exemption Would
Affect Company Adversely .................................... 21
Investment in Common Shares by Certain Benefit Plans
May Give Rise to Prohibited Transaction under
ERISA and the Code .......................................... 22
Board of Trustees May Change Policies Without
Shareholder Consent ......................................... 22
Limitation of Liability of Officers and Trustees .............. 22
Conflicts of Interest in the Business of the Company .......... 22
Ownership Limitation May Restrict Business
Combination Opportunities ................................... 22
Preferred Shares May Prevent Change in Control ................ 23
Maryland Anti-Takeover Statutes May Restrict Business
Combination Opportunities ................................... 23
Future Offerings of Capital Stock May Result in
Dilution of the Book Value per Common Share ................. 23
CONFLICTS OF INTEREST .............................................. 24
USE OF PROCEEDS .................................................... 25
INVESTMENT OBJECTIVES AND POLICIES ................................. 26
General .......................................................... 26
Types of Financing ............................................... 26
Loan Origination Sources ......................................... 27
Certain Financial Guidelines ..................................... 28
Location of Properties Relating to Loans ......................... 28
Types of Properties Relating to Loans ............................ 29
Acquisition of Loans at Discount ................................. 29
Lending Procedures ............................................... 29
Acquisition of Property Interests ................................ 30
Leverage ......................................................... 31
Portfolio Turnover ............................................... 32
Other Policies ................................................... 32
Existing Investments ............................................. 33
Recent Developments .............................................. 40
Certain Legal Aspects of Real Property Loans and
Investments ................................................... 41
General ....................................................... 41
Types of Mortgage Instruments ................................. 42
Leases and Rents .............................................. 42
Condemnation and Insurance .................................... 43
Foreclosure ................................................... 43
Bankruptcy Laws ............................................... 44
Default Interest and Limitations on Prepayments ............... 45
Forfeitures in Drug and RICO Proceedings ...................... 45
Environmental Matters ......................................... 46
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Page
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Applicability of Usury Laws ............................ 47
Americans With Disabilities Act. ....................... 47
THE COMPANY ................................................. 48
Management ............................................. 48
Trustees and Executive Officers ........................ 48
Option Plan ............................................ 51
Employment Agreements .................................. 51
Indemnification of Trustees and Executive Officers ..... 51
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT ..................................... 52
PRICE RANGE OF COMMON SHARES AND
DISTRIBUTION POLICY ....................................... 53
Price Range of Common Shares ........................... 53
Distribution Policy .................................... 53
CAPITALIZATION .............................................. 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION ....................................... 55
Overview .................................................. 55
Liquidity and Capital Resources ........................... 55
Results of Operations ..................................... 55
Recent Developments ....................................... 55
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST................. 56
General ................................................... 56
Common Shares ............................................. 56
Preferred Shares .......................................... 57
Restrictions on Ownership and Transfer .................... 57
Dividend Reinvestment Plan ................................ 59
Reports to Shareholders ................................... 59
Transfer Agent and Registrar .............................. 59
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE DECLARATION OF TRUST AND BYLAWS ....................... 59
Board of Trustees ......................................... 59
Business Combinations ..................................... 60
Control Share Acquisitions ................................ 60
Amendment of the Declaration of Trust and Bylaws .......... 61
Meetings of Shareholders .................................. 61
Advance Notice of Trustee's Nominations and New
Business ............................................... 61
Dissolution of the Company ................................ 61
Indemnification; Limitation of Trustees' and Officers'
Liability .............................................. 61
Indemnification Agreements ................................ 62
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Page
--
Possible Anti-Takeover Effect of Certain Provisions of
Maryland Law and of the Declaration of Trust and
Bylaws .................................................... 62
Maryland Asset Requirements ................................. 62
COMMON SHARES AVAILABLE FOR FUTURE SALE ..................... 63
OPERATING PARTNERSHIP AGREEMENT ............................. 63
General ................................................... 64
General Partner Not to Withdraw ........................... 64
Capital Contribution ...................................... 64
Redemption Rights ......................................... 64
Operations ................................................ 65
Distributions ............................................. 65
Allocations ............................................... 65
Term ...................................................... 65
Tax Matters ............................................... 66
FEDERAL INCOME TAX CONSIDERATIONS ........................... 66
Taxation of RAIT .......................................... 66
Requirements for Qualification ............................ 67
Income Tests ........................................... 68
Asset Tests ............................................ 71
Distribution Requirements .............................. 72
Recordkeeping Requirements ............................. 73
Failure to Qualify ........................................ 73
Taxation of Taxable U.S. Shareholders Generally ........... 74
Taxation of Shareholders on the Disposition of the Common
Shares ................................................. 75
Capital Gains and Losses .................................. 75
Information Reporting Requirements and Backup
Withholding ............................................ 75
Taxation of Tax-Exempt Shareholders ....................... 75
Taxation of Non-U.S. Shareholders ......................... 76
State and Local Taxes ..................................... 77
Sale of RAIT's Property ................................... 77
BENEFIT PLAN CONSIDERATIONS ................................. 78
Employee Benefit Plans, Tax-Qualified Retirement Plans
and IRAs ............................................... 78
Status of the Company under ERISA's Plan Asset Rules ...... 79
UNDERWRITING ................................................ 80
LEGAL MATTERS ............................................... 81
EXPERTS ..................................................... 81
GLOSSARY .................................................... 82
4
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, accordingly, is
required to file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed with the Commission are available for
inspection and copying at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W. Washington,
D.C. 20549, and at the Commission's Regional Offices located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at
Seven World Trade Center, New York, New York 10048. Copies of such documents
may also be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, copies of such documents may be obtained through the
Commission's Internet address at http://www.sec.gov. The Common Shares are
authorized for quotation on the American Stock Exchange and, accordingly, such
materials and other information can also be inspected at its offices, 86
Trinity Place, New York, New York 10006-1872.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 (No. 333-53067) (together with any amendments thereto, the "Registration
Statement"), under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the securities offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, omits certain information
contained in the Registration Statement as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the securities offered hereby, reference is made to the
Registration Statement and the exhibits and financial statements, notes and
schedules filed as part thereof or incorporated by reference therein, which may
be inspected at the public reference facilities of the Commission at the
addresses set forth above. Statements made in this Prospectus concerning the
contents of any documents referred to herein are not necessarily complete, and
in each instance are qualified in all respects by reference to the copy of such
document filed as an exhibit to the Registration Statement or incorporated by
reference therein.
This Prospectus contains certain forward-looking statements which involve
substantial risks and uncertainties. These forward-looking statements can
generally be identified as such because the context of the statement includes
words such as the Company "believes," "anticipates," "expects," "estimates,"
"intends," or other words of similar intent. Similarly, statements that
describe the Company's future plans, objectives and goals are also
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from those expressed or implied in these
forward-looking statements as a result of certain factors, including those set
forth in "Risk Factors" and elsewhere in this Prospectus.
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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 the Underwriters'
over-allotment option is not exercised and that the offering price (the
"Offering Price") of the Common Shares is $____ per share. Unless the context
otherwise requires, all references in this Prospectus to (i) the "Company"
shall mean Resource Asset Investment Trust and (a) its wholly-owned
subsidiaries, RAIT General, Inc., a Maryland corporation (the "General
Partner"), and RAIT Limited, Inc., a Maryland corporation (the "Initial Limited
Partner") and (b) RAIT Partnership, L.P., a Delaware limited partnership (the
"Operating Partnership"), in which the General Partner currently owns a 1%
interest and the Initial Limited Partner currently owns 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 herein shall have
the meanings set forth in the Glossary beginning on page 82.
The Company
General. RAIT is a Maryland real estate investment trust that will elect to
be taxed as a REIT under the Code for its taxable year ending December 31,
1998. The Company's principal business activity is to acquire or provide loans
(or participation interests in such loans) secured by mortgages on commercial
real property and/or deeds-in-lieu of foreclosure or similar instruments (each
such loans or interest owned by the Company, a "Loan") in situations that,
generally, do not conform to the underwriting standards of institutional lenders
or sources that provide financing through securitization. To a lesser extent,
the Company may also acquire real property or interests in real property. 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 purchases or originates
Loans relating to multi-family residential, office and other commercial
properties for its own account. The Company seeks to provide junior lien loans
and other forms of subordinated financing, including wraparound loans, with
principal amounts or, with respect to acquired loans, acquisition prices
generally between $1.0 million and $10.0 million. The Company is not, however,
limited in the type of financing it may provide and, accordingly, may originate
or acquire first lien loans for its portfolio or loans that are larger or
smaller than its targeted size range. The Company may acquire a partial
interest in a loan (a "participation interest"). The Company may also provide
short-term bridge financing to a borrower in excess of the targeted size range
where the borrower has committed to obtain financing to prepay the short-term
bridge financing (either in whole or in part), or the Company believes it can
arrange such financing, to reduce the Company's investment to an amount within
the targeted size range. In structuring its financings, the Company seeks to
include provisions allowing it to participate in any appreciation of the value
of properties underlying the Loans or in any increase in property revenues from
rents (each an "Appreciation Interest"). The Company will typically seek
Appreciation Interests at a minimum rate of 25%. There can be no assurance that
the Company will be able to obtain that rate, or any Appreciation Interests at
all.
The Company's financings consist of direct loans to borrowers and the
acquisition of existing loans. In direct loans, the Company endeavors to adapt
the financing terms to the needs of its borrowers, and will utilize 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
loans, the Company focuses on loans that can be acquired at a discount to their
outstanding balances and the appraised value of the underlying properties
because of one or more past defaults under the original loan terms (due to lack
of a strong operating history for the underlying property, historical credit or
cash flow problems of the borrower or the underlying property or other
factors). The Company does not acquire any such loans 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 real property or interests in
partnerships, joint ventures, limited liability companies
6
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or other entities owning real property (each a "Property Interest"). Although
the Company will generally seek to obtain indirect Property Interests which
have preferences as to current distributions and return of capital, the Company
is not limited as to the kinds of indirect Property Interests it may acquire,
and some or all of its indirect Property Interests may not have a preferred
position. The Company believes that acquiring Property Interests is
advantageous for three 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 provides 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. Certain of the Loans 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 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 ongoing investment activities with the
proceeds of this Offering and future equity offerings. Although the Company is
permitted to incur debt to fund its investment in Loans 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 to 1.0 (excluding debt relating only to a particular property that
is without recourse to the Company). 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."
In addition to indebtedness that may be incurred by the Company, the
properties underlying the Loans owned by the Company (or the Property Interests
acquired by the Company) may be subject to indebtedness existing at the time of
the Company's financing or acquisition or created in connection with the
Company's financing. Provided that such indebtedness is without recourse to the
Company (but subject to the Company's financial guidelines; see "Investment
Objectives and Policies -- Certain Financial Guidelines"), the Company is not
subject to limitations in connection with the amount of debt financing
pertaining to properties underlying the Loans or the Property Interests.
Recent Developments
In January 1998, the Company completed its initial public offering (the
"IPO") of 2,833,334 Common Shares, which, together with 500,000 Common Shares
sold simultaneously to RAI (as the Company's sponsor), resulted in the Company
obtaining $46,500,000 of net proceeds. As of March 31, 1998, the Company had
utilized $31,750,000 of these proceeds in the acquisition or origination of
14 loans. In addition, the Company purchased a property in Rohrerstown,
Pennsylvania for $1,625,000. See "Investment Objectives and Policies --
Existing Investments."
In April 1998, the Company originated a loan in the original principal
amount of $17,300,000 bearing interest at the annual rate of 10.8%. The Company
has a $16,000,000 participation interest in the Loan. The Company's secured
interest in the Loan is senior to a subordinated interest of RAI in the amount
of $1,300,000. The loan matures on April 16, 1999, unless on or before that
date the borrower obtains senior financing in the amount of $12,000,000 and the
loan is converted into a wraparound loan. Before the conversion to a wraparound
loan, the Company's participation interest entitles it to receive monthly
interest payments at 11% per annum and additional monthly interest payments
equal to 80% of the net cash flow from the underlying property. In addition,
the Company received advance interest of $160,000 at the time of the loan
closing. After the conversion to a wraparound loan, the Company's interest in
the resulting loan will entitle it to: (i) monthly interest payments calculated
at a rate per annum equal to the rate of interest per annum on the senior
financing plus 5.5%, (ii) additional interest, payable monthly, in an amount
equal
7
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to 50% of net cash flow from the underlying property and (iii) additional
interest, payable at maturity, in an amount equal to 50% of the difference
between the appraised fair market value of the property and $19,900,000. The
loan is secured by a first mortgage on an apartment complex located in
Forestville, Maryland. The Company obtained a $12,000,000 interim loan from an
unaffiliated third party, pledging the $17,300,000 promissory note and related
loan documents in order to secure such loan. The Company anticipates that this
interim lender will provide the senior financing to the borrower. See
description of Loan 115 under "Investment Objectives and Policies -- Recent
Developments."
In May 1998, the Company permitted partial repayment in the amount of
$5,380,000 of a Loan in the original principal amount of $7,380,000 and
complete repayment of another Loan in the original principal amount of
$900,000. See description of Loans 111 and 112 under "Investment Objectives and
Policies -- Existing Investments" and "-- Recent Developments."
The Company is currently negotiating, pursuant to a proposal dated March
19,1998, two related loans in the aggregate principal amount of approximately
$10,000,000. The proposed terms of the loans are as follows: One loan, in the
approximate amount of $2,400,000, will be a wraparound loan in the original
principal amount of approximately $26,400,000. This loan will be secured by (i)
a wraparound second mortgage on a shopping center in Philadelphia, Pennsylvania,
(ii) a second priority assignment of leases and rents, and (iii) a recordable,
title-insured purchase option entitling the Company to purchase the property in
the event of a default for a purchase price equal to the outstanding balance on
the senior loan at the time of the default. An unaffiliated third party owns a
first mortgage loan on the property, in the original principal amount of
approximately $24,000,000. The other loan, in the approximate amount of
$7,600,000, will be secured by a pledge of all of the capital stock of the
wraparound loan borrowers. Both of the loans will bear interest at 11% per annum
and will mature on April 1, 2007, when all principal, accrued interest and other
amounts will be due and payable. Additional interest on the loans will be
payable to the Company as follows: (i) advance interest equal to 1% of the
amount of each loan will be due at the closing and (ii) at maturity or upon
refinancing, an amount equal to 25% of the difference between the then fair
market value of the property and $40,000,000 (but the Appreciation Interest
cannot exceed $40,000,000 multiplied by a compounded annual rate of 3% for each
year, or part thereof, that the loans are outstanding) will be payable. The
borrowers will be permitted to repay the loans in full at maturity or to sell
the property to the Company for a purchase price equal to (i) the fair market
value thereof less (ii) the amount due under the loans less (iii) the amount
that would otherwise be due pursuant to the Company's Appreciation Interest. The
Company expects to close these loans before the end of its second fiscal
quarter; however, there can be no assurance that the loans will close at all or
that the terms thereof will not be modified. See "Investment Policies and
Objectives -- Recent Developments."
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 provides mortgage and other debt financing in situations
that, generally, do not conform to the underwriting standards of
institutional lenders or sources that provide financing through
securitization. The Company emphasizes junior lien loans and other forms
of subordinate financing, including wraparound loans. Financing provided
by the Company, accordingly, is subject to greater risks than
institutional and senior lien financing.
o As of March 31, 1998, nine of the Loans in the Company's portfolio and
the loans underlying two of the Company's participation interests were,
and future Loans (and loans underlying participation interests) acquired
by the Company may be, in default under their terms as originally
underwritten. Ten of the eleven Loans are, and any such loans acquired in
the future typically will be, subject to forbearance agreements postponing
exercise of default remedies so long as certain payment and
8
<PAGE>
other conditions are met. The eleventh loan is subject to a confirmed plan
of reorganization that provides remedies similar to those of a forbearance
agreement in favor of the holder. Such loans may be subject to high rates
of default following expiration of the forbearance arrangements.
o The loan-to-value ratio (including senior debt) of the Company's Loans
typically will be in excess of 80%, increasing the risk of loss on the
Company's Loans in the event of default.
o The Company has broad discretion to acquire Property Interests.
o The Company may be subject to intense competition in identifying suitable
Loans for acquisition or origination.
o The value of, and income from, the Company's portfolio of Loans and
Property Interests may be adversely affected by economic factors over
which the Company has no control.
o The Company's senior management has limited prior experience in managing
a REIT.
o The Company's investment policies may be revised by the Company's Board
of Trustees (the "Board of Trustees") without shareholder approval or
prior notice.
o Geographic concentration of the Company's Loans and Property Interests
may subject them to regional economic fluctuations.
o Environmental risks may adversely affect the value of the Company's Loans
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 (which
may own up to 15% of the Common Shares) is limited to 8.3% of the
outstanding Common Shares, which may deter third parties from seeking
control of, or seeking to acquire, the Company.
<PAGE>
o Transfer of the Common Shares or the Company's preferred shares is
prohibited if such transfer would (i) result in any person violating the
ownership limitations set forth in the Company's Declaration of Trust,
(ii) result in the Company being "closely-held" under Section 856(h) of
the Code, (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. See "Description of
Shares of Beneficial Interest -- Restrictions on Ownership and Transfer."
o As a result of relationships among the Company, RAI, Brandywine and their
affiliates, conflicts of interest may arise in connection with the price
and terms at which investments are sold or services provided to the
Company by RAI, Brandywine and their affiliates. See "Conflicts of
Interest."
o If the Company fails to qualify or maintain its qualification as a REIT,
the Company will be taxed as a regular corporation for federal income tax
purposes which would materially adversely affect income available for
distribution to shareholders.
o The Company may provide or acquire 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 100% 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.
9
<PAGE>
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.
Management of the Company
The Company is internally managed through its Board of Trustees and senior
officers. For a description of the background of such persons, see "The Company
- -- Trustees and Executive Officers."
Conflicts of Interest
The Company has established relationships with RAI, Brandywine and their
affiliates that may give rise to conflicts of interest. RAI, which is the
sponsor of the Company, currently owns 15% of the outstanding Common Shares
and, following completion of this Offering, will own 8.2% of the outstanding
Common Shares (7.6% if the Underwriters exercise their over-allotment option).
Until such time as its ownership of outstanding Common Shares is less than 5%,
RAI has the right to nominate one member of the Board of Trustees. One of the
Company's current trustees and officers, Jonathan Z. Cohen, is serving as RAI's
nominee. Mr. Cohen is an officer of RAI and 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 and Chief Executive Officer of RAI. In
connection with the completion of the IPO in January 1998, the Company acquired
12 loans (77.8%, by initial book value, of its investment portfolio as of March
31, 1998) from RAI (the "Initial Investments") and, subject to certain
limitations, anticipates purchasing additional investments from RAI. The
Company also anticipates that it may join with RAI in acquiring or providing
Loans; as of March 31, 1998, the Company has joined with RAI in one such Loan.
See description of Loan 114 under "Investment Objectives and Policies --
Existing Investments" and " -- Recent Developments." The Company has retained,
and may from time to time in the future (but is not obligated to) retain, RAI
and/or Brandywine to perform due diligence investigations on properties
underlying proposed Loans (excluding Loans acquired from RAI) or on Property
Interests the Company is considering for acquisition. As of March 31, 1998,
Brandywine provided real estate management or management supervisory services
to ten of the properties underlying the Company's Loans (46.0%, by book value).
The Company anticipates that Brandywine will in the future provide similar
services with respect to properties underlying Loans or Property Interests
acquired by the Company. Accordingly, the Company's relationship with RAI,
Brandywine and their affiliates may be subject to conflicts over the price at
which investments are sold to the Company, the cost of services provided or
similar matters. The Company has instituted certain procedures to mitigate the
effects of any such conflicts with RAI, Brandywine and their affiliates. See
"Conflicts of Interest."
In addition, since each of the Company and RAI seeks to originate or
acquire mortgage loans, there may be conflicts of interest among the Company
and RAI regarding the allocation of loan opportunities. Also, since Mrs. Cohen
is the Chairman and Chief Executive Officer of JeffBanks, Inc. ("JeffBanks"), a
banking institution with which the Company has normal depositary relationships
and from which the Company sublets office space, similar conflicts may arise
between the Company and JeffBanks. The Company believes, however, that these
conflicts are substantially mitigated because of the significant differences
between the investment objectives of the Company, RAI and JeffBanks and because
the anticipated sources of the Company's loan referrals (apart from loans
acquired from RAI) are different from those of RAI and JeffBanks. To further
limit conflicts between the Company and RAI, RAI has agreed to certain
restrictive covenants with respect to REITs that RAI may sponsor in the future,
and has given the Company a right of first refusal with respect to certain
types of loans. See "Conflicts of Interest."
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<PAGE>
The Offering
Shares offered to the public(1) .................... 2,800,000
Shares to be outstanding after Offering(2) ......... 6,133,434
Amex symbol ........................................ RAIT
- -------------
(1) Assumes that the Underwriters' over-allotment option to purchase up to an
additional 420,000 Common Shares is not exercised.
(2) Excludes (i) 141,667 Common Shares which are issuable in connection with
warrants granted to FBR in connection with the IPO and (ii) 387,500 Common
Shares issuable in connection with options granted to officers and
trustees of the Company.
Use of Proceeds
The Offering proceeds will be invested in the manner described in
"Investment Objectives and Policies." It is anticipated that the investment
process will take up to eight 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 held in
interest-bearing bank accounts or 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 -- Income Tests" and "-- 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 taxed as ordinary income or return on capital,
although in certain circumstances a portion of any distribution may constitute
long-term capital gain or return of capital. The Company commenced making
distributions in March 1998 and intends to make future distributions quarterly.
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, 1998. 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 ("Counsel"), has rendered its opinion, based on certain assumptions and
representations about the Company's method of operation, current business and
investment activities and other matters, that the Company qualifies for
taxation as a REIT under the Code and its organization and method of operation
(if continued) will enable it to continue to qualify as a REIT. There can be no
assurance that the Company will be able to comply with such assumptions and
representations in the future. Furthermore, Counsel's opinion is not binding on
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
has adopted 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 -- Ownership Limitation May Restrict Business
Combination Opportunities," "Federal Income Tax Considerations -- Requirements
for Qualification" and "Description of Shares of Beneficial Interest --
Restrictions on Ownership and Transfer."
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<PAGE>
STRUCTURE OF THE COMPANY
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 undertakes the business
of the Company, including the origination and acquisition of Loans 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 |
---------------------------
| 91.8% (1)
--------------------------- -------------------
| RAIT |---------| RAI |
--------------------------- 8.2%(1) -------------------
| 100% | 100% |
- --------------------- --------------------- |
| RAIT Limited, Inc.| | RAIT General, Inc.| |
- --------------------- --------------------- |
(2) | 99% | 1% (2) |
---------------------------- (3) |
| RAIT Partnership, L.P. |--------------
----------------------------
(1) Assumes the Underwriters do not exercise their over-allotment option. If
exercised, RAI would own 7.6% and the public shareholders 92.4% of the
Company.
(2) RAIT owns 100% of each of the General Partner, the Initial Limited Partner
and, indirectly, the Operating Partnership. Accordingly, they will not be
treated as entities separate from RAIT for federal income tax purposes. See
"Federal Income Tax Considerations -- Requirements for Qualification."
(3) RAI may provide investments or services to the Company, and has done so in
the past. For a discussion of certain relationships between the Company,
RAI, its affiliates and other entities, see "Conflicts of Interest."
12
<PAGE>
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 Loans Dependant on Conditions Beyond Company's Control.
The Company's principal portfolio assets are Loans relating to real property.
The Company anticipates that investments acquired or originated and funded with
the proceeds of this Offering principally will consist of such loans. 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 "Investment
Objectives and Policies -- Certain Legal Aspects of Real Property Loans and
Investments." The real property underlying the Company's existing Loans (and,
it is anticipated, future Loans made or acquired by the Company) is the primary
or sole source of any recovery for the Company. Accordingly, the Company is
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's Loans typically 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, mortgage lenders can lose any priority of their lien to
mechanics', materialmen's and other liens in many jurisdictions, including
those in which the Company's existing Loans are located. 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 Loans are Illiquid and Value
May Decrease. The Company's Loans generally will have maturities between four
and ten years and typically will not conform to standard underwriting criteria.
Many of the Company's Loans (including eight of the Loans as of March 31, 1998)
will be subordinate loans. As a result, the Loans in the Company's portfolio
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 Loans may
decrease in the future. Although the Company will attempt to obtain
Appreciation Interest features in its Loans to provide it with additional
compensation and a hedge against inflation, there can be no assurance that it
will be able to do so. As of March 31, 1998, only two of the Company's Loans
had such a feature. Moreover, even if the Company is able to obtain
Appreciation Interest features in a particular Loan, economic and other factors
may have a material adverse effect upon its value or its ability to provide an
inflation hedge.
Lengthy Loan Commitment Periods May Reduce Company's Returns. The Company
typically issues a loan commitment to a borrower before the 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, distributions to
shareholders) will be adversely affected.
Investment in Subordinate Loans May Involve Increased Risk of Loss. The
Company emphasizes junior lien loans and other forms of subordinated financing,
including wraparound loans. As of March 31, 1998, eight of
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<PAGE>
the Company's Loans (including three first mortgage wraparound Loans in which
the Company holds a subordinate position) were junior lien loans. Because of
their subordinate position, 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 Loan is located could adversely affect the value of the property
such that the aggregate outstanding balances of senior liens and the Company's
Loan 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 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 Loan, and may
accordingly increase the risk of loss to the Company in the event of a default
by the borrower on the Company's Loan. See "Investment Objectives and Policies
- -- Certain Legal Aspects of Real Property Loans and Investments."
When the Company acquires a loan, it may not acquire the right to service
senior loans to which the underlying property may be subject. The servicers of
the senior loans are responsible to the holders of such loans, whose interests
will likely not coincide with those of the Company, particularly in the event
of a default. Accordingly, the senior loans may not be serviced in a manner
which is most advantageous to the Company.
As of March 31, 1998, five of the Company's Loans (constituting 19.8% of
the Company's Loans, by book value) were not collateralized by recorded or
perfected liens (though they are secured by deeds-in-lieu of foreclosure) and
certain future Loans 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 the Company's existing non-mortgage secured Loans,
see "Investment Objectives and Policies -- Existing Investments." The Company
believes that the five non-mortgage secured existing Loans are qualifying assets
for the purposes of the REIT asset tests of the Code and anticipates that any
similarly structured financings in the future will be treated in a similar way.
Financings that would not so qualify will be undertaken only in amounts that
will not jeopardize the Company's qualification 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 Loans will 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 lack of a strong operating history for the properties
underlying the Loans, 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 than conventional loans.
Any such loss may reduce distributions to shareholders or adversely affect the
value of the Common Shares.
Financing with High Loan-to-Value Ratios May Involve Increased Risk of
Loss. The Company anticipates that many of its Loans will have loan-to-value
ratios (the ratio of the amount of the Company's financing, plus the amount of
any senior indebtedness, to the appraised value of the property underlying the
Loan) in excess of 80%. As of March 31, 1998, nine of the Company's Loans had
loan-to-value ratios in excess of that amount. By reducing the margin available
to cover fluctuations in property value (or differences between appraised value
and amounts actually obtainable upon foreclosure and sale), a Loan with a high
loan-to-value ratio may involve increased risk that, upon default, the amount
obtainable from sale of the underlying property may be insufficient to repay
the financing.
Interest Rate Changes May Adversely Affect Company's Investments. The
market value of Loans in the Company's portfolio will be affected by changes in
interest rates. In general, the market value of a loan will
14
<PAGE>
change in inverse relation to an interest rate change where a loan has a fixed
interest rate or only limited interest rate adjustments. Accordingly, in a
period of rising interest rates, the market value of such a 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 Loans may be
invested at lower rates than the Company had been able to obtain in prior
investments, or than the rates on the repaid Loans. Also, increases in interest
on debt, if any, incurred by the Company in originating or acquiring Loans or
Property Interests may not be reflected in increased rates of return on the
Loans or Property Interests funded or acquired through such debt, thereby
adversely affecting the Company's return on such investments. Accordingly,
interest rate changes may materially affect the total return on the Company's
investment portfolio, which in turn will affect the amount available for
distribution to the Company's shareholders.
Lack of Geographic Diversification Exposes Company's Investments to Higher
Risk of Loss Due to Regional Economic Factors. The Company emphasizes financing
with respect to properties located in metropolitan areas of the United States
and, to date, its investments have been concentrated in the Philadelphia,
Pennsylvania metropolitan area (12 of the Company's 14 Loans as of March 31,
1998 relate to properties located in this area). See "Investment Objectives and
Policies -- Locations of Properties Relating to Loans." Although the Company
does not have 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), it anticipates that its Loans will continue to be
concentrated in the Philadelphia region and the Baltimore/Washington corridor
for the foreseeable future. Such a lack of geographic diversification may
result in the Company's investment portfolio being more sensitive to, and the
Company being less able to respond to, economic developments of a primarily
regional nature, which may result in reduced rates of return, or higher rates
of default, on the Company's Loans 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 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 Loans and
adversely affect its ability to obtain Appreciation Interests in connection
with its Loans. 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 competitors 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 reduce
the yields available thereon or increase the credit risk inherent in the
available loans.
Appreciation Interests May Reduce Interest Rates Without Resulting in
Additional Returns. In structuring Loans 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 an Appreciation Interest and the potentially greater benefit that could
result from a share in the appreciation in value or revenues of the property.
As of March 31, 1998, two of the Company's Loans have such Appreciation
Interest features. See "Investment Objectives and Policies -- Existing
Investments." While the Company will seek Appreciation Interests at rates of
not less than 25% there can be no assurance that it will be able to obtain such
rates. One of the two loans which have Appreciation Interest features provides
for a participation rate that, in certain circumstances, is less than the
target rate. The value of any Appreciation Interest 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 Appreciation Interests. See
"Risk Factors -- Investment Activity Risks -- Real Property Considerations."
The Company does not anticipate that amounts (if any) it may receive as a
result of Appreciation Interests will be significant in the early years of any
investment. Moreover, there can be no assurance that the Company will be able
to negotiate Appreciation Interest provisions in any of its Loans.
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<PAGE>
There may be uncertainty whether amounts receivable pursuant to
Appreciation Interests 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 Loans 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
Loan, a court in a bankruptcy, arrangement or similar proceeding 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 a situation.
Loans Secured by Interests in Entities Owning Real Property May Involve
Increased Risk of Loss. The Company may originate or acquire a Loan which is
secured by interests in entities that own real properties rather than a direct
security interest in the underlying properties. Although the Company does not
anticipate that it will originate or acquire a material number of Loans 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 Loan. See "Risk Factors -- Investment Activity
Risks -- Real Property Considerations -- Investments in Joint Ventures,
Partnerships or Other Real Property Interests May Result in Less Control by
Company" and "Investment Objectives and Policies -- Recent Developments." Loans
secured by interests in such entities may also not be deemed to be "qualifying
interests" for Investment Company Act purposes. In the event that less than 55%
of the Company's assets are "qualifying interests" or less than an additional
25% are "qualifying interests" and other "real estate type" assets, the Company
may be required to change its method of operations or to register as an
investment company under the Investment Company Act, which could have an
adverse effect on the Company and the market price for its Common Shares. See
"Risk Factors -- Legal and Tax Risks -- Loss of Investment Company Act
Exemption Would Affect Company Adversely." In addition, Loans secured by
partnership 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 qualify as a REIT. See "Federal Income Tax
Considerations Requirements for Qualification -- Asset Tests."
Usury Statutes May Impose Interest Ceilings and Substantial Penalties for
Violations. Interest charged on Loans owned by the Company (which may include
amounts received in connection with Appreciation Interests) 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 seeks to structure its Loans 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.
Discounted Loans May Have High Rates of Default. The Company seeks to
acquire loans at purchase prices that represent a discount from both the
outstanding balances of principal and accrued interest on the loans, as well as
from the appraised value of the properties underlying the loans. Typically,
discounted loans are in default as to payment under the original loan terms or
other requirements. As of March 31, 1998, eight of the Company's 14 Loans
(57.0% of the Company's portfolio, by book value) had been acquired at a
discount to both outstanding balances and appraised values. Each of the eight
loans is in default under its original loan terms but is current with respect
to payments required by, and other terms of, the related forbearance
agreements. (One other Loan and the loans underlying two of the Company's
participation interests are in default under the original loan terms; each is
currently performing under its respective forbearance agreement.) Acquiring
loans at a discount may involve a substantially higher degree of risk of
collection than loans that 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, is subject.
However, there can be no assurance that previously existing problems will not
recur or that other problems will not arise.
Construction Financing May Increase Repayment Risk. Although the Company
does not seek to originate construction loans, the Company may make loans in
situations where construction is involved, generally either
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(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 Loans." As of March 31, 1998, one of the Company's Loans (Loan 113) is
secured by a property where construction was involved (involving tenant
leasehold improvements where the tenant continued to pay rent through the
construction period). Loans in construction situations may involve a higher
degree of risk than other lending, to the extent that repayment is dependent
upon successful completion of the project, or as a result of the lack of an
operating history on the project as constructed or rehabilitated upon which to
base a loan's underwriting, difficulties in estimating construction costs and
timing, 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 emphasizes originating or acquiring
Loans, the Company has acquired one Property Interest as of March 31, 1998 and
anticipates that it will acquire further 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 capital appreciation
generated by the related properties as well as the expenses incurred in
connection therewith. If the properties do not generate income sufficient to
meet operating expenses, including debt service and capital expenditures, the
ability to make distributions to the Company's shareholders 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 will
be adversely affected if a significant number of tenants are unable to pay rent
or if available space cannot 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 to customers 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 Return from,
Property Interests. The Company intends to maintain (or cause to be maintained)
comprehensive insurance on the properties underlying its Property Interests (as
well as on properties underlying its Loans), 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 Real Property
Interests May Result in Less Control by the Company. From time to time the
Company may acquire equity interests in entities which own real property,
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rather than acquiring or making a real property loan or acquiring a property
directly. See "Investment Objectives and Policies -- Acquisition of Property
Interests." While the Company anticipates that any equity interest it may
acquire will be senior in right of payment to existing and future equity
interests, the Company is not limited as to the kind of equity interests it may
acquire, and it may acquire equity interests that are not senior or preferred
interests. Since an equity interest is subordinate to all creditors, where the
Company purchases equity interests, the Company's risk of loss may be
increased. Moreover, acquisition of equity interests provides certain risks not
present in real property loans or direct property ownership. For example, there
is the possibility that the other equity owners in the entity holding the
property might have economic or business interests or goals which are
inconsistent with the business interests or goals of the Company or be in a
position to take action contrary to the instructions or requests of the Company
or contrary to its policies or objectives. While the Company will seek to
obtain sufficient contractual rights with respect to a property in which it
obtains an equity interest to allow it to protect the value of its interest,
there can be no assurance that any rights obtained will, in fact, enable it to
do so. Moreover, in limited partnerships, even if the Company is a limited
partner, if its rights under the partnership agreement allow it sufficient
control over the partnership or its property, it might be deemed to be a
general partner and, in such a case, could incur liability for the debts of the
partnership beyond the amount of its investment.
Compliance with Americans with Disabilities Act and Other Changes in
Governmental Rules and Regulations 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 Loans which may be made or acquired by the Company) may not be in
compliance with the ADA. While the Company believes that all of the properties
underlying its Loans or included in its Property Interests are in material
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.
Increases in Property Taxes Decrease Returns on Property Interests. All
properties included in the Company's Property Interests or underlying its Loans
are 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 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 "Investment Objectives and Policies -- Certain Legal Aspects of
Real Property Loans and Investments -- Environmental Matters."
Other Investment Activity Considerations
Recently-Formed Entity; Limited REIT Management Experience of Senior
Management. The Company has been recently formed and has only a limited prior
operating history in pursuing its operating strategies and policies. The
Company will be dependent for the monitoring of its day-to-day operations,
including, but not limited to, the selection, structuring and monitoring of its
investments and associated borrowings, on the diligence and skill of its senior
management, which has limited prior experience in managing a REIT. There can be
no assurance that the Company and its management will be able to implement the
Company's operating strategies and policies successfully.
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Importance of Key Personnel. The Company believes that its future success
will depend 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 has entered into employment agreements with its Chairman and Chief
Executive Officer, Mrs. Cohen, and its President and Chief Operating Officer,
Mr. Eisner, it does not maintain key person life insurance on any officer. Mr.
Eisner, Mr. Jay Cohen and Ms. DiStefano 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 devotes substantial amounts of her time. Mrs. Cohen's
obligations to these businesses limit the amount of time she has available to
devote to the Company's business.
Leverage Can Reduce Income Available for Distribution and Cause Losses.
The Company is permitted to leverage its portfolio as a whole (as distinguished
from debt relating only to a particular property that is without recourse to
the Company) through borrowings although, in general, it will not do so unless
it does not have immediately available capital sufficient to make a particular
investment. The amount of the Company's recourse borrowing under any credit
facility (and, as a result, the Company's leverage ratio) will vary depending
on the Company's estimate of the stability of the cash flow of its portfolio.
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 Borrower or Sell Assets to Meet REIT Distribution Requirements." In
general, the Company expects that the ratio of the Company's overall
indebtedness (excluding debt relating only to a particular property that is
without recourse to the Company) to its equity will not exceed 0.5 to 1. See
"Investment Objectives and Policies -- Leverage." However, the Company's
Declaration of Trust (the "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 (whether with recourse to the Company generally or only with respect
to a particular property) 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.
Lack of Diversification in Investments Increases Company's Dependence on
Individual Investments. Although the Company will generally invest between $1.0
million and $10.0 million in a Loan or Property Interest, the Company is not
limited as to the size of its investments. To the extent the Company invests
larger amounts in its Loans or Property Interests, the Company's portfolio will
be concentrated in a smaller number of assets, increasing the risk of loss to
shareholders in the event of a default or other problem with respect to one or
more such Loans or Property Interests. While the Company may, with respect to
short-term bridge loans, seek to protect against loss by requiring a borrower
to obtain (or itself obtaining) a take-out commitment for some or all of the
Loans, there can be no assurance that any such commitments will be obtained, or
that conditions to completion of any such commitment can or will be fulfilled.
Legal and Tax Risks
Failure to Maintain REIT Status Would Result in Company Being Taxed as a
Regular Corporation. The Company has operated and intends to continue 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 the Company's REIT status, it has received an opinion of Counsel
that, based on its current operations and on
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certain assumptions and representations concerning future operations, 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 alternative minimum tax) on its taxable income at regular corporate
rates, and distributions to shareholders would not be deductible by the Company
in computing its taxable income. Any such corporate tax liability could be
substantial and would reduce the amount of cash available for distribution to
shareholders, which in turn could have an adverse impact on the value of, and
trading prices for, the Common Shares. Unless entitled to relief under certain
Code provisions, the Company also would be disqualified from taxation as a REIT
for the four taxable years following the year during which it ceased to qualify
as a REIT.
"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 maintain its status as a REIT. 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 has made and intends to continue
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 Loans that may be deemed to have original issue discount
("OID") for federal income tax purposes, which is generally equal to the
difference between an obligation's issue price and its redemption price. For
example, mortgages with participation features sometimes will be considered to
have OID and, if so, the holder thereof 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 accrual 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 in turn
will increase the amount that the Company must distribute to its shareholders
in order to avoid corporate income tax for that year (unless there is an
equivalent amount of deductions that do not require expenditures of cash, e.g.,
depreciation on owned real estate), notwithstanding the fact that there may be
no corresponding contemporaneous receipt of cash by the Company. As of March
31, 1998, one of the Company's Loans has OID. The Company may also be required
to accrue interest with respect to a mortgage Loan 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. As of March 31, 1998, seven
of the Loans in the Company's portfolio provide such "phantom income."
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
loans. Even if, as expected, there is positive cash flow to the Company from
the transaction, it may be that the amount of principal the Company is required
to pay on the senior obligations will exceed the amount of principal it
receives from the obligor on the wraparound loan, and that the amount of
interest it receives from the obligor will exceed the amount of interest it
pays on the senior obligations. This could create a situation where the
Company's taxable income exceeds the Company's cash flow from the wraparound
loan. REIT taxable income in excess of cash received may also arise in
connection with certain property sales and where a "significant" modification
is made to a loan. As of March 31, 1998, four of the Loans in the Company's
portfolio create such a situation. 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 capital expenditures, or repayment of debt.
To offset these risks as well as risks relating to OID, 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.
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Origination Fees Which May Be Received by the Company Will Not Be REIT
Qualifying Income. Although the Company does not now anticipate receiving
origination fees in connection with its Loans, any origination fees received by
the Company will not be qualifying income for purposes of the 75% or 95% gross
income tests of the Code. The Company has received and expects to continue to
receive additional interest paid in advance with respect to its Loans. So long
as the payment is for the use of money, rather than for services provided by
the Company, such as loan processing and closing services, such income should
not be classified as non-qualifying origination fees. However, it is possible
that the Service would seek to reclassify such income as origination fees
instead of interest. See "Federal Income Tax Considerations Requirements for
Qualification -- Income Tests." Failure of the Company to satisfy these tests
as a result of origination fees received (or for any other reason) could cause
the Company not to qualify as a REIT. See "Risk Factors -- Legal and Tax Risks
- -- Failure to Maintain REIT Status Would Result in Company Being Taxed as a
Regular Corporation."
Income from Certain Loans May Not Be REIT Qualifying Income. Five of the
loans in the Company's portfolio as of March 31, 1998 (constituting 19.8% of
the Company's assets, by book value, at such date) are not secured by recorded
mortgages (although the Company holds a deed-in-lieu of foreclosure that it may
record upon a default by the Loan borrower). The Company may acquire or
originate loans that are not secured by mortgages in the future. The Company
may also originate junior loans where a senior loan prevents the Company from
recording a mortgage against the property or permits the recordation of a
junior mortgage but substantially restricts the Company from exercising its
rights as a junior secured lender. In such situations, it is possible that the
Service would conclude that interest on the junior lender's loan 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. See "Federal Income Tax Considerations Requirements for
Qualification -- Income Tests." With respect to the five loans in the Company's
portfolio as of March 31, 1998 that are subject to such restrictions, because
the Company will have, upon any default, rights directly exercisable by the
Company that are substantially similar to foreclosure rights, Counsel is of the
opinion that interest income from such loans will constitute qualifying 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 a 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 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 from its registration
requirements 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" ("Qualifying
Interests"). Under current interpretations of the Commission, in order to
qualify for a "no action" position from the Commission with respect to the
availability of this exemption, the Company, among other things, must maintain
at least 55% of its assets in Qualifying Interests and also may be required to
maintain an additional 25% in Qualifying Interests or other "real estate type"
assets. 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 Loans, 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 Loan 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 Loan will constitute
a Qualifying Interest for the purpose of the Investment Company Act. The
Company does not intend, however, to seek
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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 Loan 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.
Investment in Common Shares 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 an initial 15% excise tax
on the amount involved in any prohibited transaction involving the assets of
the Plan and 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 the 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 or notice to
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
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 has entered into
indemnification agreements with its trustees and executive officers containing
similar provisions. See "Certain Provisions of Maryland Law and of the
Declaration of Trust and Bylaws -- Indemnification; Limitation of Trustees' and
Officers' Liability" and "-- Indemnification Agreements."
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 current
ownership of 15% of the Common Shares and RAI's affiliation with Brandywine.
RAI has in the past and anticipates that it will in the future (subject to
certain limitations) sell investments to the Company or participate in
investments with the Company. RAI and Brandywine may also provide real estate
due diligence and management services to the Company. As a result of these
relationships, there is a risk that conflicts of interest may arise among the
Company, RAI, Brandywine and their affiliates in connection with the price and
terms at which investments are sold or services provided to the Company by RAI,
Brandywine and their affiliates. For a more detailed discussion of these
relationships, see "Conflicts of Interest."
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. For the purpose of
preserving the Company's REIT qualification, the Declaration of Trust generally
prohibits direct or indirect ownership of more than 8.3% (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
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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 Declaration of Trust
authorizes the Board of Trustees to issue preferred shares ("Preferred
Shares"), to establish the preferences and rights of any Preferred Shares
issued, to classify any unissued Preferred Shares and reclassify any previously
classified but unissued Preferred Shares. Although the Company has no current
intention to issue any series of Preferred Shares in the foreseeable future,
the issuance of any series of Preferred Shares could have the effect of
delaying or preventing a change in control of the Company (apart from the
Ownership Limitation) even if a majority of the Company's shareholders believe
such change of control is desirable. See "Description of Shares of Beneficial
Interest -- Preferred Shares."
Maryland Anti-Takeover Statutes May Restrict Business Combination
Opportunities. As a Maryland real estate investment trust, the Company is
subject to various provisions of Maryland law which impose certain restrictions
and require certain procedures with respect to certain takeover offers and
business combinations, including, but not limited to, combinations with
interested holders and share repurchases from certain holders. While the
Company has elected to "opt out" of these provisions, the Board of Trustees has
the right to rescind such election at any time without notice to the
shareholders. See "Certain Provisions of Maryland Law and of the 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.
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CONFLICTS OF INTEREST
The Company has established relationships with RAI, Brandywine and their
affiliates which may give rise to conflicts of interest. RAI, which is the
sponsor of the Company, currently owns 15% of the outstanding Common Shares
and, following completion of this Offering, will own 8.2% of the outstanding
Common Shares (7.6% if the Underwriters exercise their over-allotment option).
RAI has the right to nominate one person for election to the Board of Trustees
until such time as its ownership of outstanding Common Shares is less than 5%.
Currently, Jonathan Z. Cohen is serving as RAI's nominee. Mr. Cohen, an officer
of RAI, is the son of Betsy Z. Cohen, the Chairmain and Chief Executive Officer
of the Company, and Edward E. Cohen. Edward E. Cohen is the Chairman, Chief
Executive Officer, a director and a principal shareholder of RAI.
As of March 31, 1998, the Company had acquired 12 Loans (comprising the
Initial Investments) at an aggregate cost of approximately $18.0 million,
constituting 77.8% of the initial book value, from RAI. RAI realized a gain of
approximately $3.1 million from the sale of these Loans. Subject to the
limitations referred to below in this section, the Company anticipates
purchasing additional investments from RAI. The Company also anticipates that
it may join with RAI in acquiring or funding Loans. As of March 31, 1998, the
Company has joined with RAI in one such Loan. See description of Loan 114 under
"Investment Objectives and Policies -- Existing Investments," see also "--
Recent Developments." The Company has retained, and may from time to time in
the future (but is not obligated to) retain, RAI and/or Brandywine to perform
due diligence investigations on properties underlying Loans (excluding Loans
being acquired from RAI) or on Property Interests that the Company is
considering for acquisition. As of March 31, 1998, Brandywine, which is an
affiliate of RAI, provided real estate management and or management supervisory
services to 10 of the properties underlying the Company's Loans (46.0% by book
value). Brandywine's address is 1609 Walnut Street, Philadelphia, Pennsylvania
19103. The Company anticipates that Brandywine will in the future provide
similar services with respect to properties underlying Loans or Property
Interests originated or acquired by the Company. Accordingly, the Company's
relationship with RAI, Brandywine and their affiliates may be subject to
conflicts over the price at which investments are sold to the Company, the cost
of services provided or similar matters.
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 investments acquired from RAI (or in which an
officer or trustee of the Company has an interest) be determined based upon
independent appraisal of the underlying property, (iii) limiting the
investments which may be acquired from RAI to a maximum of 30% of the Company's
investments (excluding the Initial Investments), based upon the Company's
investment cost (the amount of the investment plus legal, filing and other
related fees and expenses), (iv) requiring that fees for any 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 or Brandywine 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 Company maintains customary banking relationships with the bank
affiliates of JeffBanks, and has maintained uninvested funds in money market
accounts with such affiliates. See "Management's Discussion and Analysis of
Financial Condition -- Results of Operations." These affiliates may also refer
to the Company
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financing proposals which are not within JeffBanks' normal underwriting
criteria. The Company subleases office space from JeffBanks. Betsy Z. and
Edward E. 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 because of the significant differences between the
investment objectives of the Company, RAI and JeffBanks. RAI has advised the
Company that it seeks to acquire loans which are either in default, or at risk
of imminent default, requiring active intervention by RAI in the workout
process. The Company, however, seeks to acquire loans where the workout process
has already been initiated and there is no need for its active intervention.
JeffBanks has advised the Company that it seeks to provide customary commercial
lending services emphasizing (with respect to real estate loans) first lien
financing that is subject to specified underwriting standards. The Company
seeks to provide financing that does not conform to JeffBanks' underwriting
standards. The Company believes that conflicts are further mitigated because
the anticipated sources of the Company's loan referrals (apart from loans
acquired from RAI) are different from those of RAI and JeffBanks.
To further limit conflicts between the Company and RAI, the Company and
RAI have agreed that, until January 14, 2000, (i) RAI will not sponsor another
REIT with investment objectives and policies which are the same as, or
substantially similar to, those of the Company; (ii) if RAI proposes to provide
new wraparound or other junior lien or subordinated financing with respect to
multifamily, office or other commercial properties to a borrower (other than to
a borrower with an existing loan from RAI), RAI must first offer the
opportunity to the Company; and (iii) if RAI desires to sell any loan it has
acquired that conforms to the Company's investment objectives and policies with
respect to acquired loans, it must first offer to sell it to the Company. RAI
has also agreed that if it sponsors a REIT after January 14, 2000 with
investment objectives similar to those of the Company, RAI's representative on
the Board of Trustees (should RAI have a representative on the Board at that
time) will recuse himself or herself from considering or voting upon matters
relating to Loans which may be deemed to be within the lending guidelines of
both the Company and the REIT sponsored by RAI.
Subject only to the limitations referred to above, to the extent that an
investment opportunity is presented to one entity which may be deemed
appropriate for either entity, the entity to which the opportunity is presented
may invest 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 acts as Counsel to the Company, also has
in the past acted as counsel to RAI, Brandywine, JeffBanks and their affiliates
(including Messrs. Jonathan Z. and Edward E. Cohen and Mrs. Cohen) and
anticipates that it will continue to do so in the future. Until April 1996,
Edward E. Cohen was Of Counsel to such firm, of which he was previously a
member, and from which he receives certain debt service payments in connection
with his withdrawal as a member of the firm 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 Offering proceeds will be invested in the manner described in
"Investment Objectives and Policies." It is anticipated that the investment
process will take up to eight 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 held in
interest-bearing bank accounts (see "Conflicts of Interest") or 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."
25
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INVESTMENT OBJECTIVES AND POLICIES
General
The Company originates and acquires Loans secured by recorded or perfected
liens on real property and/or deeds-in-lieu of foreclosure or similar
instruments in situations that do not conform to the underwriting standards of
institutional lenders or sources which provide financing through securitization.
The Company's Loans consist of direct loans to borrowers and the acquisition of
existing loans (or interests in either such kinds of loans). The Company may
also acquire Property Interests. The Company's investment in a Loan or a
Property Interest will generally be between $1.0 million and $10.0 million. The
Company is not, however, limited in the amount of any investment and may invest
amounts that are larger or smaller than its targeted size range. The Company may
also provide short-term bridge financing to a borrower in excess of the targeted
size range where the borrower has committed to obtain financing to pay the
short-term bridge financing, either in whole or in part, (or the Company
believes that it can arrange such financing) to reduce the Company's investment
to an amount within the targeted size range. The Company seeks 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 Appreciation Interests and proceeds
from the sale of portfolio investments. The Company does not seek or receive
origination fees in connection with its Loans. See "Risk Factors -- Legal and
Tax Risks -- Origination Fees Which May Be Received by the Company Will Not Be
REIT Qualifying Income."
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, use 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.
Types of Financing
The Company emphasizes junior lien loans and other forms of subordinated
financing, including wraparound loans. 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 Loans, the Company endeavors 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. It is not anticipated
that the Company's Loans 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.
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Generally, junior lien loans and subordinated financing, including
wraparound loans, 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. Junior lien loans
and subordinated financing (including wraparound loans) offer the potential for
higher yields than those 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 Loans May Involve Increased Risk of Loss."
The Company may acquire loans that are not secured by recorded or
perfected liens. Of the 14 Loans in the Company's portfolio as of March 31,
1998, five loans (19.8% by book value of the Company's portfolio) are not so
secured. See "Risk Factors -- Investment Activity Risks -- Financing
Considerations." Management believes that, with respect to any such Loans
(including applicable existing Loans), the following matters serve to mitigate
the Company's risks as an unsecured lender. First, rents and other cash flow
from the underlying properties generally will be deposited directly to a bank
account 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 existing Loans, 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.
The Company seeks to originate or acquire Loans that not only have current
cash returns higher than those obtained in typical first lien institutional
financing but that also have various features designed to increase the return
over the term of the Loans. In particular, the Company seeks to obtain
Appreciation Interests. These participations typically will be one of two
types: (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 Loan or the principal amount of the Loan), payable at the
maturity of the Loan or the time the property is sold or refinanced, or (ii) a
grant of an interest in the revenues from the property, whether or not in
excess of a specified amount. The Company typically seeks an Appreciation
Interest at a rate of not less than 25%, and may seek to obtain either or both
types of participations. The Company believes that obtaining Appreciation
Interests may be advantageous to it because 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 Appreciation Interests 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 an
Appreciation Interest in any Loan, or as to the final terms (including the
participation rate) under which it may be granted. Moreover, because
Appreciation Interests are more usually associated with subordinate loans in
order to compensate the lender for its subordinated position, the Company may
not be able to find borrowers willing to give Appreciation Interests in first
mortgage loans (to the extent originated by the Company) on terms acceptable to
the Company. Two of the Loans in the Company's portfolio as of March 31, 1998
have Appreciation Interests. One of such interests exceeds the Company's
targeted participation rate and the other, under certain circumstances, is less
than the targeted participation rate. See "Investment Objectives and Policies
- -- Existing Investments."
Loan Origination Sources
To generate loan originations, the Company relies 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, including lenders
providing financing through securitization (with respect to financing not
meeting their standard criteria). For sources of loans for acquisition (in
addition to RAI), the Company will focus
27
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on senior management's existing knowledge of and relationships with
institutional holders (primarily banks and insurance companies) who may wish to
dispose of underperforming loans in their existing portfolios that meet the
Company's financing criteria. The Company's focus on smaller properties makes
it a niche buyer for loans held by these institutions as the Company believes
that others seeking to purchase subordinated loan positions typically will
focus on large size loans or pools of loans. These institutional lenders may
also refer to the Company loan opportunities presented to them that they do not
wish to underwrite.
Certain Financial Guidelines
The Company has established financial guidelines for use in evaluating
financing proposals. The Company may depart from one or more of the guidelines
in underwriting any particular Loan, provided that the Company's Loan
portfolio, in the aggregate, is in compliance. The guidelines provide as
follows: (i) the property underlying the Loan will have a current appraised
value of not less than 25% below the property's estimated replacement cost,
(ii) the principal amount of the Loan (if originated by the Company) or the
acquisition price of the Loan (in the case of acquired loans) will be between
$1.0 million and $10.0 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 1.0, (iv) the ratio of current cash flow to debt service on both
senior loans and the Company's Loan will be at least 1.1 to 1.0, (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 Loan may not exceed 90% of the appraised value of
the underlying property. The "appraised value" of a property for purposes of
the guidelines is 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 is generally 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. Each of the Company's Loans at March 31, 1998
conforms to the guidelines, except for six Loans that exceed a loan-to-value
ratio of 90% (all of which were part of the Initial Investments). The
Company's Loan portfolio, in the aggregate, conforms to the guidelines.
In departing from a particular guideline for any Loan, the Company
typically considers factors that would cause the underlying property to be in
compliance with the guidelines within a reasonable time following initial
funding of the Loan. 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 without notice to or
approval by the shareholders.
Location of Properties Relating to Loans
The Company intends to finance properties located in metropolitan areas of
the United States where there is a significant amount of small, multi-family
residential, office and other commercial properties. Initially, the Company
anticipates that it will focus its financing activities in Philadelphia,
Pennsylvania and the Baltimore/Washington corridor, with a particular emphasis
on the Philadelphia metropolitan area as a result of senior management's
existing experience and relationships and the presence of property management
firms known to the Company (in particular, Brandywine) which can provide
localized property management or oversight services to properties underlying
the Company's Loans or to the Company's Property Interests. Of the 14 Loans in
the Company's portfolio as of March 31, 1998, 12 relate to properties located
in the Philadelphia metropolitan area and two are located in the
Baltimore/Washington corridor. See "Investment Objectives and Policies --
Existing Investments." The Company is not, however, limited as to the
geographic areas in which it may provide Loans and, accordingly, it may provide
Loans in metropolitan areas other than Philadelphia and the
Baltimore/Washington corridor, in metropolitan areas that do not readily fit
the Company's targeted characteristics, or in geographic areas that are outside
of metropolitan areas, as appropriate opportunities are identified, and such
Loans 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 Loans
The Company will focus its financing activities on multi-family
residential, office and other commercial properties with property values
generally between $2 million and $30 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 two of the Loans
in the Company's portfolio as of March 31, 1998. See "Investment Objectives and
Policies -- Existing Investments." It is not anticipated, however, that a
significant number of properties will be outside the targeted range. The
Company does not normally finance undeveloped property or make loans in
situations where construction is involved except where the underlying property
(and any additional real property collateral which the Company may require as
security) meets the Company's loan-to-value guidelines. See "Investment
Objectives and Policies -- Certain Financial Guidelines" and "Risk Factors --
Investment Activity Risks -- 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
Loan, and that some or all of such persons, individually or in the aggregate,
have net worth sufficient to repay the Loan in the event of default. Any such
Loan may also condition funding upon the satisfaction of certain property
income or occupancy criteria. The Company is not limited in the amount or
percentage of its assets it may lend against any category of property. The
Company does not, however, generally intend to make loans or investments
(including Property Interest investments) the amount of which (together with
all other loans or investments by the Company) exceeds (i) with respect to any
one property, 5% of the Company's total assets, or (ii) with respect to any one
person or its affiliates, 10% of the Company's total assets, excluding the
Initial Investments from these guidelines. One of the Company's Initial
Investments, which was specifically excluded from the above guidelines (Loan
108), exceeded such guidelines. The loan constitutes 35.4% of the Company's
portfolio, by book value, at March 31, 1998. Since acquiring the Initial
Investments and through March 31, 1998, the Company has acquired one loan (Loan
114) that exceeded the guidelines. See "Investment Objectives and Policies --
Existing Investments;" see also "Investment Objectives and Policies -- Recent
Developments."
Acquisition of Loans at Discount
The Company focuses on Loans that, because of one or more past defaults
under the original loan terms (due to 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 their outstanding balances and the appraised value of
their underlying properties. The Company will not acquire any such loan,
however, unless the prior loan holder, 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 seeks to acquire loans for which completion of the resolution process
will enhance the Company's total return through increased yields or realization
of some portion or all of the discount at which they were acquired.
The Company anticipates that a substantial portion of the Loans it
acquires will be obtained from RAI, the Company's sponsor, which specializes in
acquiring and resolving mortgage loans. However, the investments that may be
acquired from RAI are limited to a maximum of 30% of the Company's investments
based upon the Company's cost, excluding the Initial Investments (77.8% of the
Company's portfolio, by initial book value). As of March 31, 1998, aside from
the Initial Investments, the Company had purchased no loans from RAI and had
participated with RAI in one Loan. See "Conflicts of Interest" and "Investment
Objectives and Policies -- Existing Investments." For a discussion of certain
loans originated with RAI after March 31, 1998, See "Investment Objectives and
Policies -- Recent Developments."
Lending Procedures
Prior to making or acquiring any Loan, the Company conducts an acquisition
review. The value of the underlying property is estimated by the Company based
upon a recent independent appraisal obtained by the borrower, an independent
appraisal obtained by the Company, or valuation information obtained by the
Company and thereafter confirmed by an independent appraisal. The Company makes
an on-site inspection of the property and, where appropriate, the Company
requires further inspections by engineers, architects or property
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management consultants. The Company may also retain environmental consultants
to review potential environmental issues. See "Risk Factors -- Real Property
Considerations -- Real Properties With Environmental Problems May Create
Liability for the Company." The Company obtains and reviews available rental,
expense, maintenance and other operational information regarding the property
and prepares cash flow and debt service analyses. For acquired loans, the
Company also evaluates 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 evaluates 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, is 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 Loan, the Company follows specified
procedures to monitor Loan performance and compliance. On a performing Loan
originated by the Company, the borrower is 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 Loans (and
in addition to the above procedures), the Company generally requires 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) are required to be paid from that account and are 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 60 days prior to the beginning of a year, which must
be reviewed and approved by the Company.
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 provides the Company with the
possibility of capital appreciation in addition to the current income realized
from its loan portfolio. Third, it assists the Company in its tax planning. It
is anticipated that certain of the Loans 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; however, the Company's acquisition of Property Interests generally
will be subject to (and included within) the asset concentration guidelines
regarding Loans. See "Investment Objectives and Policies -- Types of Properties
Relating to Loans."
The Company conducts an acquisition review with respect to Property
Interests similar to the review the Company conducts in acquiring or
originating Loans. See "Investment Objectives and Policies -- Lending
Procedures." The Company also requires 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 in the same geographic
areas as the properties underlying its Loans. See "Investment Objectives and
Policies -- Location of Properties Relating to Loans." The Company is not
limited, however, as to the geographic areas in which it may acquire Property
Interests. 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 Loans." The Company
does not
30
<PAGE>
manage any Property Interests, but retains the services of third-party
management companies, including (subject to approval by a majority of the
Independent Trustees) Brandywine. (As of March 31, 1998, Brandywine provided
real estate management or management supervisory services to 10 properties as
to which the Company provided financing.) See "Conflicts of Interest."
Brandywine may also be retained by the Company to supervise a local property
manager. In instances where Brandywine manages a Property Interest or
supervises a local manager, the fees paid to Brandywine and the local manager,
in the aggregate, may not exceed the amount customarily charged by property
managers in the area for management of comparable properties.
In addition to acquiring a property directly, the Company may also acquire
indirect interests in a property, typically in the form of an interest in a
partnership, joint venture or limited liability company owning the property.
The Company anticipates that any such interests would be acquired either to
provide financing in situations where further debt financing cannot be used,
where further debt financing is inappropriate (as, for example, where senior
lienors have imposed covenants against further borrowing or against the
imposition of junior liens), or where the Company is seeking an equity interest
in a property as part of a financing package. The Company will typically
require that its interests in any property or entity be preferred over the
interests of other owners both as to current distributions and repayment of
invested capital. The Company will also typically require that the owners incur
no further debt and issue no equity interest of equal rank with or senior to
the Company's interest without the Company's consent. However, the Company is
not limited in the kinds of equity interests that it may acquire and can,
accordingly, acquire interests that are not preferred or permit co-owners of
the properties to incur further debt without the Company's consent. See "Risk
Factors -- Real Property Considerations -- Investments in Joint Ventures,
Partnerships or Other Real Property Interests 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 so that 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." The Company will also closely monitor any such
investments so that the Company will not jeopardize its exemption from the
registration requirements of the Investment Company Act. See "Risk Factors --
Legal and Tax Risks -- Loss of Investment Company Act Exemption Would Affect
the Company Adversely."
Leverage
The Company intends to finance its investment activities with the proceeds
of this Offering and future equity offerings. Although the Company is permitted
to leverage its portfolio as a whole (as distinguished from debt relating only
to a particular property that is without recourse to the Company) through
borrowings, it 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 recourse debt in order to prevent default under
loans senior to the Company's Loan or to discharge senior loans entirely if
this becomes necessary to protect the Company's Loan. This may occur if
foreclosure proceedings are instituted by the holder of a mortgage interest
which is senior to the Company's Loan or if filing a deed-in-lieu of
foreclosure upon default of the Company's Loan would constitute a default under
a related senior loan. 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 Loan. 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 to 1.0. For
purposes of calculating this ratio, the Company's indebtedness will be equal to
all recourse indebtedness of the Company, and equity will be equal to the fair
market value of the Company's net assets based upon the most recent appraised
value of the properties underlying the portfolio. However, where the Company's
Loan is in the form of wraparound financing, the stated principal amount of the
Loan for book purposes is increased by the amount of the senior debt to which
the underlying property is subject, and the Company records a corresponding
liability, even where the sole recourse for the senior debt is to the
underlying property. Any such senior debt is not included in calculating the
Company's debt to equity ratio. The Company is not limited as to the amount of
debt that it may incur, and may
31
<PAGE>
have a debt to equity ratio that may from time to time vary substantially from
0.5 to 1.0, if appropriate investment opportunities are presented. See "Risk
Factors -- Other Investment Activity Considerations -- Leverage Can Reduce
Income Available for Distribution and Cause Losses" and "Investment Objectives
and Policies -- Recent Developments."
In addition to indebtedness that may be incurred by the Company, the
properties underlying financing provided by the Company (or the Property
Interests acquired by the Company) may be subject to indebtedness existing at
the time of the Company's financing or created in connection with the Company's
financing. Provided that such indebtedness is without recourse to the Company
(but subject to the Company's financial guidelines; see "Investment Objectives
and Policies -- Certain Financial Guidelines"), the Company is not subject to
limitations in connection with the amount of debt financing pertaining to
properties underlying its Loans or Property Interests.
Portfolio Turnover
The Company does 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. In addition, the Company may provide bridge loan financing
requiring repayment within a substantially shorter period of time than the
Company's other Loans. The Company may reinvest the proceeds of such Loans into
new loans or may roll over such bridge loans to permanent financing.
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. The Company intends to offer securities of the Operating
Partnership to sellers of assets to the Company in order to provide those
sellers with the opportunity to transfer assets to the Company in a
tax-deferred exchange. These policies may be changed by majority vote of the
Board of Trustees, including a majority of the Independent Trustees, without
shareholder approval or notice. The Company, however, does not currently
anticipate any such changes.
32
<PAGE>
Existing Investments
At March 31, 1998, the Company's investments consisted of one Property
Interest and 14 loans or loan participations.
Property Interest. On March 17, 1998, the Company purchased a property in
Rohrerstown, Pennsylvania for $1,655,000. The property, which consists of a
12,630 square foot building on 2.193 acres, is currently being used as a
diagnostic imaging center by a subsidiary of a large health care provider. The
current tenant has occupied the property since December 1997 and currently pays
rent of $169,242 per year (approximately $13.40 per square foot) under a
"triple net" lease that terminates on February 28, 2008. The property was
renovated for the current tenant by the prior owner; the Company does not
anticipate that further renovations will be made for the foreseeable future.
Real estate taxes on the property for 1998 are $14,528. The Company's
depreciable basis in the property for federal tax purposes (excluding land
value) is $1,495,218. The property is being depreciated using the straight-line
method based on a 39 year life. As part of its purchase, the Company obtained a
right of first refusal on any other sale or lease transactions between the
seller/developer and the tenant and the tenant's affiliates. In the opinion of
the Company's management, the property is adequately covered by insurance.
33
<PAGE>
Loans
The following table sets forth certain information regarding each of the
Loans as of March 31, 1998:
<TABLE>
<CAPTION>
Maturity of Book Value (4)
Loan/Expiration Outstanding of Investment
of Forbearance Type of Loan Including Amount of
Loan Number(1) Agreement(2) Property Location Receivable(3) Senior Debt Senior Debt(5)
- ---------------- ----------------- --------------- ------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
101 10/31/03 Multifamily Philadelphia, PA $ 1,624,391 $ 796,011 $ --
102 10/31/03 Multifamily Philadelphia, PA 1,488,523 1,149,054 --
103 12/31/04 Office Arlington, VA 5,857,460 2,563,831 873,309
104 08/31/04 Multifamily Philadelphia, PA 5,424,715 3,093,636 1,096,019
105 09/02/99 Multifamily Philadelphia, PA 1,620,917 747,267 --
106 12/02/99 Multifamily Philadelphia, PA 3,060,311 2,038,435 1,255,030
107 03/28/01 Multifamily Philadelphia, PA 726,963 583,926 --
108 01/01/02 Office Philadelphia, PA 55,891,549 17,884,324 12,984,323
109 10/31/99 Multifamily Philadelphia, PA 1,679,186 1,679,186 884,084
110 12/31/02 Multifamily Philadelphia, PA 4,684,094 4,675,675 3,172,022
111 12/31/02 Retail/Office Philadelphia, PA 7,530,000 7,385,073 2,500,000
112 12/31/02 Retail Philadelphia, PA 900,000 900,000 --
113 3/01/99 Retail Philadelphia, PA 1,150,000 1,150,000 --
114 -- Office Washington, DC 65,000,000 65,000,000 55,000,000
------------ ------------ -----------
Total Investments in Real Estate Loans $156,638,109 $109,646,418 $77,764,787
============
Less senior debt not included
on the Company's balance sheet (9) 59,056,106 59,056,106
------------ -----------
Net balance included on the
Company's balance sheet $ 50,590,312 $18,708,681
============ ===========
</TABLE>
- ------------
(1) In January 1998, Loans 101 through 112 were purchased from RAI. Loans 111
and 112 were originated by the Company prior to completion of the IPO and
were funded by RAI. Upon completion of the IPO, Loans 111 and 112 were
purchased from RAI at RAI's cost. See "-- Recent Developments" below.
(2) Loans 101 through 108 are subject to forbearance agreements which expire on
the specified dates. Loans 109 through 113 are not subject to forbearance
agreements; the dates specified are the maturity dates of the Loans. Loan
114 has matured; the holder of the loan, RAI, is currently negotiating
with the borrower to restructure the terms of the loan.
(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 March 31,
1998.
(4) As used in this table, "book value" of an investment means the cost of the
investment as carried on the books and records of the Company, plus the
amount, as of the date of the Company's acquisition of the investment, of
any senior indebtedness to which the property was subject, and including
(a) all acquisition costs and expenses, (b) subsequent advances, if any,
made by the Company and (c) amounts representing accretion of discount by
the Company.
(5) Outstanding balance of all senior indebtedness relating to the underlying
property as of March 31, 1998.
(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 (who
is not related to Betsy Z., Edward E. or Jonathan Z. Cohen) with respect
to Loans 105, 106 and 108; Louis A. Iatarola Realty Appraisal Group, Ltd.
with respect to Loans 111, 112 and 113; and John Poole and Associates with
respect to Loan 114) to appraise the properties underlying the Loans. 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, and March and May
34
<PAGE>
<TABLE>
<CAPTION>
Monthly
Value of Ratio of Revenues from Ratio of
Appraised Value Investment Senior Debt Operations Cash Flow to
of Underlying to Appraised to Appraised or Monthly Senior Debt
Property(6) Value Value Debt Service(7) Service(8)
- ----------------- -------------- -------------- ----------------- -------------
<S> <C> <C> <C> <C>
$ 900,000 88% 0% $ 6,158 n/a
1,200,000 96% 0% 9,985 n/a
2,800,000 92% 31% 15,376 2.92
3,200,000 97% 34% 15,024 2.41
800,000 93% 0% 7,756 n/a
2,200,000 93% 57% 9,178 1.89
600,000 97% 0% 5,199 n/a
34,000,000 53% 38% 64,487 2.33
2,700,000 62% 33% 12,324 3.01
5,725,000 82% 55% 23,307 1.83
8,400,000 88% 30% 40,230 3.11
2,200,000 41% 0% 7,950 n/a
2,320,000 50% 0% 9,583 n/a
98,000,000 66% 56% 83,333 1.43
------------ -- -- -------- ----
$165,045,000 66% 47% $309,891 1.79
============ == == ======== ====
</TABLE>
1998. The appraised values generally were developed based on consideration
of the cost, sales comparison and income valuation methods. The cost
method determines a value based upon the market value of the land plus the
depreciated replacement cost of the improvements. The sales comparison
method 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 method develops a
going-concern value of the subject properties by determining the 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 methods, the appraisers analyze
the estimates in light of information regarding the property under
consideration, which typically include one or more factors such 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 (vi) 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.
35
<PAGE>
(7) 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 114 represent the monthly debt service
required to be paid on the loans. With respect to Loans 108 through 114,
the monthly revenues from operations with respect to the underlying
properties are $174,800, $15,400, $23,200, $44,000, $12,500, $19,000 and
$272,000, respectively. For purposes of this table, (i) "Monthly Revenues
from Operations" consist of the monthly rent roll as of March 31, 1998
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, 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.
(8) Consists of monthly revenues from operations before interest on the senior
indebtedness divided by the monthly payment of principal and interest
required under the senior indebtedness. The amount set forth with respect
to Loan 114 includes the additional principal payments due on the senior
debt in an amount equal to 50% of the net cash flow from the underlying
property. Were such additional principal payments not included in the
calculation, the ratio would be 2.54.
(9) Where a Loan is a wraparound loan, the face amount of the Loan is increased
by the amount of the senior debt at the date of the investment, and the
Company records a corresponding liability in the amount of the senior
debt, notwithstanding that the sole recourse of the senior lender may be
only to the property underlying the financing.
The following is a description of certain of the material terms of the
Loans:
Loan 101. Loan evidenced by a note in the original principal amount of
$1,080,000, secured by a first mortgage on multi-family residential property
located in Philadelphia, Pennsylvania, bearing interest at 12% per year. The
Company's purchase price for the Loan was $786,000. The Loan was in default
under its original terms at the time it was acquired by RAI in June 1992. The
forbearance agreement with respect to this Loan will terminate on October 31,
2003 when all principal, accrued interest and other amounts become due and
payable. Pursuant to the forbearance agreement, (i) the Company 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. The Loan is currently
performing under the forbearance agreement. Under the loan documents, the
Company (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 Company.
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% and a maximum rate of 14.5% (which, as of March 31,
resulted in an interest rate of 8.5%). The Company's purchase price for the
Loan was $1,140,000. The Loan was in default under its original terms at the
time it was acquired by RAI in May 1993. The forbearance agreement with respect
to this Loan will terminate on October 31, 2003 when all principal, accrued
interest and other amounts become due and payable. Pursuant to the forbearance
agreement, (i) the Company has agreed, subject to receiving specified minimum
monthly payments, to defer exercise of existing rights to proceed on the Loan,
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. The Loan is currently performing under the
forbearance agreement. Under the loan documents, the Company (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 Company.
36
<PAGE>
Loan 103. Loan evidenced by a note in the original principal amount of
$4,812,000, bearing interest at an annual rate of 0.5% over the Maryland
National Bank prime rate (which, as of March 31, resulted in an interest rate
of 9.0%). The Company's purchase price for the Loan was $1,676,294. The Loan
was in default under its original terms at the time it was acquired by RAI in
December 1994. The forbearance agreement with respect to this loan will
terminate on December 31, 2004 when all principal, accrued interest and other
amounts become due and payable. Pursuant to the forbearance agreement, (i) the
Company has agreed, subject to receiving specified minimum monthly payments, to
defer exercise of existing rights to proceed on the loan, 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. The Loan is currently performing under the
forbearance agreement. Brandywine currently acts as the property manager. The
Loan is subject to senior indebtedness held by an unaffiliated third party in
the form of a first mortgage loan in the amount of $873,309 on an office
property located in Arlington, Virginia. Under the loan documents, the Company
(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 Company.
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 March 31, resulted in an
interest rate of 7.5%). The Company's purchase price the Loan was $1,973,725.
The Loan was in default under its original terms at the time it was acquired by
RAI in July 1994. The forbearance agreement with respect to this loan will
terminate on August 31, 2004, when all principal, accrued interest and other
amounts become due and payable. Pursuant to the forbearance agreement, (i) the
Company has agreed, subject to receiving specified minimum monthly payments, to
defer exercise of existing rights to proceed on the Loan, 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. The Loan is currently performing under the
forbearance agreement. Brandywine currently acts as the property manager. 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 $1,096,019. Under the
loan documents, the Company (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 Company.
Loan 105. Loan evidenced by a note in the original principal amount of
$1,211,000, secured by a first mortgage on a multi-family residential property
located in Philadelphia, Pennsylvania, bearing interest at 12.5%. The Company's
purchase price for the Loan was $735,000. The Loan was in default under its
original terms at the time it was acquired by RAI in September 1994. The
forbearance agreement with respect to this loan terminates on September 2, 1999,
when all principal, accrued interest and other amounts become due and payable.
Pursuant to the forbearance agreement, (i) the Company has agreed, subject to
receiving specified minimum monthly payments, to defer exercise of existing
rights to proceed on the Loan, including the right of foreclosure, (ii) the
Company receives rents directly 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. The Loan is
currently performing under the forbearance agreement. In addition, under the
loan documents the Company (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 Company.
Loan 106. Loan evidenced by notes in the original aggregate principal
amount of $1,695,000, bearing interest at varying annual rates from 12% to 14%
per year. The Company's purchase price for the Loan was $749,928. The Loan was
in default under its original terms at the time it was acquired by RAI in
December 1994. The forbearance agreement with respect to this Loan terminates
on December 2, 1999 when all principal, accrued interest and other amounts
become due and payable. Pursuant to the forbearance agreement, (i) the Company
has agreed, subject to receiving specified minimum monthly payments, to defer
exercise of existing
37
<PAGE>
rights to proceed on the Loan, including the right of foreclosure, (ii) the
Company receives rents directly from the underlying property and (iii) the
borrower has agreed to retain a property management company acceptable to the
Company. The Loan is currently performing under the forbearance agreement.
Brandywine currently acts as the property manager. 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 $1,255,030. Under the loan documents, the
Company (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
Company.
Loan 107. Loan evidenced by a note in the original principal amount of
$600,000, secured by a first mortgage on a multi-family residential property
located in Philadelphia, Pennsylvania, bearing interest at an annual rate of
12%. The Company's purchase price for the Loan was $580,000. The Loan was in
default under its original terms at the time it was acquired by RAI in March
1996. The forbearance agreement with respect to this Loan terminates on March
28, 2001 when all principal, accrued interest and other amounts become due and
payable. Pursuant to the forbearance agreement, (i) the Company has agreed,
subject to receiving specified minimum monthly payments, to defer exercise of
existing rights to proceed on the Loan, including the right of foreclosure,
(ii) the Company receives rents directly from the underlying property and (iii)
the borrower has agreed to retain a property management company acceptable to
the Company. The Loan is currently performing under the forbearance agreement.
Brandywine currently acts as the property manager. Under the loan documents,
the Company (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 Company.
Loan 108. Wraparound participation in the amount of $4.9 million in a loan
evidenced by notes in the original aggregate principal amount of $40,906,000
bearing interest at an annual rate of 8% and secured by a first mortgage on an
office property located in Philadelphia, Pennsylvania. RAI is the holder of the
loan. The Company's participation interest is subject to a senior participation
held by an unaffiliated third party in the amount of $12,984,323 with interest
at an annual rate of 9%. The participation agreement with RAI was recently
amended to provide that (i) interest is payable on the Company's interest at an
annual rate of 10.85% and (ii) the Company is entitled to 5% of all collections
received by RAI with respect to the loan (less payments due pursuant to the
senior participation interest) in excess of $25.0 million but less than $34.0
million and 35% of all collections in excess of $34.0 million. The loan was in
default under its original terms at the time it was acquired by RAI in December
1996. The forbearance agreement with respect to this loan terminates on January
1, 2002 (or January 1, 2009 if the borrower exercises an option to extend), when
all principal, accrued interest and other amounts become due and payable.
Pursuant to the forbearance agreement, (i) the holder 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, and (ii) the borrower has
agreed to retain a property management company acceptable to the holder. The
Loan is currently performing under the forbearance agreement. Under the loan
documents, (i) the holder may record a deed to the property, which is held in
escrow, on the occurrence of certain defaults, (ii) the holder 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 $29.0 million but
increasing in 1999 and thereafter) and (ii) giving the holder a preferred
partnership interest entitling the holder to all net cash flow from the property
to specified limits (currently $10.0 million, but increasing in 1999 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
Company's purchase price for the Loan was $765,000. 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 $884,084. Under the loan documents, the Company
(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. Brandywine currently acts as property manager.
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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 Company.
Loan 110. Loan evidenced by a note in the original principal amount of
$4,627,000, bearing interest at annual rate of 18.0% until December 31, 2002
when all principal, accrued interest and other amounts become due and payable.
The Company's purchase price for the Loan was $1,500,817. 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 $3,172,022. Under the loan
documents, the Company (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. Brandywine currently acts as property
manager. 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 Company.
Loan 111. Participation in the amount of $4,880,000 in loans evidenced by
notes in the aggregate original principal amount of $7,380,000, bearing interest
at annual rates of 9.7% with respect to $6,080,000 of the original principal
amount and 11% with respect to $1,300,000 of the original principal amount. The
participation interest is subject to the senior secured interest of RAI in the
amount of $2.5 million. RAI is entitled to receive, from payments made on the
loan, interest at an annual rate of 10%. The Company may, at any time, purchase
RAI's senior interest for its then outstanding principal balance, plus accrued
interest thereon, if any. 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 Company 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, 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. See also "Investment Objectives and Policies -- Recent
Developments."
Loan 112. Loan evidenced by a note in the original principal amount of
$900,000 bearing interest at an annual 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 Company 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 Company. See also
"Investment Objectives and Policies -- Recent Developments."
Loan 113. Original loan evidenced by a note in the original principal
amount of $1,150,000 and bearing interest at 10% per year. The Company received
additional interest of $75,000 at the time of closing. The Loan is secured by a
first mortgage on a retail property used as a health club, an assignment of
leases and rents, and personal guaranties of the borrower's principals. The
Loan matures on March 1, 1999. In addition, the Company holds a deed-in-lieu of
foreclosure, which may be recorded upon default by the borrower and/or the
guarantors.
Loan 114. Participation in the amount of $10,000,000 in a loan evidenced by
notes in the original aggregate principal amount of $80,000,000 and bearing
interest at 15%. The loan was in default at the time of its acquisition in March
1998 shortly before the borrower's bankruptcy plan of reorganization became
final. Pursuant to such plan, the holder of the loan is entitled to all monthly
net cash flow from the property. The loan is secured by a first mortgage on an
office building. Title to the loan is held by RAI and the property is currently
managed by Brandywine. The participation interest is subject to RAI's repayment
to an unaffiliated third party of purchase money financing in the amount of
$55,000,000. RAI pledged the $80,000,000 loan to secure its repayment of the
acquisition loan. The Company's participation interest entitles it to receive
(i) a 10% return on its participation interest, subject only to debt service
payments on RAI's acquisition indebtedness and (ii) the first $10.0 million of
principal payments from the loan after RAI repays its acquisition indebtedness.
In addition, the Company received additional interest of $512,000. All tenants
of the property pay rents directly into an account owned by RAI but pledged to
RAI's acquisition lender and restricted from any other use until all payments
due under RAI's acquisition debt are paid. Because RAI's repayment of the
acquisition loan is secured by the $80,000,000 loan, the
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Company's participation interest could be materially impaired if RAI defaults
under its acquisition loan. The Company believes the possibility of a default
is remote because (i) the minimum rents collectible each month from the
underlying property exceed RAI's acquisition debt service by approximately 123%
and (ii) the self-effectuating method by which RAI's acquisition lender
receives its debt service payments.
Recent Developments
In January 1998, the Company completed the IPO, which, together with
500,000 Common Shares sold simultaneously to RAI (as the Company's sponsor),
resulted in the Company obtaining $46.5 million of net proceeds. As of March
31, 1998, the Company had utilized $31.75 million of these proceeds in the
acquisition or origination of 14 loans. In addition, the Company purchased a
property in Rohrerstown, Pennsylvania for $1,655,000. See "Investment
Objectives and Policies - Existing Investments." After the end of the first
quarter and through the date of this Prospectus, the Company originated one
additional loan, agreed to permit partial prepayment of Loan 111 and complete
repayment of Loan 112 and commenced negotiations with respect to two other
related loans. The following is a description of certain of the material terms
of these transactions:
Loan 115. Participation in the amount of $16,000,000 in a loan evidenced by
a note in the original principal amount of $17,300,000 bearing interest at the
annual rate of 10.8%. The Company is the named holder of the loan. RAI owns a
junior secured participation interest in the amount of $1,300,000 (the
"Subordinate Interest"). The loan matures on April 16, 1999, unless on or before
that date the borrower obtains senior financing in the amount of $12,000,000 and
the loan is converted into a wraparound loan, as described below. Interest
payments on the Company's participation interest, calculated at 11% per annum,
are due monthly. In addition, additional interest on the note is payable (or was
paid) to the Company as follows: (i) $160,000 was paid to the Company at the
time of closing and (ii) 80% of the net cash flow from the underlying property
(after payment of the monthly interest payments) is payable monthly (the other
20% is payable to the Subordinate Interest). Under the terms of the note,
$260,000 in additional interest is accrued annually and payable on the maturity
date; pursuant to the terms of the participation agreement between the Company
and RAI, this additional annual interest is for the account of the Subordinate
Interest. The loan is secured by a first mortgage on an apartment complex
located in Forestville, Maryland. Under the loan documents, the Company (i)
holds a deed-in-lieu of foreclosure with respect to the property, which may be
recorded upon default by the borrower, (ii) may replace the manager of the
property upon an event of default and (iii) receives all rents from the property
directly into a bank account controlled by the Company. An affiliate of the
borrower currently manages the property. On or before April 16, 1999, the
borrower is required to obtain new first mortgage financing in the amount of
$12,000,000; if the borrower fails to obtain such financing acceptable to the
Company, the loan matures and all principal and interest becomes due and
payable. In the event the borrower obtains such senior financing, the loan will
convert to a wraparound loan (the "Wrap Loan") whose maturity date is the
maturity date of the senior financing. The Company's interest in the Wrap Loan
will entitle it to: (i) monthly interest payments calculated at a rate per annum
equal to the rate of interest per annum on the senior financing plus 5.5%, (ii)
additional interest, payable monthly, in an amount equal to 62.5% of net cash
flow from the underlying property multiplied by 80% (the other 20% is payable to
the Subordinate Interest) and (iii) additional interest, payable at maturity, in
an amount equal to 50% of the difference between the appraised fair market value
of the property and $19,900,000. Simultaneously with the closing of the senior
financing and the conversion of the loan to the Wrap Loan, the borrower is
required to deliver to the Company a recordable, title-insured purchase option
entitling the Company to purchase the property in the event of a default under
the Wrap Loan for a purchase price equal to the outstanding balance on the
senior financing at the time of default. CB Commercial Real Estate Group, Inc.
conducted an appraisal of the property in April 1998, determining that its fair
market value is $19,500,000. (An appraisal is only an estimate of value and
should not be relied upon as a precise measure and realizable value. For a
description of appraisal methods, see note 6 to the table above under "--
Existing Investments -- Loans.") The Company financed the loan with a
$12,000,000 loan from an unaffiliated third party, bearing interest at an annual
rate equal to LIBOR plus 2.25% (the "Interim Loan"). The Interim Loan is secured
by a pledge of the $17,300,000 note and related loan documents. The Interim Loan
matures on May 25, 1999. The Company anticipates that the Interim Loan lender
will provide the senior financing to the borrower under the $17,300,000 loan on
or before the loan's April 1999 maturity date.
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Loans 111 and 112. In May 1998, the Company permitted the borrower to
partially prepay Loan 111 and to prepay Loan 112 in full on the following
terms: (i) with respect to Loan 111, the borrower paid to the Company the
$50,000 additional interest required upon repayment of the Loan, $176,250 in
satisfaction of the Company's participation in the appreciation on the
underlying property, all accrued and unpaid interest, and principal in the
amount of $5,380,000, and (ii) with respect to Loan 112, all outstanding
amounts under the Loan, including accrued and unpaid interest, were paid in
full plus an advance yield maintenance payment in the amount of $66,920. In
addition, the Company received a 5% participation interest in the distributions
made by the borrower to its partners (including fees payable to such partners
or their affiliates for services performed on behalf of the borrower) from
existing uses or future development of the real estate owned by the borrower,
comprised of the five properties which secured the original Loans and an
adjacent parcel. The borrower executed a new first mortgage note in the
original principal amount of $2,000,000 bearing interest at the rate of 15%.
The note matures on November 30, 2001 and is not prepayable. The Company
released the second mortgage liens on the properties underlying Loan 111 (but
retained its first mortgage lien) and released the first mortgage lien on the
property underlying Loan 112. The Company continues to hold a deed-in-lieu of
foreclosure with respect to Loan 111 and tenants of the property will pay rents
directly to the Company. RAI's senior participation interest in Loan 111 was
repaid in full at the time of the restructuring closing.
Proposed Loan 116. The Company is currently negotiating two related loans
in the aggregate principal amount of approximately $10,000,000. The proposed
terms of the loans, pursuant to the Company's written proposal dated March 19,
1998, are as follows. One loan, in the approximate amount of $2,400,000, will be
evidenced by a wraparound note in the original principal amount of approximately
$26,400,000 and secured by (i) a wraparound second mortgage on a shopping center
in Philadelphia, Pennsylvania, (ii) a second priority assignment of leases and
rents, and (iii) a recordable, title-insured purchase option entitling the
Company to purchase the property in the event of a default for a purchase price
equal to the outstanding balance on the senior loan at the time of the default
(the "Mortgage-Secured Loan"). An unaffiliated third party owns a first mortgage
loan on the property, in the original principal amount of $24,000,000. The other
loan, in the approximate amount of $7,600,000, will be secured by a pledge of
the stock of the Mortgage-Secured Loan borrowers (the "Stock-Secured Loan" and,
collectively with the Mortgage-Secured Loan, "Proposed Loan 116"). Proposed Loan
116 will bear interest at 11% per annum and will mature on April 1, 2007, when
all principal, accrued interest and other amounts will be due and payable.
Additional interest on Proposed Loan 116 will be payable to the Company as
follows: (i) advance interest in an amount equal to 1% of Proposed Loan 116 will
be due at the closing and (ii) at maturity or upon refinancing, an amount equal
to 25% of the difference between the then fair market value of the property and
$40,000,000 (but such Appreciation Interest cannot exceed $40,000,000 multiplied
by a compounded annual rate of 3% for each year, or part thereof, that Proposed
Loan 116 is outstanding) will be payable. The borrowers will be permitted to
repay either of the loans in cash at maturity or to sell the underlying property
to the Company for a purchase price equal to (i) the fair market value thereof
less (ii) the amount due under Proposed Loan 116 less (iii) the amount that
would otherwise be due pursuant to the Company's Appreciation Interest. The
purchase price may be paid, at the borrowers' discretion, in cash or by a
tax-deferred exchange of marketable securities of the Operating Partnership (or
an affiliate of the Operating Partnership) having a fair market value equal to
the purchase price for the stock of the Mortgage-Secured Loan borrowers. The
Company expects to close Proposed Loan 116 before the end of its second fiscal
quarter. However, there can be no assurance that Proposed Loan 116 will close at
all or that the terms thereof will not be modified.
Certain Legal Aspects of Real Property Loans and Investments
The Company primarily originates or acquires Loans and, to a lesser
extent, Property Interests. There are a number of legal considerations involved
in the origination and acquisition of Loans and Property Interests and the
foreclosure and sale of defaulted Loans. The following discussion provides
general summaries of certain legal aspects of real estate loans and real
property. Because such legal aspects are governed by applicable state law
(which laws vary from state to state), the summaries do not purport to be
complete, to reflect the laws of any particular state, or to encompass the laws
of all states. The summaries are not based upon opinions of counsel, either as
to the general content thereof or as to the laws of any particular state.
Accordingly, the summaries are qualified in their entirety by reference to the
applicable laws of the states where the property is located.
General. Each existing Loan is, and all future Loans 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,
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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" (except for the specific
discussion of mortgages in the following paragraph). As of March 31, 1998, nine
of the Company's Loans (80.2% of the Company's portfolio, by book value) were
secured by mortgages and five of the Loans were secured by deeds-in-lieu of
foreclosure. 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 agreements 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. As of March 31, 1998, six of the Company's
mortgage-secured Loans (10.5% of the Company's portfolio, by book value) were
first lien mortgage Loans, three were subordinate participation interests in
first mortgage loans (69.7% of the Company's portfolio, by book value) and five
(19.8% of the Company's portfolio, by book value) were subordinate Loans secured
by deeds-in-lieu of foreclosure. See "Investment Objectives and Policies --
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. A
deed-in-lieu of foreclosure is a deed, conveying title to the property, given
by the owner of the property to the lender. The lender has the right to record
the deed upon a loan default, thus acquiring title to the property without
instituting foreclosure proceedings. The mortgagee's authority under a
mortgage, the trustee's authority under a deed of trust, the grantee's
authority under a deed to secure debt and the grantee's authority under a
deed-in-lieu of foreclosure are governed by the express provisions of the
related instrument, the law of the state in which the real property is located,
certain federal laws and, in some deed of trust transactions, the directions of
the beneficiary. As of March 31, 1998, one of the mortgage-secured Loans (Loan
114) is secured by a deed of trust and five of the Loans are secured by
deeds-in-lieu of foreclosure.
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. As of
March 31, 1998, each of the mortgage-secured Loans is also secured by an
assignment of rents and leases. In addition, each of such Loans (except for
Loan 108) 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 the 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 Loans 101 through 110 and Loan 114 are not currently
generating income sufficient to pay the debt service under the original loan
terms. However, each of such properties is generating revenues sufficient to
pay debt service required under the forbearance arrangements. The remainder of
the Company's existing Loans are performing in accordance with their loan
terms.
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
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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 deed of trust to
the extent the junior mortgage or deed of trust so provides (subject, however,
to any inter-creditor agreements). The laws of certain states may limit the
ability of mortgagees or beneficiaries to apply the proceeds of hazard insurance
and partial condemnation awards to the secured indebtedness. In such states, the
mortgagor or trustor must be allowed to use the proceeds of hazard insurance to
repair the damage unless the security of the mortgage or 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 existing financings are located do not contain these
limitations.
Foreclosure. 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.
Two primary methods of foreclosing a mortgage are judicial foreclosure
(the method applicable to the mortgage-secured Loans existing as of March 31,
1998, except for Loan 114 which is secured by a deed of trust), involving court
proceedings, and non-judicial foreclosure pursuant to a power of sale granted
in the mortgage instrument (the method applicable to Loan 114). Other
foreclosure procedures are available in some states, such as strict
foreclosure, but they are either infrequently used or available only in limited
circumstances. Through March 31, 1998, the Company had not been involved in any
foreclosure proceedings.
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.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to a power of sale 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 generally
allows a non-judicial public sale to be conducted following a request from the
beneficiary/lender to the trustee to sell the property upon default by the
borrower and after notice of sale is given in accordance with the terms of the
mortgage and applicable state law. The borrower or junior lienholder may then
have the right, during a reinstatement period required in some states, to cure
the default by paying the entire actual amount in arrears (without regard to
the acceleration of the indebtedness), plus the lender' expenses incurred in
enforcing the obligation. In other states, the borrower or the junior
lienholder is not provided a period to reinstate the loan, but has only the
right to pay off the entire debt to prevent the foreclosure sale. Generally,
state law governs the procedure for public sale, the parties entitled to
notice, the method of giving notice and the applicable time periods. An action
to halt a non-judicial foreclosure might be brought if valid defenses to such
foreclosure exist.
United States courts have often applied 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 the court 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
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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.
In a majority of states (excluding Pennsylvania with respect to mortgages
on properties of the type underlying the Company's existing 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.
Many Loans acquired or originated by the Company (including 13 of the 14
Loans as of March 31, 1998) 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 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
44
<PAGE>
necessary to resolve the issue could be time-consuming, with resulting delays
in the lender's receipt of the rents. In addition, the Bankruptcy Code has been
amended to provide that a lender's perfected pre-petition security interest in
leases, rents and hotel revenues continues in the post-petition leases, rents
and hotel revenues, unless a bankruptcy court orders to the contrary "based on
the equities of the case."
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery, as a preferential transfer, of any payments made by the mortgagor
under the related mortgage loan to the owner of such mortgage loan. Payments on
long-term debt may be protected from recovery as preferences to the extent the
lender is oversecured or if they are payments in the ordinary course of
business made on debts incurred in the ordinary course of business. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
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 payment of prepayment fees or yield maintenance penalties. The
notes and mortgages of the existing Loans include either or both of late fees
or prepayment charges but do not have formal yield maintenance 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 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
45
<PAGE>
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. 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 Property Considerations -- 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.
The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of site assessment and remediation. A secured lender may be liable as an
"owner" or "operator" of a contaminated mortgaged property if agents or
employees of the lender have become sufficiently involved in the management of
such mortgaged property or the operations of the borrower. Such liability may
exist even if the lender did not cause or contribute to the contamination, and
whether the lender has actually taken possession of a mortgaged property
through foreclosure, deed-in-lieu of foreclosure or otherwise. The magnitude of
the CERCLA liability at any given contaminated site is a function of the
actions required to address adequately the risks to human health and the
environment posed by the particular conditions at the site. As a result, such
liability is not constrained by the value of the property or the amount of the
original or unamortized principal balance of any loans secured by the property.
Moreover, under certain circumstances, liability under CERCLA may be joint and
several; any liable party may be obligated to pay the entire remediation cost
regardless of its relative contribution to the contamination.
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.
Many states have environmental clean-up statutes similar to CERCLA, and
not all those statutes provide 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.
46
<PAGE>
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."
The cost of remediating environmental contamination at a property can be
substantial. 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
requires that a recent "Phase I" environmental site assessment report be
obtained or available for properties underlying any Loan or Property Interest.
The purpose of Phase I environmental assessments is to identify potential
environmental contamination that is made apparent from historical reviews of
the properties, reviews of certain public records, preliminary investigations
of the sites and surrounding properties, and screening for the presence of
hazardous substances, toxic substances and underground storage tanks.
Environmental site assessments vary considerably in their content and quality.
Even when adhering to good professional practices, environmental consultants
sometimes do not detect significant environmental problems. Accordingly, these
reports may not reveal all environmental liabilities or there may be material
environmental liabilities of which the Company is unaware. Nevertheless, in
assessing and addressing environmental risks in connection with commercial real
estate (including multifamily properties) it is generally helpful to conduct an
environmental site assessment of a property because it enables anticipation of
environmental problems and, if agreements are structured appropriately, can
allow a party to decline to go forward with a transaction. Depending on what
the Phase I assessment discloses, a Phase II environmental site assessment may
be performed.
Where a property has been the subject of a recent Phase I assessment
report which is addressed to the borrower, owner or another person, the Company
may accept such assessment report in lieu of requiring that another assessment
be performed. The Company normally requires 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 do not apply to certain types of residential (including
multifamily) first mortgage loans originated by certain lenders after March 31,
1980. Title V authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision that
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits and/or to
limit discount points or other charges. The states in which the properties
underlying the existing Loans are located do not have these limitations.
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, owners, landlord, or other applicable person.
In addition to imposing a possible financial burden on the borrower in its
capacity as owner or landlord, the ADA may also impose such requirements on a
foreclosing lender who succeeds to the interest of the borrower, owner or
landlord. Furthermore, since the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
lender who is financially more capable than the borrower of complying with the
requirements of the ADA may be subject to more stringent requirements that
those to which the borrower is subject.
47
<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 for its
taxable year ending December 31, 1998. RAIT will have a perpetual life unless
terminated by the affirmative vote of at least two-thirds of the outstanding
shares entitled to vote. The principal executive offices of the Company are
located at 1845 Walnut Street, 10th Floor, Philadelphia, Pennsylvania 19103.
The Company's telephone number is (215) 861-7900.
Management
The Company is self-administered and self-managed with respect to its
investments in Loans and Property Interests. While the Company supervises the
management of the properties underlying its Loans and Property Interests, the
leasing, operational and tenant improvement services are provided by
third-party managers, including Brandywine. The Company internally services its
Loans, 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 and Brandywine. 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 56 Chairman, Chief Executive Officer and Trustee
Jay J. Eisner 41 President and Chief Operating Officer
Jay R. Cohen 57 Executive Vice President
Ellen J. DiStefano 32 Chief Financial Officer
Jonathan Z. Cohen(1) (3) 27 Secretary and Trustee
Jerome S. Goodman(2) (4) 62 Trustee
Joel R. Mesznik(2) (4) 51 Trustee
Daniel Promislo(2) (3) (4) 64 Trustee
Jack L. Wolgin(2) (3) 81 Trustee
</TABLE>
- ------------
(1) Trustee nominated by RAI
(2) Independent Trustee
(3) Member of Audit Committee
(4) Member of Compensation Committee
All of the trustees are members of the Investment Committee.
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 $1.3 billion in total assets as of March 31, 1998, 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, Inc. and Life Technologies, Inc. Mrs. Cohen
is married to Edward E. Cohen, Chairman and Chief Executive Officer of RAI.
Jonathan Z. Cohen, a trustee and Secretary of the Company, is Mrs. Cohen's son,
and Jay R. 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 and Chief Operating Officer of the Company. Mr. Eisner
also served as Secretary of the Company from August 1997 to February 1998. 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
48
<PAGE>
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, as RAI's nominee, and was elected Secretary of the Company in
February 1998. From 1994 to present, Mr. Cohen has been a founder and the Chief
Executive Officer of Blue Guitar Films, Inc., a New York based feature film
production company. Mr. Cohen received his J.D. from the American University
with honors in May 1995 and his B.A. from the University of Pennsylvania. From
1989 to 1991, Mr. Cohen was President and founder of a group of neighborhood
advertising supplements/magazines called "In Walking Distance." Mr. Cohen is
the son of Betsy Z. Cohen.
Jerome S. Goodman was elected 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 is a director of Aetna, Inc.
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 has been Of Counsel (from 1994 to date) and a partner
(from 1977 to 1994) of Wolf, Block, Schorr and Solis-Cohen, a Philadelphia,
Pennsylvania law firm, principally involved in corporate and real estate
finance matters. He currently is also President and a director of Historic
Documents Co. and Historical Souvenir Co. (of which he is also a founder),
which manufacture souvenirs of American history, and a director of U.S.
Physicians, Inc., a physicians' practice management company. From 1994 to date
he has been a director, and from 1996 to 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),
49
<PAGE>
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, 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 is currently being 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>
Long-term
Annual Compensation Compensation
---------------------------------------------- -------------
Securities
Name and Other annual underlying
Principal Position Salary Bonus compensation options(2)
- ---------------------------------- ----------- --------- -------------------- -------------
<S> <C> <C> <C> <C>
Betsy Z. Cohen ................... $250,000 (1) $ -- 225,000
Chairman and Chief
Executive Officer
Jay J. Eisner .................... 150,000 (1) -- 75,000
President and Chief
Operating Officer
Jay R. Cohen ..................... 200,000 (1) 4,200 (3) 50,000
Executive Vice
President
Ellen J. DiStefano ............... 125,000 (1) 16,400 (3) 35,000
Chief Financial Officer .........
</TABLE>
- ------------
(1) Bonuses may be paid at the discretion of the Board of Trustees. No such
bonuses have been provided for as of the date hereof.
(2) See "-- Option Plan" below.
(3) 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. See "Risk Factors -- Other Investment
Considerations -- Importance of Key Personnel." 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.
The 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.
50
<PAGE>
Option Plan
The Company has adopted a share option plan (the "Option Plan"), which
provides 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 450,000 shares. The
purpose of the Option Plan is to provide a means of performance-based
compensation in order to provide incentive for the Company's key employees.
The Option Plan provides for a term of ten years, and vesting of options in
equal increments over the four years following the date of grant. The Company
has issued 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 and has issued options to acquire 500
shares to each of the trustees other than Mrs. Cohen. All such options were
granted immediately following completion of the IPO at the public offering price
per share of $15.00.
Employment Agreements
The Company has entered 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 provides she will devote only such time to
the Company as is reasonably required to fulfill her duties. The agreement has
a term of one year which is automatically extended so that, on any day that 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 contained deliberate
negligent performance or non-performance of duties) or disability of Mrs. Cohen
for more than an aggregate of 180 days during any 365 days period. The
agreement may be terminated by Mrs. Cohen upon 45 days notice for "good reason"
(generally, relocation of the Company out of the Philadelphia area, a change in
control of the Company, a substantial change in Mrs. Cohen's duties, the
Company's failure to continue coverage under benefit plans or a material breach
of the agreement by the Company), subject to a 30-day cure period. In the event
of a termination other than for cause, Mrs. Cohen (or her estate) will receive
a lump sum benefit equal to her "average compensation." As used in the
agreement, "average compensation" means the average of Mrs. Cohen's
compensation (including the annualized current year's compensation) in the
three most highly compensated years during the previous five years, except that
if she has been employed for less than three years, it means the highest annual
compensation received during the period. In addition, upon termination, all
options to acquire Common Shares held by Mrs. Cohen vest on the later of the
effective date of termination or six months after the options were granted.
Except as to compensation, number of option shares, and the requirement
that Mr. Eisner devote his full-time services to the business and affairs of
the Company, Mr. Eisner's employment agreement, including the formula for
calculating the termination benefit, is substantially similar to that of Mrs.
Cohen.
Indemnification of Trustees and Executive Officers
The 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. The Company has
entered into indemnification agreements with its trustees and officers
containing similar provisions. See "Certain Provisions of Maryland Law and of
the Declaration of Trust and Bylaws -- Indemnification; Limitation of Trustees'
and Officers' Liability" and "-- Indemnification Agreements."
51
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of Common Shares
owned, as of May 31, 1998, by (a) each person who, to the knowledge of the
Company, is the beneficial owner of 5% or more of the outstanding Common
Shares, (b) each of the Company's present trustees, (c) each of the Company's
executive officers, and (d) all of the Company's present executive officers and
trustees as a group. This information is reported in accordance with the
beneficial ownership rules of the Commission under which a person is deemed to
be the beneficial owner of a security if that person has or shares voting power
or investment power with respect to such security or has the right to acquire
such ownership within 60 days. Common Shares issuable pursuant to options or
warrants are deemed to be outstanding for purposes of computing the percentage
of the person or group holding such options or warrants but are not deemed to
be outstanding for purposes of computing the percentage of any other person.
See note (3) below, for information concerning outstanding options.
<TABLE>
<CAPTION>
Common Shares
-------------------------------------
Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
- ---------------------------------------------------------------- ----------------------- -----------
<S> <C> <C>
Trustees:(1)
Betsy Z. Cohen .............................................. 33,433 (2) 1.0%
Jonathan Z. Cohen .............................................. 500 (3) *
Jerome S. Goodman .............................................. 1,500 (3) *
Joel R. Mesznik ................................................ 500 (3) *
Daniel Promislo ................................................ 1,500 (3) *
Jack L. Wolgin ................................................. 3,500 (3) *
Executive Officers:(1)
Jay J. Eisner .................................................. 2,200 *
Jay R. Cohen ................................................... 11,200 *
Ellen J. DiStefano ............................................. 1,000 *
All trustees and executive officers as a group (9 persons): 55,333 1.7%
Other owners of 5% or more of outstanding Common Shares(4)
Resource America, Inc. ......................................... 500,000 15.0%
Kramer Spellman, L.P. .......................................... 232,000 (5) 7.0%
Wellington Management Company. LLP ............................. 427,600 (6) 12.8%
FBR Asset Investment Corporation................................ 300,000 (7) 9.0%
</TABLE>
- ------------
* Less than 1%.
(1) The address for each trustee and executive officer is 1845 Walnut Street,
10th floor, Philadelphia, Pennsylvania 19103.
(2) Includes 18,997 shares owned by Mrs. Cohen's spouse, Edward Cohen.
(3) Includes 500 shares issuable to each trustee, other than Mrs. Cohen, upon
exercise of options granted under the Option Plan.
(4) Includes shares held by entities managed by the named persons. The address
for Resource America, Inc. is 1521 Locust Street, Philadelphia,
Pennsylvania 19102; the address for Kramer Spellman, L.P. is 2050 Center
Avenue, Suite 300, Fort Lee, New Jersey 07024, the address for Wellington
Management Company, LLP is 75 State Street, Boston, Massachusetts 02109
and the address for FBR Asset Investment Corporation is 1001 19th Street
North, Arlington, Virginia 22209.
(5) Information based on Schedule 13G of Kramer Spellman, L.P. dated May 15,
1998. Kramer Spellman, L.P. has shared voting and dispositive power with
respect to all of such shares with Orin S. Kramer, its general partner.
(6) Information based on Schedule 13G of Wellington Management Company, LLP
dated March 9, 1998. Wellington Management Company, LLP has shared voting
power with respect to 414,900 of such shares, and shared dispositive power
with respect to all of such shares, with the record owners of such shares
for whom Wellington Management Company, LLP acts as investment adviser.
(7) FBR Asset Investment Corporation is an externally managed REIT. The
manager of FBR Asset Investment Corporation (Friedman, Billings, Ramsey
Investment, Inc.) is a wholly owned subsidiary of FBR.
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PRICE RANGE OF COMMON SHARES AND DISTRIBUTION POLICY
Price Range of Common Shares
The Common Shares are traded on the Amex under the symbol "RAS." The
following table sets forth the high and low sale prices of the Common Shares,
as reported by Amex, on a quarterly basis since the inception of trading
(January 9, 1998):
Fiscal 1998 High Low
- --------------------------------- ----------- -----------
Second Quarter
(through June 4, 1998) ......... $ 19.13 $ 17.19
First Quarter (from
inception of trading) .......... 19.50 15.00
Distribution Policy
In order to maintain its status as a REIT, 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 Company intends to distribute not less than the amounts
required by the Code for qualification as a REIT. 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.
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 Loans and Property Interests. The Company may, however,
under certain circumstances, make a distribution of principal. Such
distributions, if any, will be made at the discretion of the Board of Trustees.
It is anticipated that distributions generally will be taxable as ordinary
income, although (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."
The Company paid a dividend of $.27 per share (none of which constituted a
return of capital) to shareholders of record on March 25, 1998, with respect to
its first quarter of operations. The Company has approved a dividend of $.48
per share (none of which constitutes a return of capital), payable to
shareholders of record on June 22, 1998, with respect to the second quarter of
1998. Because it is not anticipated that this Offering will close before June
22, 1998, purchasers in this Offering will not participate in such dividend.
They will, however, be entitled to receive dividends declared and paid by the
Company in subsequent quarters. The Company intends to make future
distributions quarterly.
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CAPITALIZATION
The capitalization of the Company, as of March 31, 1998, and as adjusted
to reflect the sale of the Common Shares offered hereby at an assumed offering
price of $17.875 per share (the closing price on June 4, 1998), is as follows:
<TABLE>
<CAPTION>
Actual As Adjusted(1)
---------------- ---------------
<S> <C> <C>
Senior Indebtedness ........................................... $ 18,708,681 $ 18,708,681
Shareholder's Equity
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;
3,333,434 shares outstanding; 6,133,434 shares outstanding, as
adjusted(2) .................................................. 33,334 61,334
Additional paid-in capital .................................... 44,082,579 90,726,829
Accumulated Deficit ........................................... (4,132) (4,132)
------------ ------------
Total Shareholder's Equity ................................. $ 44,111,781 $ 90,784,031
------------ ------------
Total Capitalization ....................................... $ 62,820,462 $109,492,712
============ ============
</TABLE>
- ------------
(1) Stated after deducting expenses of the Offering, estimated to be $625,000,
payable by the Company.
(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an additional 420,000 Common Shares, and excludes 141,667 shares
issuable pursuant to warrants granted to FBR in connection with the IPO
and 387,500 shares issuable to officers and trustees of the Company
pursuant to employee options.
As of May 31, 1998, there were 3,333,434, Common Shares outstanding, owned
by approximately 490 beneficial owners.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Overview
The Company's principal business objective is to generate income for
distribution to its shareholders from a combination of interest, rents and
distributions in respect of rents from both Loans and Property Interests. The
Company commenced operations on January 14, 1998 upon the conclusion of the
IPO. The IPO resulted in net proceeds for the Company of approximately $46.5
million. Since the commencement of operations, the Company has been in the
process of building its investment portfolio through investment of these
proceeds.
Liquidity and Capital Resources
At the conclusion of the IPO, the Company had approximately $44.0 million
available for investment, excluding $500,000 held as working capital reserves.
The Company utilized $20.6 million immediately following the IPO to acquire the
Initial Investments from RAI and to acquire certain senior lien interests
related thereto. Following the acquisition of the Initial Investments, and
through March 31, 1998, the Company entered into two additional Loan
transactions, providing funding of approximately $11.2 million, and purchased
one Property Interest at a cost of approximately $1.7 million. On March 31,
1998, the Company paid dividends to its shareholders aggregating approximately
$900,000. At March 31, 1998, the Company had approximately $10.5 million in
funds available for investment. All of such funds were temporarily invested in
a money-market account with JeffBanks that the Company believes had a high
degree of liquidity and safety. See "Conflicts of Interest."
Results of Operations
The Company had average earning assets for the quarter ended March 31,
1998 of $31.6 million, including $5.5 million of average earning assets
invested in a bank money-market account. The interest rate on the money-market
account is substantially below interest rates the Company seeks from its Loans
or Property Interests.
The Company's primary source of income for the period was interest income
from its earning assets, of which $1,126,000 was derived from Loans and
$249,000 from the money-market account. The yield on average earning loan
assets was 14% for the period, while the yield on average earning money-market
account assets was 5.3%. The Company also derived $50,000 of income from a
subordination fee which resulted from the restructuring of one of its
financings and $7,000 from rents from its one Property Interest. Included in
interest income is approximately $110,000 of income recognized on $587,000 of
additional interest received in advance, $5,000 of amortization of original
issue discount, and $52,000 of accretion of loan discount.
Nine of the Company's purchased Loans and two of the loans in which the
Company has purchased a participation are in default with respect to their
terms as originally underwritten; however, each of these Loans is subject to a
forbearance agreement or other contractual arrangement. During the period
ending March 31, 1998, all payments under the agreements were timely made and
all borrowers were otherwise in full compliance with the terms of the
forbearance agreements. The remaining three Loans in the Company's portfolio
are performing in accordance with their terms as originally underwritten by the
Company and were current as to payments as of March 31, 1998.
The Company incurred expenses of $491,000 during the quarter ended March
31, 1998, consisting primarily of $137,000 in compensation expense and $320,000
in interest expense. Interest expense relates to interest payments made on
senior indebtedness encumbering properties underlying the Company's Loans. The
Company anticipates that compensation expense and interest expense will
increase in the second quarter to reflect full period operations, increases in
the size of the Company's Loan portfolio and an increase in personnel required
by full operations.
Recent Developments
Since the close of the first quarter, the Company acquired a $16.0 million
participation interest in a $17.3 million loan. In addition, the Company
permitted partial prepayment of Loan 111 and complete prepayment of
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<PAGE>
Loan 112. The Company is currently negotiating two related loans in the
aggregate principal amount of approximately $10.0 million. These loans will be
secured by retail property in Philadelphia, Pennsylvania and by a pledge of all
of the stock of the single-purpose corporations that own the property. The
Company anticipates that these loans will close before the end of its second
quarter. See "Investment Objectives and Policies -- Recent Developments."
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
General
The Declaration of Trust authorizes the issuance of up to 200,000,000
Common Shares and 25,000,000 Preferred Shares. Upon completion of this
Offering, 6,133,434 Common Shares will be issued and outstanding (6,553,434
Common Shares if the Underwriters exercise their over-allotment option in full)
and no Preferred Shares will be issued and outstanding. An additional 591,667
Common Shares are reserved for issuance in connection with the Option Plan and
warrants issued to FBR in connection with the IPO.
Common Shares
Each outstanding Common Share entitles the holder to one vote on all
matters presented to shareholders for a vote, including the election of
trustees, and, except as otherwise required by law or as provided in any
resolution adopted by the Board of Trustees with respect to any other class or
series of shares establishing the designation, powers, preferences and
relative, participating, optional or other special rights and powers of such
series, the holders of such shares possess the exclusive voting power, subject
to the provisions of the Declaration of Trust regarding the ownership of Common
Shares in excess of the Ownership Limitation or as otherwise may be permitted
by the Board of Trustees, as described below. Holders of Common Shares 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. 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. The Company declared a dividend of $.27 per share with respect
to the first quarter of fiscal 1998, payable to shareholders of record on March
25, 1998, and a dividend of $.48 per share with respect to the second fiscal
quarter of fiscal 1998, payable to shareholders of record on June 22, 1998. See
"Price Range of Common Shares and 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 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
56
<PAGE>
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. The Ownership Limitation may deter third parties from
seeking control of, or seeking to acquire, the Company. See "Risk Factors --
Legal and Tax Risks -- Ownership Limitation May Restrict Business Combination
Opportunities" and "Description of Shares of Beneficial Interest --
Restrictions on Ownership and Transfer."
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 12 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 Shares and Preferred
Shares which are intended to assist the Company in complying with these
requirements. The Ownership Limitation set forth in the 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 8.3% 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 8.2% of the outstanding Common Shares at the
conclusion of the Offering; 7.6% if the Underwriters exercise their
over-allotment option), or (ii) more than 9.8% of the number of outstanding
Preferred Shares of any class or series. The constructive ownership rules are
complex, and may cause shares owned actually or constructively by a group of
related individuals and/or entities to be owned constructively by one
individual or entity. As a result, the acquisition or ownership of less than
8.3% 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 8.3% 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 Declaration of Trust or as otherwise established by the Board
of Trustees. The Board of Trustees may, but in no event will be required to,
waive the Ownership Limitation with respect to a particular shareholder if it
determines that such ownership will not jeopardize the Company's status as a
REIT and the Board of Trustees otherwise decides such action would be in the
best interest of the Company. As a condition of such waiver, the Board of
Trustees may require an opinion of counsel satisfactory to it or undertakings
or representations from the applicant with respect to preserving the REIT
status of the Company. No such waiver or opinion has been required with respect
to RAI's ownership rights, which are established as part of the Declaration of
Trust, nor with respect to the number of Common Shares owned by Wellington
Management Company, LLP, which ownership was consented to by the Company.
Wellington Management Company, LLP holds such shares as investment manager for
several clients, none of whose beneficial ownership, individually, exceeds the
Ownership Limitation.
57
<PAGE>
The Declaration of Trust further prohibits any person from actually or
constructively owning Common Shares or Preferred Shares that would (i) cause
the Company to be "closely held" under Section 856(h) of the Code, (ii) cause
the Company to own constructively 10% or more of the ownership interests in a
tenant of the Company's real property (within the meaning of Code section
856(d)(2)(B)), or (iii) cause the Company's shares to be owned by fewer than
100 persons. Any person, including RAI, who acquires or attempts or intends to
acquire actual or constructive ownership of Common Shares or Preferred 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
Shares or Preferred Shares (including transfers by RAI) or any other event
would (i) result in any person violating the Ownership Limitation or such other
limit as provided in the Declaration of Trust, or as otherwise permitted by the
Board of Trustees, (ii) result in the Company being "closely held," (iii)
result in the Common Shares being owned by fewer than 100 persons, or (iv)
cause the Company to own constructively 10% or more of the ownership interests
in a tenant of its real property, the transfer will be void and of no force or
effect with respect to the purported transferee (the "Prohibited Transferee")
as to that number of shares in excess of the Ownership Limitation or such other
limit, and the Prohibited Transferee will acquire no right or interest (or, in
the case of any event other than a purported transfer, the person or entity
holding record title to any such excess shares (the "Prohibited Owner") shall
cease to own any right or interest) in the excess shares. Excess shares will be
transferred automatically, by operation of law, to a trust, the beneficiary of
which will be a qualified charitable organization selected by the Company (the
"Beneficiary"). The automatic transfer will be deemed to be effective as of the
close of business on the business day 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 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 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 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
58
<PAGE>
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. See "Risk Factors -- Ownership Limitation May Restrict
Business Combination Opportunities."
Under the Declaration of Trust, every owner of a specified percentage (or
more) of the outstanding Common Shares must file a completed questionnaire with
the Company containing information regarding his ownership of such shares, as
set forth in the Treasury Regulations. Under current Treasury Regulations, the
percentage will be set between 0.5% and 5.0%, depending upon the number of
record holders of the Common Shares. In addition, each shareholder is required,
upon demand, 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 Declaration of Trust or as
otherwise permitted by the Board of Trustees.
Dividend Reinvestment Plan
The Company plans to implement a dividend reinvestment and share purchase
plan whereby shareholders may automatically reinvest their dividends, and make
voluntary cash investments, 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 is American Stock
Transfer & Trust Company.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE DECLARATION OF TRUST AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law
relating to REITs and of the 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.
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 of the
remaining trustees, provided that Independent Trustees shall nominate
replacements for vacancies in Independent Trustee positions.
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<PAGE>
The Declaration of Trust provides that a trustee may be removed with or
without cause by the affirmative vote of at least two-thirds of the votes
entitled to be cast in the election of trustees. This provision, when coupled
with the provision in the Bylaws authorizing the Board of Trustees to fill
vacant trusteeships, precludes the Company's shareholders, as a practical
matter, from removing incumbent trustees and filling the vacancies created by
such removal with their own nominees.
Business Combinations
Under the Maryland General Corporation Law ("MGCL"), as applicable to
REITs, certain "business combinations" (including a merger, consolidation,
share exchange, or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between the Company and any person who
beneficially owns, directly or indirectly, 10% or more of the voting power of
the Company's shares, or an affiliate of the Company who, at any time within
the previous two years was the beneficial owner of 10% or more of the voting
power of the Company's then outstanding shares (an "Interested Shareholder") or
an affiliate of an Interested Shareholder are prohibited for five years after
the most recent date on which the Interested Shareholder became an Interested
Shareholder. Thereafter, a proposed business combination must be recommended by
the Board of Trustees and approved by the affirmative vote of at least (i) 80%
of the votes entitled to be cast by holders of outstanding voting shares and
(ii) two-thirds of the votes entitled to be cast by holders of outstanding
voting shares excluding shares held by the Interested Shareholder unless, among
other conditions, the Company's shareholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Shareholder for its
shares. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the Board of Trustees prior to
the time that the Interested Shareholder becomes an Interested Shareholder. The
Company has "opted out" of the business combination provisions of the MGCL.
There can be no assurance that the Board of Trustees will not determine to
rescind such opting out.
Control Share Acquisitions
The MGCL, as applicable to REITs, provides that control shares (as defined
below) of the Company acquired in a control share acquisition (as defined
below) have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares
owned by the acquiror or by officers or trustees who are employees of the
Company. "Control Shares" are voting shares which, if aggregated with all other
such shares previously acquired by the acquiror, or in respect of which the
acquiror is able to exercise or direct the exercise of voting power (except
solely by revocable proxy), would entitle the acquiror to exercise voting power
in electing trustees within one of the following ranges of voting power: (i)
one-fifth or more but less than one-third; (ii) one-third or more but less than
a majority; or (iii) a majority of all voting power. Control Shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained shareholder approval. A "Control Share Acquisition"
means the acquisition of Control Shares, subject to certain exceptions. 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
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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 contain a
provision exempting from the Control Share Acquisition statute any and all
acquisitions by any person of the Common Shares 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 the Declaration of Trust and Bylaws
The Declaration of Trust may not be amended without the affirmative vote
of at least a majority of the shares entitled to vote on the matter except that
the sections of the Declaration of Trust relating to the trustees, the
Ownership Limitation, amendments to the Declaration of Trust and the duration
and termination of the Company may not be amended without the affirmative vote
of two-thirds of the shares entitled to vote on the matter. In addition, the
Declaration of Trust may be amended by a two-thirds vote of the Board of
Trustees, without any action by the shareholders of the Company, to allow the
Company to qualify, or continue its qualification, as a REIT under the Code or
Maryland law and, by a majority vote of the Board of Trustees, to increase or
decrease the aggregate number of shares of beneficial interest or the number of
shares of any class of shares of beneficial interest that the Company has the
authority to issue. See "Description of Shares of Beneficial Interest -- Common
Shares." The Bylaws may be amended or altered only by the Board of Trustees.
Meetings of Shareholders
The Declaration of Trust provides for annual meetings of shareholders,
commencing in 1998, to elect the Board of Trustees and transact such other
business as may properly be brought before the meeting. Special meetings of
shareholders may be called by the Chairman, the Chief Executive Officer, the
President or the Board of Trustees and shall be called at the request in
writing of the holders of 50% or more of the outstanding shares entitled to
vote.
Advance Notice of Trustee's Nominations and New Business
The 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 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 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
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the Company and at the request of the Company, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a trustee, director, officer, partner or otherwise, from
and against any claim or liability to which such person may become subject or
which such person may incur by reason thereof. The Bylaws require the Company
to indemnify each trustee or officer who has been successful, on the merits or
otherwise, in the defense of any proceeding to which he is made a party by
reason of his service in the foregoing capacities.
Maryland law permits a Maryland REIT to indemnify and advance expenses to
its trustees officers, employees and agents to the same extent as permitted by
the MGCL for directors and officers of Maryland corporations. The MGCL permits
a corporation to indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by them in connection with any proceeding to which
they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the
director or officer was material to the matter giving rise to the proceeding
and (i) was committed in bad faith or (ii) was the result of active and
deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. However, a Maryland corporation
may not indemnify for an adverse judgment in a suit by or in the right of the
corporation. In accordance with the MGCL, the Bylaws require the Company, as a
condition to advancing expenses, to obtain (i) a written affirmation by the
trustee or officer of his or her good faith belief that he or she 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 or her 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 has entered into indemnification agreements with each of its
officers and trustees. The indemnification agreements 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 the
Declaration of Trust and Bylaws
The provisions of the Declaration of Trust regarding the removal of
trustees and the restrictions on the transfer of shares, and the advance notice
provisions of the Bylaws, could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company that might
involve a premium price for holders of Common Shares or that they otherwise may
believe to be desirable. Also, if the resolution of the Board of Trustees
opting out of the business combination statute or the provisions of the Bylaws
electing not to be governed by the control share acquisition statute are
rescinded, such statutes could have a similar effect.
Maryland Asset Requirements
To maintain its qualification as a Maryland real estate investment trust,
Maryland law requires at least 75% of the value of the Company's assets to be
held, directly or through other entities, in real estate assets, mortgages or
mortgage related securities, government securities, cash and cash equivalent
items, including high-grade short term securities and receivables. Maryland law
also prohibits the Company from using or applying land for farming,
agricultural, horticultural or similar purposes.
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COMMON SHARES AVAILABLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 6,133,434 Common
Shares outstanding (6,553,434 Common Shares if the Underwriters exercise their
over-allotment option). All of such Common Shares will be available for resale
to the public 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 ("Rule 144"). In connection with the IPO, RAI
(which purchased 500,000 Common Shares as sponsor of the Company) and certain
persons affiliated or associated with RAI, Brandywine and their affiliates (who
purchased 124,280 Common Shares in the IPO) agreed not to offer, sell or
otherwise dispose of any of their Common Shares until July 13, 1998 without the
prior written consent of FBR.
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 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. See
"Operating Partnership -- Redemption Rights."
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted shares from the
Company or any "affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding Common Shares or the average weekly
trading volume of the Common Shares during the four calendar weeks preceding
the date on which notice of the sale is filed with the Commission. Sales under
Rule 144 also are subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. If two years have elapsed since the date of acquisition of restricted
shares from the Company or from any affiliate of the Company, and the acquiror
or subsequent holder thereof is deemed not to have been an affiliate of the
Company at any time during the three months preceding a sale, such person would
be entitled to sell such shares in the public market under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
There are currently outstanding management options under the Option Plan,
and warrants issued to the FBR in connection with the IPO, to purchase an
aggregate of 529,167 Common Shares, exercisable at the IPO price of $15.00 per
share. The management options (covering 387,500 Common Shares) become
exercisable 25% per year commencing on January 14, 1999; all of the warrants
(covering 141,667 Common Shares) become exercisable on January 14, 1999.
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 is a Delaware limited partnership, the General
Partner of which is RAIT General, Inc., and the Initial Limited Partner of
which is RAIT Limited, Inc., each of which is a wholly-owned subsidiary of RAIT.
Because RAIT indirectly owns 100% of the partnership interests in the Operating
Partnership, the Operating Partnership will be disregarded as a separate entity
from RAIT for federal income tax purposes until a third party is admitted as a
partner of the Operating Partnership. The Company organized the Operating
Partnership in order to provide future sellers of assets with the opportunity
to transfer those assets to the Company in a tax-deferred exchange. The
Operating Partnership Agreement currently does not contain many of the
provisions described below. Instead, the following summary of the Operating
Partnership Agreement, and the descriptions of certain provisions thereof set
forth elsewhere in this Prospectus, describe certain provisions that likely
will appear in the Operating Partnership Agreement when third-party sellers of
assets who wish to achieve tax deferral are admitted as partners of the
Operating Partnership. The provisions described in this summary, however, may
not appear in the Operating Partnership Agreement that ultimately is executed.
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General
Pursuant to the Operating Partnership Agreement, the General Partner, as
the sole general partner of the Operating Partnership, has 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") 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. As a result
of its ownership of the General Partner, RAIT will control the assets and
business of the Operating Partnership. However, it is anticipated that any
amendment to the Operating Partnership Agreement that would (i) convert a
Limited Partner's interest in the Operating Partnership into a General Partner
interest; (ii) increase the liability of a Limited Partner under the Operating
Partnership Agreement; (iii) alter a Partner's rights to distributions; (iv)
alter or modify any aspect of a Partners' rights with respect to redemption of
his interest; or (v) cause the early termination of the Operating Partnership
(other than as set forth in the Operating Partnership Agreement) will require
the consent of the Limited Partners affected thereby.
General Partner Not to Withdraw
It is anticipated that the General Partner will not be able to withdraw
voluntarily from the Operating Partnership or transfer or assign its interest
in the Operating Partnership unless (i) the transaction in which such
withdrawal or transfer occurs results in the liquidation of the Operating
Partnership or (ii) the Limited Partners, by majority vote, elect to continue
the Operating Partnership and to appoint a successor General Partner.
Capital Contribution
RAIT has capitalized the Operating Partnership by contributing the net
proceeds of its initial public offering to the Operating Partnership, and will
contribute the net proceeds of this Offering to the Operating Partnership. The
General Partner holds a 1% general partnership interest in the Operating
Partnership, and the Initial Limited Partner holds a 99% limited partnership
interest in the Operating Partnership. The General Partner and Initial Limited
Partner are wholly-owned subsidiaries of RAIT through which RAIT currently owns
100% of the Units in the Operating Partnership.
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, it is anticipated that the
General Partner will be authorized to cause the Operating Partnership to issue
Units for less than fair market value if the Company has concluded in good
faith that such issuance is in the best interest of the Company and the
Operating Partnership. Under the Operating Partnership Agreement, each of the
General Partner and the Initial Limited Partner is obligated to contribute the
net proceeds of any future share offering by RAIT as additional capital to the
Operating Partnership in exchange for additional Units. Upon such contribution,
the General Partner's and the Initial Limited Partner's percentage interests in
the Operating Partnership would be increased on a proportionate basis based
upon the amount of such additional capital contributions. The percentage
interest of the Limited Partners (other than the Initial Limited Partner) would
be decreased on a proportionate basis in the event of additional capital
contributions by the General Partner and the Initial Limited Partner. In
addition, if the General Partner and the Initial Limited Partner were to
contribute additional capital to the Operating Partnership, the General Partner
would revalue the property of the Operating Partnership to its fair market
value (as determined by the General Partner) and the capital accounts of the
partners would be adjusted to reflect the manner in which the unrealized gain
or loss inherent in such property (that has not been reflected in the capital
accounts previously) would be allocated among the partners under the terms of
the Operating Partnership Agreement as if there were a taxable disposition of
such property for such fair market value on the date of the revaluation.
Redemption Rights
It is anticipated that the Limited Partners (other than the Initial
Limited Partner) will have the right (the "Redemption Rights") to cause the
Operating Partnership to redeem their Units for cash or, at the election of the
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General Partner, Common Shares on a one-for-one basis. The redemption price
will be paid in cash in the discretion of the Company or in the event that the
issuance of Common Shares to the redeeming Limited Partner would (i) result in
any person owning, directly or indirectly, Common Shares in excess of the
Ownership Limitation, (ii) result in capital shares of the Company being owned
by fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in the Company being "closely held" within the
meaning of section 856(h) of the Code, (iv) cause the Company to own, actually
or constructively, 10% or more of the ownership interests in a tenant of the
Company's or the Operating Partnership's real property, within the meaning of
section 856(d)(2)(B) of the Code, or (v) cause the acquisition of Common Shares
by such redeeming Limited Partner to be "integrated" with any other
distribution of Common Shares for purposes of complying with the Securities
Act.
Operations
The Operating Partnership Agreement requires that the Operating
Partnership be operated in a manner that will enable RAIT to satisfy the
requirements for being classified as a REIT for federal tax purposes, to avoid
any federal income or excise tax liability imposed by the Code, and to ensure
that the Operating Partnership will be not classified as a "publicly traded
partnership" for purposes of section 7704 of the Code.
In addition to the administrative and operating costs and expenses
incurred by the Operating Partnership, it is anticipated that the Operating
Partnership will pay all general, operating and administrative expenses of the
Company, the General Partner and the Initial Limited Partner (collectively, the
"Company Expenses") and the Company Expenses will be treated as expenses of the
Operating Partnership. The Company Expenses generally include (i) all expenses
relating to the organization and continuation of the Company, the General
Partner and the Initial Limited Partner, (ii) all expenses relating to the
public offering and registration of securities by the Company, (iii) all
expenses associated with the preparation and filing of any periodic reports by
the Company under federal, state or local laws or regulations, (iv) all
expenses associated with compliance by the Company, the General Partner and the
Initial Limited Partner with laws, rules and regulations promulgated by any
regulatory body and (v) all other general, operating and administrative costs
of the Company, the General Partner and the Initial Limited Partner incurred in
the ordinary course of their business on behalf of the Operating Partnership.
Distributions
It is anticipated that the Operating Partnership Agreement will provide
that the Operating Partnership will distribute cash from operations (including
net sale or refinancing proceeds, but excluding net proceeds from the sale of
the Operating Partnership's property in connection with the liquidation of the
Operating Partnership) on a quarterly (or, at the election of the General
Partner, more frequent) basis, in amounts determined by the General Partner in
its sole discretion, to the partners in accordance with their respective
percentage interests in the Operating Partnership. Upon liquidation of the
Operating Partnership, after payment of, or adequate provision for, debts and
obligations of the Operating Partnership, including partner loans, it is
anticipated that any remaining assets of the Operating Partnership will be
distributed to all partners with positive capital accounts in accordance with
their respective positive capital account balances. If the General Partner has
a negative balance in its capital account following a liquidation of the
Operating Partnership, it will be obligated to contribute cash to the Operating
Partnership equal to the negative balance in its capital account.
Allocations
It is anticipated that income, gain and loss of the Operating Partnership
for each fiscal year generally will be allocated among the partners in
accordance with their respective interests in the Operating Partnership,
subject to compliance with the provisions of Code sections 702 and 704 and
Treasury Regulations promulgated thereunder.
Term
The Operating Partnership will continue until December 31, 2050, or until
sooner terminated as provided in the Operating Partnership Agreement or by
operation of law.
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Tax Matters
The General Partner has been designated in the Operating Partnership
Agreement as 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. has acted as Counsel to the Company, has reviewed this summary and
has rendered an opinion that the descriptions of the law and the legal
conclusions contained herein are correct in all material respects, and that the
discussions hereunder fairly summarize the federal income tax considerations
that are likely to be material to the Company and a holder of the Common
Shares. This discussion does not purport to address all aspects of taxation
that may be relevant to particular shareholders (including insurance companies,
tax-exempt organizations, financial institutions or broker-dealers and, except
to the extent discussed below, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws.
The statements in this discussion and the opinion of Counsel are based on
current provisions of the Code, existing, temporary and currently proposed
Treasury Regulations promulgated under the Code, the legislative history of the
Code, existing administrative rulings and practices of the Service, 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 THE COMPANY'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,
1998. 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
RAS'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 current and proposed method of
operation will enable it to continue to meet the requirements for qualification
and taxation as a REIT under the Code. Investors should be aware, however, that
opinions of counsel are not binding upon the Service or any court. It must be
emphasized that Counsel's opinion is based on various assumptions and is
conditioned upon certain representations made by the Company as to factual
matters, including representations regarding its business, assets and future
operations, as set forth below in this discussion. Moreover, such qualification
and taxation as a REIT depends upon RAIT's ability to meet on a continuing
basis, through actual annual operating results, distribution levels, and
diversity of share ownership, the various qualification tests imposed under the
Code discussed below, the results of which will not be reviewed
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by Counsel. Accordingly, no assurance can be given that the actual results of
RAS'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:
o RAIT will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains.
o Under certain circumstances, RAIT may be subject to the "alternative
minimum tax" on its undistributed items of tax preference, if any.
o 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.
o 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.
o 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.
o 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.
o If RAIT acquires any asset from a C corporation (i.e., a corporation
generally subject to full corporate-level tax) in a merger or other
transaction in which the basis of the asset in RAIT's hands is determined
by reference to the basis of the asset (or any other asset) in the hands
of the C corporation and RAIT recognizes gain on the disposition of such
asset during the 10-year period beginning on the date on which it acquired
such asset, then to the extent of such asset's "built-in-gain" (i.e., the
excess of the fair market value of such asset at the time of acquisition
by RAIT over the adjusted basis in such asset at such time), RAIT will be
subject to tax at the highest regular corporate rate applicable (as
provided in Treasury Regulations that have not yet been promulgated). The
results described above with respect to the tax on "built-in-gain" assume
that RAIT will elect pursuant to IRS Notice 88-19 to be subject to the
rules described in the preceding sentence if it were to make any such
acquisition.
Requirements for Qualification
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors, (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation but
for Sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as
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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.
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 in this section.
Income Tests. In order for RAIT to qualify and to maintain its
qualification as a REIT, two requirements relating to RAIT's gross income must
be satisfied annually. First, at least 75% of RAIT's gross income (excluding
gross income from prohibited transactions) for each taxable year must consist
of defined types of income derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and interest on obligations secured by mortgages on real
property or on interests in real property) or temporary investment income.
Second, at least 95% of RAIT's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property, mortgages
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on real property, or temporary investments, and from dividends, other types of
interest, certain hedging instruments that reduce the interest rate risk with
respect to certain of RAIT's liabilities, and gain from the sale or disposition
of stock or securities, or from any combination of the foregoing. Income
deriving from origination fees does not qualify for inclusion under either such
test; see "Risk Factors -- Legal and Tax Risks -- Origination Fees Which May Be
Received by the Company Will Not Be REIT Qualifying Income." The specific
application of these tests to the Company is discussed below.
There may be circumstances in which the principal amount of mortgage loans
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 has acquired (and may continue to acquire) loans the
principal amount of which exceeds the fair market value of the underlying
property, such recharacterization may occur although the existence of
forbearance or other workout arrangements 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.
RAS 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 amount of a loan may exceed the value of the
real property securing the loan, which will result in a portion of the income
from the loan being classified as qualifying income for purposes of the 95%
gross income test, but not for purposes of the 75% gross income test. It is
also possible that, in some instances, the interest income from a loan may be
based in part on the borrower's profits or net income, which generally will
disqualify the income from the loan for purposes of both the 75% and 95% gross
income tests. In addition, RAIT has purchased and originated loans that are only
indirectly secured by real estate, and may continue to do so in the future. 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
RAS believes will enable it to obtain an interest in the underlying property
upon default. With respect to the five loans in the Company's investment
portfolio as of March 1998, that are indirectly secured by real estate, all are
collateralized with deeds-in-lieu of foreclosure. Counsel is of the opinion
that interest, OID and market discount income derived from such loans will be
qualifying interest income for purposes of both the 75% and 95% gross income
tests. It is possible, however, that the Service would conclude that interest
on these loans 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 appropriate
steps to ensure that it will always have sufficient qualifying income to meet
the 75% and 95% gross income tests. A loan under negotiation as of the date of
this Prospectus, the Stock-Secured Loan, will, if consummated, be secured by
a pledge of stock by the owner of the Subchapter S Corporations which own the
property underlying the mortgage-secured Loan. Because a pledge of corporate
stock is not directly covered by private letter rulings equating to pledge of
partnership interests with a mortgage on the property owned by any such
partnership, it may be that interest on the Stock-Secured Loan will not be
qualifying interest for the purposes of the 75% gross income test. See
description of Proposed Loan 116 "Investment Objectives and Policies -- Recent
Developments."
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In the case of wraparound loans made or acquired by a REIT, there is
authority for the position that only the interest attributable to the amounts
advanced by the REIT (or the person from whom it acquired the wraparound loan)
will constitute income to it. Under this interpretation, amounts received by
the REIT from the borrower that are used to pay debt service on the underlying
senior debt would be treated as having been paid directly by the borrower to
the senior lender and thus excluded from the REIT's gross income. The effect
would be to reduce the amount of the REIT's gross income for purposes of the
75% and 95% gross income tests.
RAIT may originate or acquire mortgage loans that have shared appreciation
provisions. As of March 31, 1998, two of RAIT's Loans had such features. 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 regarding the accrual of OID on contingent payment debt
obligations. 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 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 otherwise would be
qualifying income for purposes of the 75% gross income test), less expenses
directly connected with the production of such income. REITS, however, are
allowed to treat income
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from foreclosure property as qualifying income for purposes of both the 75% and
95% gross income tests, even though such income would not otherwise be
qualifying income. "Foreclosure property" is defined as any real property
(including interests in real property) and any personal property incident to
such real property (i) that is acquired by a REIT as the result of such REIT
having bid in such property at foreclosure, or having otherwise reduced such
property to ownership or possession by agreement or process of law, after there
was a default (or default was imminent) on a lease of such property or on an
indebtedness owed to the REIT that such property secured, (ii) for which the
related loan was acquired by the REIT at a time when default was not imminent
or anticipated, and (iii) for which the REIT makes a proper election to treat
the property as foreclosure property. A property generally may be treated as
foreclosure property until the last day of the third full taxable year
following the election, although the IRS may grant one extension of the period
for treating the property as foreclosure property if RAIT establishes that an
extension is necessary for the orderly liquidation of RAIT's interest in the
property. Such extension may not extend the treatment as foreclosure property
beyond six years from the date the property is acquired by RAIT. The Company
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 will not receive the benefit of the foreclosure
property rules, which allow otherwise non-qualifying income to be treated as
qualifying income for purposes of the 75% or 95% gross income tests. 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 is or 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
RAS 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
RAS's profitability.
Asset Tests. At the close of each quarter of each taxable year, RAIT must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of RAIT's total assets must be represented by cash or cash items
(including certain receivables), government securities, "real estate assets,"
or, in cases where RAIT raises new capital through offerings of shares or
long-term (at least five-year) debt, temporary investments in stock or debt
instruments during the one-year period following RAIT's receipt of such capital.
The term "real estate assets" includes interests in real property, interests in
mortgages on real property to the extent the principal balance of a mortgage
does not exceed the fair market value of the associated real property, and
shares of other REITs. For purposes of the 75% asset test, the term "interest
in real property" includes an interest in mortgage loans or land and
improvements thereon, such as buildings or other inherently permanent
structures (including
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items that are structural components of such buildings or structures), a
leasehold of real property, and an option to acquire real property (or a
leasehold of real property). To the extent that the fair market value of the
real property securing a mortgage loan equals or exceeds the outstanding
principal balance of the loan, the loan will qualify as a real estate asset.
However, if the outstanding principal balance of a mortgage loan exceeds the
fair market value of the real property securing the loan, such loan may not be
a qualifying real estate asset to the extent that the loan amount exceeds the
value of the associated real property, although the matter is not free from
doubt. An "interest" in real property also generally includes an interest in
mortgage loans secured by controlling equity interests in entities treated as
partnerships for federal income tax purposes that own real property, to the
extent that the principal balance of the mortgage does not exceed the fair
market value of the real property that is allocable to the equity interest. In
addition, RAIT has purchased and originated loans that are only indirectly
secured by real estate, and may continue to do so in the future. 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. With
respect to the five loans in the Company's investment portfolio as of March 31,
1998 (19.8% by book value) that are indirectly secured by real estate, all are
collateralized with deeds-in-lieu of foreclosure. Counsel is of the opinion
that these loans qualify as real estate assets for the purposes of the 75%
asset test. It is possible, however, that the Service would conclude that these
loans are not "secured by mortgages on real property or on interests in real
property," so that such loans would not be qualifying assets for purposes of
the 75% asset test. 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 Partner and Initial Limited Partner, 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 secured by a mortgage on 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. The Company
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.
Distribution Requirements. In order to qualify as a REIT, RAIT is required
to distribute with respect to each taxable year dividends (other than capital
gain dividends) to its shareholders in an aggregate amount at least equal to
(i) the sum of (A) 95% of its "REIT taxable income" (computed without regard to
the dividends paid deduction and its net capital gain) and (B) 95% of the net
income (after tax), if any, from foreclosure property, minus (ii) the sum of
certain items of noncash income. Such distributions must be paid in the taxable
year to which they relate, or in the following taxable year if declared before
RAS 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 with
respect to deemed distributions of long-term capital gain). Furthermore, if RAIT
should fail to distribute during each calendar year (or, in the case of a
distribution with declaration and record dates falling in the last three months
of the calendar year, by the end of the January immediately following such
year) at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii)
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95% of its REIT capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, RAIT would be subject to a 4% nondeductible
excise tax on the excess of such required distribution over the amounts
actually distributed. If RAIT makes the election to retain and pay income tax on
its net long-term capital gains (see "Federal Income Tax Considerations --
Taxation of Taxable U.S. Shareholders Generally") such amounts are treated as
distributed for purposes of the 4% excise tax. RAIT intends to make timely
distributions sufficient to satisfy the annual distribution requirements.
It is possible that, from time to time, RAIT may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, RAIT will
recognize taxable income in excess of its cash receipts when OID accrues with
respect to its loans. OID generally will be accrued using a constant yield
methodology that takes into account projected prepayments but that does not
allow credit losses to be reflected until they are actually incurred. Thus,
pursuant to certain Treasury Regulations, RAIT may be required to recognize the
amount of any payment projected to be made pursuant to a participation
provision in a loan over the term of the loan using the constant yield method.
In addition, RAIT may recognize as income taxable market discount income upon
the receipt of proceeds from the disposition of, or principal payments on,
loans that are "market discount bonds" (i.e., obligations with a stated
redemption price at maturity that is greater than RAIT's tax basis in such
obligations), although such proceeds often will be used to make non-deductible
principal payments on related borrowings. RAIT may also recognize income in
excess of cash receipts if it makes wraparound loans where the payments of
nondeductible principal it must make on the underlying loans exceed the amount
of nontaxable principal it is receiving from the borrower. There is authority,
however, for the position that only the interest on the amount advanced by the
wraparound lender is included in the income of a REIT making such a loan; this
would reduce or limit the possibility of mismatching. It also is possible that,
from time to time, RAIT may recognize net capital gain attributable to the sale
of depreciated property that exceeds its cash receipts from the sale. RAIT also
may recognize taxable income without receiving a corresponding cash
distribution if it forecloses on or makes a "significant modification" (as
defined in Regulations Section 1.1001-3(e)) to a loan, to the extent that the
fair market value of the underlying property or the principal amount of the
modified loan, as applicable, exceeds RAIT's basis in the original loan.
Finally, capital losses recognized by RAIT may not be deducted from its REIT
taxable income. Therefore, RAIT may have less cash than is necessary to meet its
annual 95% distribution requirement or to avoid corporate income tax or the
excise tax imposed on certain undistributed income. In such a situation, RAIT
may find it necessary to arrange for short-term (or possibly long-term)
borrowings or to raise funds through the issuance of Preferred Shares or
additional Common Shares.
Under certain circumstances, RAIT may be able to rectify a failure to meet
the distribution requirements for a year by paying "deficiency dividends" to
its shareholders in a later year, which may be included in RAIT's deduction for
dividends paid for the earlier year. Although RAIT may be able to avoid being
taxed on amounts distributed as deficiency dividends, it will be required to
pay to the Service interest based upon the amount of any deduction taken for
deficiency dividends.
Recordkeeping Requirements. Pursuant to applicable Treasury Regulations,
RAS 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 its
Common Shares. However, corporate shareholders may be required to treat up to
20% of certain capital gain dividends as ordinary income. RAIT may elect to
retain and pay income tax on net long-term capital gains it receives during the
taxable year. If RAIT makes this election, (i) its shareholders would include in
their income as long-term capital gains their proportionate share of the
undistributed long-term capital gains as designated by RAIT, (ii) each
shareholder would be deemed to have paid the shareholder's share of the tax,
which would be credited or refunded to the shareholder, and (iii) the basis of
each shareholder's shares would be increased by the amount of the undistributed
long-term capital gains (less the amount of capital gains tax paid by RAIT)
included in the shareholder's long-term capital gains. Distributions in excess
of current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's Common Shares, but rather will reduce the adjusted basis of such
shares. To the extent that these distributions exceed the adjusted basis of a
shareholder's Common Shares, such distributions will be included in income as
long-term capital gain (or short-term capital gain if the Common Shares had
been held for one year or less), assuming the Common Shares are a capital asset
in the hands of the shareholder. In addition, any distribution declared by RAIT
in October, November, or December of any year and payable to a shareholder of
record on a specified date in any such month shall be treated as both paid by
RAS 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 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
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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, the investor's before-tax return on the investment would be 10%, and the
investor's 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%,
the investor's after-tax rate of return on the shares might be somewhat less
than 7% as a result of RAIT's phantom income. In general, as the ratio of RAIT's
phantom income to its total income increases, the after-tax rate of return
received by a taxable shareholder of RAIT will decrease. RAIT will consider the
potential effects of phantom income on its taxable shareholders in managing its
investments.
Taxation of Shareholders on the Disposition of the Common Shares
In general, any gain or loss realized upon a taxable disposition of the
Common Shares by a shareholder who is not a dealer in securities will be
treated as long-term capital gain or loss if the Common Shares have been held
for more than 12 months (subject to a reduction in tax rate if the Common
Shares have been held for more than 18 months; see "Federal Income Tax
Considerations -- Capital Gains and Losses") and otherwise as short-term
capital gain or loss. However, any loss upon a sale or exchange of Common
Shares by a shareholder who has held such shares for six months or less (after
applying certain holding period rules) will be treated as a long-term capital
loss to the extent of distributions from RAIT required to be treated by such
shareholder as long-term capital gain. All or a portion of any loss realized
upon a taxable disposition of the Common Shares may be disallowed if other
Common Shares are purchased within 30 days before or after the disposition.
Capital Gains and Losses
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%.
The maximum tax rate on long-term capital gains applicable to individuals is
28% for assets held for more than one year but not more than 18 months, and 20%
for assets held more than 18 months. Thus, the tax rate differential between
capital gain and ordinary income for individuals may be significant. In
addition, the characterization of income as capital gain or ordinary income may
affect the deductibility of capital losses. Capital losses not offset by
capital gains may be deducted against an individual's ordinary income only up
to a maximum annual amount of $3,000. Unused capital losses may be carried
forward indefinitely by individuals. All net capital gain of a corporate
taxpayer is subject to tax at ordinary corporate rates. A corporate taxpayer
can deduct capital losses only to the extent of capital gains, with unused
losses being carried back three years and forward five years.
Information Reporting Requirements and Backup Withholding
RAIT will report to its U.S. shareholders and to the Service the amount of
distributions paid during each calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a shareholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid unless
such holder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with the applicable requirements of
the backup withholding rules. A shareholder who does not provide RAIT with his
correct taxpayer identification number also may be subject to penalties imposed
by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, RAIT may be
required to withhold a portion of capital gain distributions to any
shareholders who fail to certify their nonforeign status to RAIT. The Treasury
Department has issued new regulations regarding the backup withholding rules as
applied to Non-U.S. Shareholders that are effective for payments made after
December 31, 1998. The new regulations have eased certain of the recordkeeping
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 unrelated trade or business of the exempt employee pension
trust. Based on that ruling, amounts distributed
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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 8.3% of the number of outstanding Common Shares (other than
RAI, which may own no more than 15% of the number of outstanding Common Shares
and will, at the conclusion of the Offering, own 8.2% of the outstanding Common
Shares, assuming the Underwriters do not exercise their over-allotment option)
or (ii) more than 9.8% of the number of outstanding Preferred Shares of any
series, RAIT should not be a pension-held REIT and, accordingly, no pension
trust should be required to treat a percentage of the dividends from RAIT as
UBTI.
Taxation of Non-U.S. Shareholders
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corpo-rations, 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 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 has
issued new regulations that, for payments made after December 31, 1999, 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 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
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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 the
Company. RAIT is required 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 Common Shares
generally will not be taxed under FIRPTA if RAIT is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the shares was held directly or
indirectly by Non-U.S. persons. However, because the Common Shares will be
publicly traded, no assurance can be given that RAIT will be a "domestically
controlled REIT." In addition, a Non-U.S. Shareholder that owns, actually or
constructively, not more than 5% of RAIT's shares throughout a specified
"look-back" period will not recognize gain on the sale of 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." 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.
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BENEFIT PLAN CONSIDERATIONS
The following summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended, and the prohibited
transaction provisions of section 4975 of the Code, does not purport to deal
with all aspects of ERISA or section 4975 of the Code that may be relevant to
particular shareholders (including plans subject to Title I of ERISA, other
retirement plans and individual retirement accounts ("IRAs") subject to the
prohibited transaction provisions of section 4975 of the Code, and governmental
plans or church plans that are exempt from ERISA and section 4975 of the Code
but that may be subject to state law requirements) in light of their particular
circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON SHARES ON BEHALF
OF A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE AND STATE
LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF THE COMMON SHARES BY
SUCH PLAN OR IRA.
Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs
Each fiduciary of a 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.
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
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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 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 Common Shares are "widely held" and it is anticipated
that, after this Offering, they will continue to be "widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with this offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as ordinarily not affecting that finding include:
(i) any restriction on or prohibition against any transfer or assignment that
would result in the termination or reclassification of an entity for federal or
state tax purposes, or that otherwise would violate any federal or state law or
court order, (ii) any requirement that advance notice of a transfer or
assignment be given to the issuer, (iii) any administrative procedure that
establishes an effective date, or an event (such as completion of an offering),
prior to which a transfer or assignment will not be effective, and (iv) any
limitation or restriction on transfer or assignment that is not imposed by the
issuer or a person acting on behalf of the issuer. The Company believes that
the restrictions imposed under the Declaration of Trust on the transfer of the
Company's Common Shares will not result in the failure of the Common Shares to
be "freely transferable." The Company also is not aware of any other facts or
circumstances limiting the transferability of the Common Shares that are not
identified in the Plan Asset Regulations as factors that ordinarily do not
adversely affect a finding that securities are freely transferable. However, no
complete assurances can be given that the DOL or the Treasury Department would
not reach a contrary conclusion.
Assuming that the Common Shares will be "widely held" and that no other
facts and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Shares, the Common Shares
should be publicly offered securities and the assets of the Company should not
be deemed to be "plan assets" of any Plan, IRA or Non-ERISA Plan that invests
in the Common Shares. However, no assurances can be given that the Company's
assets will not be deemed to be plan assets.
If the assets of the Company were to be deemed to be "plan assets" under
ERISA, (i) the prudence standards and other provisions of Part 4 of Title I of
ERISA would be applicable to any transactions involving the Company's assets,
(ii) persons who exercise any authority over the Company's assets, or who
provide investment advice to the Company, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each Plan that acquires
Common Shares, (iii) a fiduciary exercising his investment discretion over the
assets of a Plan to cause it to acquire or hold the Common Shares could be held
liable under Part 4 of Title I of ERISA for transactions entered into by the
Company that do not conform to ERISA standards of prudence and fiduciary
responsibility, and (iv) certain transactions that the Company might enter into
in the ordinary course of its business and operations might constitute
"prohibited transactions" under ERISA and the Code.
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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., Piper Jaffray Inc. and Gruntal & Co., L.L.C., are acting as
Representatives, 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.
Piper Jaffray Inc. ....................
Gruntal & Co., L.L.C. .................
---------
Total ............................... 2,800,000
=========
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.
The Underwriters propose initially to offer the Common Shares directly to
the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such offering price less a concession not
to exceed $_______ per Common Share. The Underwriters may allow and such
dealers may reallow a concession not to exceed $______ per Common Share to
certain other dealers. After the Common Shares are released for sale to the
public, the offering price and other selling terms may be changed by the
Underwriters.
The Company has granted to the Underwriters an option exercisable during a
30-day period after the date hereof to purchase, at the initial offering price
less underwriting discounts and commissions, up to an additional 420,000 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.
In connection with the IPO, the Company granted to FBR preferential rights
until January 13, 2000 to act as the exclusive underwriter for, or advisor to,
the Company in specified transactions or offerings. In addition, the Company
issued FBR warrants to purchase up to 141,667 Common Shares at an exercise
price of $15.00 per share. Transfer of the warrants is restricted until January
14, 1999. The warrants are exercisable commencing January 14, 1999 and
terminate January 14, 2003 (the "Warrant Exercise Term"). The Company has also
registered the Common Shares underlying the warrants. During the Warrant
Exercise Term, the warrant holder 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.
Also in connection with the IPO, RAI and certain affiliates or associates
of RAI, Brandywine and their affiliates, agreed not to offer, sell, contract to
sell or otherwise dispose of Common Shares purchased by them in, or in
connection with, the IPO until July 13, 1998. See "Common Shares Available for
Future Sale."
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.
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The Representatives have 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.
As of May 12, 1998, Friedman, Billings, Ramsey Investment Management,
Inc., an affiliate of FBR, was the beneficial owner of 314,005 shares of RAI's
common stock, representing 6.6% of all RAI common stock issued and outstanding.
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 statements of the Company as of December 31, 1997 and for
the period from August 20, 1997 (date of inception) through December 31, 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 statements are 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 Company's existing
investments have been included herein in reliance upon the reports of Johnson,
McClellan, Sullins & Page, Joseph Dennis Pasquarella & Co., M. Richard Cohen,
Louis A. Iatarola Realty Appraisal Group, Ltd., John Poole and Associates and
CB Commercial Real Estate Group, Inc. as experts in appraising real properties.
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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.
"affiliate" of a specified person shall mean a person that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or
is under common control with, the specified person.
"Amex" shall mean the American Stock Exchange.
"Appreciation Interest" means a participation interest in any appreciation
in value of properties underlying the Loans or in any share of property
revenues.
"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 mean the Board of Trustees of RAIT.
"book value" for an investment shall mean the cost of the investment as
carried on the books and records of the Company, plus the amount, as of the
date of the Company's acquisition of the investment, of any senior indebtedness
to which the property was subject, and including (a) all acquisition costs and
expenses (b) subsequent advances, if any, made by the Company in connection
with the acquisition, and (c) amounts representing accretion of discount by the
Company.
"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.
"Check-the-Box Regulations" shall mean the Treasury Regulations relating
to entity classification.
"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 RAIT, 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.
"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.
82
<PAGE>
"FBR" shall mean Friedman, Billings, Ramsey & Co., Inc.
"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., a Maryland corporation and
the sole general partner of the Operating Partnership.
"Independent Trustee" shall mean a trustee who, within the last two years,
has not (i) been an affiliate of RAI, JeffBanks, Brandywine or their
affiliates, (ii) been an officer of the Company, or (iii) had any material
business or professional relationship with the Company, RAI, Brandywine,
JeffBanks or their affiliates.
"Ineligible Property" shall mean real property that is not eligible for
treatment as a foreclosure property because the related loan was acquired by a
REIT at a time when default was imminent or anticipated.
"Initial Investments" shall mean those Loans acquired by the Company in
January 1998 in connection with the completion of the IPO.
"Initial Limited Partner" shall mean RAIT Limited, Inc., a Maryland
corporation and the sole 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.
"IPO" shall mean the Company's initial public offering of 2,833,334 Common
Shares, completed on January 14, 1998.
"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.
"Loan" shall mean any one or more of the mortgage or other debt
obligations, including loan participation interests, the Company originates or
acquires for its investment portfolio.
"MGCL" shall mean the Maryland General Corporation Law.
"1996 Lender Liability Act" shall mean the Asset Conversion, Lender
Liability and Deposit Insurance Act of 1996.
"Non-ERISA Plan" shall mean a plan that does not cover common law
employees.
"Non-U.S. Shareholder" shall mean alien individuals, foreign corporations,
foreign partnerships and other foreign shareholders that are not resident in
the United States.
"Offering" shall mean the offering of Common Shares made pursuant to this
Prospectus.
"Offering Price" shall mean the offering price of $___________ per Common
Share offered pursuant to this
Prospectus.
"OID" shall mean original issue discount.
"Operating Partnership" shall mean RAIT Partnership, L.P., a Delaware
limited partnership.
"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.
83
<PAGE>
"Ownership Limitation" shall mean the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of (a) more than
8.3% 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 Owner" shall mean a person holding record title to Common
Shares in excess of the Ownership Limitation.
"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 interest acquired by the Company in
real property or in a partnership, joint venture, limited liability company or
other entity owning real property as all or substantially all of its assets.
"Qualifying Interests" shall mean mortgages and other liens on and
interests in real estate, within the meaning of the Investment Company Act.
"RAI" shall mean Resource America, Inc., the sponsor of the Company.
"RAS" shall mean Resource Asset Investment Trust.
"Related Party Tenant" shall mean a tenant of which RAIT, or a direct or
indirect owner of 10% or more of RAIT, owns 10% or more.
"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.
"Registration Statement" shall mean the registration statement filed with
the Commission (File No. 333-53067) of which this Prospectus forms a part.
"REIT" shall mean a real estate investment trust, as defined in section
856 of the Code.
"Representatives" shall mean FBR, Piper Jaffray Inc. and Gruntal & Co.,
L.L.C., as representatives 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.
"UBTI" shall mean unrelated business taxable income.
"UBTI Percentage" shall mean the gross income derived by the Company in
any year from an unrelated trade or business divided by the gross income of the
Company for that year.
84
<PAGE>
"Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc., Piper
Jaffray Inc. and Gruntal & Co., L.L.C. and each of the underwriters for whom
they are acting as Representatives.
"Underwriting Agreement" shall mean the agreement pursuant to which the
Underwriters will underwrite the Common Shares.
"Units" shall mean units of limited partnership interest in the Operating
Partnership.
"UST" shall mean an underground storage tank.
"Warrant Exercise Term" shall mean the term, commencing January 14, 1999
and ending January 14, 2003, during which the warrants issued to FBR by the
Company in connection with the IPO are exercisable.
85
<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 and Subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, shareholder's deficiency, and
cash flows for the period from August 20, 1997 (date of inception) through
December 31, 1997. These financial statements are the responsibility of
Resource Asset Investment Trust's management. Our responsibility is to express
an opinion on these financial statements 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 statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 statements referred to above present fairly,
in all material respects, the consolidated financial position of Resource Asset
Investment Trust and Subsidiaries as of December 31, 1997, and the consolidated
results of their operations and their cash flows for the period from August 20,
1997 (date of inception) through December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Grant Thornton LLP
- -------------------------------
Philadelphia, Pennsylvania
March 5, 1998
F-1
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
---------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents ............................................... $ 11,029,795 $ 0
Accrued interest receivable ............................................. 298,827 0
Investments in real estate loans ........................................ 50,590,312 0
Investment in real estate, net .......................................... 1,652,436 0
Equipment ............................................................... 12,571 8,766
Prepaid expenses and other assets ....................................... 299,806 2,183,698
------------ -----------
Total assets .......................................................... $ 63,883,747 $ 2,192,464
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued liabilities ................................ $ 170,898 657,751
Accrued interest payable ................................................ 115,720 0
Deferred income ......................................................... 476,667 0
Borrower's escrow ....................................................... 300,000 0
Due to affiliate ........................................................ 0 1,579,330
Senior indebtedness ..................................................... 18,708,681 0
------------ -----------
Total liabilities ..................................................... 19,771,966 2,237,081
Preferred Shares, $.01 par value; 25,000,000 authorized shares .......... 0 0
Common Shares, $.01 par value; 200,000,000 authorized shares,
issued and outstanding, 3,333,434 and 100 shares, respectively ........ 33,334 1
Additional paid-in-capital .............................................. 44,082,579 999
Accumulated deficit ..................................................... (4,132) (45,617)
------------ -----------
Total shareholders' equity (deficiency) ............................... 44,111,781 (44,617)
------------ -----------
$ 63,883,747 $ 2,192,464
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Income Statements
<TABLE>
<CAPTION>
For the Period August
For the Three Months 20, 1997 (Date of Inception)
Ended March 31, 1998 through December 31, 1997
---------------------- -----------------------------
(unaudited)
<S> <C> <C>
REVENUES:
Mortgage interest income ........................... $ 1,126,426 $ 0
Fee income and other ............................... 56,824 0
Investment income .................................. 249,005 0
----------- -----------
Total revenues .................................... 1,432,255 0
COSTS AND EXPENSES:
Interest ........................................... 319,788 0
General and administrative ......................... 163,563 45,617
Depreciation and amortization ...................... 7,392 0
----------- -----------
Total costs and expenses .......................... 490,743 45,617
----------- -----------
Net income (loss) .................................. $ 941,512 $ (45,617)
=========== ===========
Net income (loss) per common share-basic ........... $ .33 $ (1,169.67)
=========== ===========
Weighted average common shares outstanding ......... 2,852,212 39
=========== ===========
Net income (loss) per common share-diluted ......... $ .33 $ (1,169.67)
=========== ===========
Weighted average common shares outstanding ......... 2,892,620 39
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Statement of Changes in
Shareholder's Deficiency For the Period From August 20,
1997 (Date of Inception) through December 31, 1997 and
the Three Months Ended March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Additional Total
Paid-in Accumulated Shareholder's
Common Stock Capital Deficit Deficiency
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Issuance of Common Stock .............. $ 1 $ 999 $ 0 $ 1,000
Net loss for the period ended ......... 0 0 (45,617) (45,617)
------- ----------- ---------- -----------
Balance, December 31, 1997 ............ $ 1 $ 999 $ (45,617) $ (44,617)
Issuance of Common Stock .............. 33,333 44,081,580 44,114,913
Cash dividends ........................ (900,027) (900,027)
Net income for the three months
ended March 31, 1998 ................. 941,512 941,512
------- ----------- ---------- -----------
$33,334 $44,082,579 $ (4,132) $44,111,781
======= =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
For the Period
August 20, 1997
For the Three Months (Date of Inception)
Ended March 31, 1998 through December 31, 1997
---------------------- --------------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ....................................... $ 941,512 $ (45,617)
Adjustments to reconcile net income (loss) to net cash
used by operating activities
Depreciation and amortization ......................... 7,128 0
Amortization of original issue discount ............... (5,001) 0
Accretion of loan discount ............................ (51,704) 0
Accretion of interest ................................. (110,333) 0
Increase in accrued interest receivable ............... (298,827) 0
Increase in prepaid expenses and other assets ......... (245,206) (2,105,642)
(Decrease) increase in accounts payable and accrued
liabilities .......................................... (486,853) 657,751
Increase in accrued interest payable .................. 115,720 0
Increase in deferred income ........................... 587,000 0
Increase in borrower's escrow ......................... 300,000 0
(Decrease) increase in due to affiliate ............... (1,579,330) 1,579,330
------------- ------------
Net cash (used by) provided by operating
activities ........................................ (825,894) 85,822
------------- ------------
Cash flows from investing activities
Purchase of property and equipment .................... (4,241) (8,766)
Purchase of real estate loans ......................... (20,646,388) 0
Real estate loans originated .......................... (11,150,000) 0
Principal repayments of senior indebtedness ........... (8,198) 0
Investment in real estate ............................. (1,654,928) 0
Other ................................................. 0 (78,056)
------------- ------------
Net cash used by investing activities .............. (33,463,755) (86,822)
------------- ------------
Cash Flows from financing activities
Issuance of common stock, net ......................... 46,219,471 1,000
Payment of dividends .................................. (900,027) 0
------------- ------------
Net cash provided by financing activities .......... 45,319,444 1,000
------------- ------------
Net change in cash and cash equivalents .................. 11,029,795 0
Cash and cash equivalents, beginning of period ........... 0 0
------------- ------------
Cash and cash equivalents, end of period ................. $ 11,029,795 $ 0
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
Notes to Consolidated Financial Statements
March 31, 1998
NOTE 1 -- FORMATION AND BUSINESS ACTIVITY
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. RAIT,
the General Partner and the Initial Limited Partner were organized in Maryland,
and the Operating Partnership was organized as a Delaware limited partnership.
RAIT was initially capitalized through the sale of 100 common shares for
$1,000.
The General Partner and the Initial Limited Partner capitalized the
Operating Partnership by contributing to it the proceeds of the public offering
of RAIT's Common Shares (See Note 10 -- Transactions With Affiliates) The
General Partner owns a 1% general partnership interest and the Initial Limited
Partner owns a 99% limited partnership interest in the Operating Partnership.
RAIT's principal business activity is to provide mortgage or other debt
financing in situations that do not conform to the underwriting standards of
institutional lenders or sources that provide financing through securitization.
RAIT purchases or originates financing relating to multifamily residential,
office and other commercial properties. RAIT emphasizes junior lien and
subordinated financing, including wraparound financing, with principal amounts
generally between $1 million and $10 million. RAIT also acquires real
properties, or interests therein. The Operating Partnership undertakes the
business of RAIT, including the origination and acquisition of financing and
the acquisition of property interests.
RAIT principally competes with banks, insurance companies, savings and
loan associations, mortgage bankers, pension funds, investment bankers, and
other public or private real estate investment trusts for origination or
acquisition of real estate loans.
RAIT emphasizes 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, RAIT anticipates that
a material portion of its loans will relate to properties located in the
Philadelphia, Pennsylvania metropolitan area (12 of the 14 loans as of March
31, 1998 relate to properties located in this area) or in the Baltimore/
Washington, D.C. corridor (2 of the 14 loans as of March 31, 1998 relate to
properties located in this area.) The Company is not limited to any specific
geographic areas for its investments.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles (GAAP) for
interim reporting. The consolidated financial statements include the accounts
of the Company and its subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
In the opinion of management, the accompanying financial statements
contain all adjustments, consisting of normal and recurring accruals, necessary
for a fair presentation of the Company's financial condition at March 31, 1998,
the results of its operations and its cash flows for the three months ended
March 31, 1998. Operating results for the period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for any other
interim periods or the entire year ended December 31, 1998.
In preparing the consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
RAIT adopted Statement of Financial Accounting Standard (SFAS) No. 130,
"Reporting of Comprehensive Income," which requires financial statements to
include details of comprehensive income. Comprehensive
F-6
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
Notes to Consolidated Financial Statements -- (Continued)
March 31, 1998
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
income consists of net income or loss for the current period and income,
expense, gains, and losses that bypass the income statement and are reported
directly in a separate component of equity. Adoption of this statement did not
have an impact on the presentation of its financial position or results of
operations.
Investment in Real Estate Loans
Certain mortgage loans, for which the borrower is not current as to
original contractual principal and interest payments, are acquired by RAIT at a
discount from both the face value of the loan and the appraised value of the
property underlying the loan. For these loans, the difference between RAIT's
cost basis in the loan and the sum of projected cash flows from, and the
appraised value of, the underlying property (up to the amount of the loan) is
accreted into interest income over the estimated life of the loan using a
method which approximates the level interest method. Projected cash flows and
appraised values of the property are reviewed on a regular basis and changes to
the projected amounts reduce or increase the amounts accreted into interest
income over the remaining life of the loan.
Loans held for investment that are originated or purchased at face value
are stated at amortized cost, less any allowance for loan losses, because the
Company has the ability and the intent to hold them for the foreseeable future
or until maturity or payoff. Interest income is accrued as it is earned. In
some instances, the borrower pays additional interest at the time the loan is
closed. This additional interest is recognized over the period of the loan to
which it relates. Loans are placed on non-accrual status after being delinquent
greater than 89 days, or earlier if the borrower is deemed by management to be
unable to continue performance. When a loan is placed on non-accrual status,
interest accrued but not received is reversed. While a loan is on non-accrual
status, interest is recognized only as cash is received. Loans are returned to
accrual status only when the loan is reinstated and ultimate collectibility of
future interest is no longer in doubt. None of RAIT's originated loans or loans
purchased at face value is on non-accrual status. Gains and losses on disposal
of such assets are computed on a specific identification basis.
Management's periodic evaluation of the adequacy of the allowance for
possible loan losses is based on known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay, historical
loss experience, the estimated value of any underlying collateral, and current
economic conditions and trends. Such estimates are susceptible to change, and
actual losses on specific loans may vary from estimated losses. The allowance
for possible loan losses will be increased by charges to income and decreased
by charge-offs (net of recoveries).
RAIT will account for the impairment of loans under SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan: Income Recognition and
Disclosures." This standard requires that a creditor measure impairment based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair value
of the collateral if the loan is collateral dependent. Regardless of the
measurement method, a creditor must measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable.
RAIT adopted SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," as amended by SFAS No.
127, which provides accounting guidance on transfers of financial assets,
servicing of financial assets and extinguishments of liabilities. Adoption of
this statement did not have a material impact on RAIT's consolidated financial
position or results of operations.
Investment in Real Estate
Investment in real estate is carried at cost less accumulated depreciation
(which is less than the net realizable value of the property). The Company
reviews its investment in real estate for impairment as defined in SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable.
F-7
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
Notes to Consolidated Financial Statements -- (Continued)
March 31, 1998
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Deferred Income
Additional interest paid by the borrower at loan closing is recognized
over the period to which it is deemed to relate. Deferred income represents the
unrecognized portion of additional interest.
Borrower's Escrow
Borrower's Escrow represents borrower's funds held by the Company to fund
certain building improvements, to be released by the Company upon receipt from
the borrower of approved requests for reimbursement.
Depreciation and Amortization
Equipment is carried at cost less accumulated depreciation. Depreciation
is provided for by the straight-line method over the estimated useful life of
five years.
Organizational costs are being amortized over a five-year period. Costs
incurred relating to acquisition of the loans acquired at the close of the
Company's initial public offering in January 1998 (the "Initial Investments")
(see Note 10, Transactions with Affiliates) are being amortized over the lives
of the loans acquired.
Depreciation and Amortization expense for the three months ended March 31,
1998 was $7,128 and no depreciation or amortization was recorded for the period
from August 20, 1997 (date of inception) through December 31, 1997.
Employee Benefit Plans
RAIT accounts for its stock option plans under FASB No. 123, "Accounting
for Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation that entities may use, and 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 instruments under 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 earnings per share as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
RAIT's stock option plan will be accounted for under APB Opinion No. 25.
Federal Income Taxes
RAIT 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,
1998. If RAIT 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.
Earnings per Share
RAIT follows the provisions of SFAS No. 128, "Earnings per Share" which
eliminated primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per share. Basic
earnings per share excludes
F-8
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
Notes to Consolidated Financial Statements -- (Continued)
March 31, 1998
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
dilution and is computed by dividing income available to common shares by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and
converted into common stock.
Consolidated Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
non-interest earning deposits and interest earning deposits. Cash paid for
interest was $204,068 for the three-month period ended March 31, 1998. No cash
was paid for interest for the period August 20, 1997 (date of inception)
through December 31, 1997. Senior indebtedness acquired in conjunction with the
Initial Investments was $18,716,879.
NOTE 3 -- INVESTMENTS IN REAL ESTATE LOANS
The Company's loan portfolio consisted of the following at March 31, 1998
(unaudited):
Multi-family residential ................ $ 10,707,085
Commercial real estate .................. 39,883,227
Less: Allowance for loan losses ......... 0
------------
Investments in real estate loans ................ $ 50,590,312
============
As of March 31, 1998, eleven of the loans currently in RAIT's portfolio
are in default under their terms as originally underwritten, although they are
subject to forbearance agreements or other contractual restructurings, and are
performing in accordance with the terms of such agreements. The remaining three
loans are all in compliance with the terms as originally underwritten.
NOTE 4 -- INVESTMENT IN REAL ESTATE
Investment in real estate is comprised of the following at March 31, 1998
(unaudited):
Land ..................................... $ 159,710
Office building and improvements ......... 1,495,218
Less: Accumulated depreciation ........... (2,492)
----------
Investment in real estate, net ................... $1,652,436
==========
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant renovations are capitalized. Fees and costs incurred in
the successful negotiation of leases are deferred and amortized on a
straight-line basis over the terms of the respective leases. Rental revenue is
reported on a straight-line basis over the terms of the respective leases.
F-9
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
Notes to Consolidated Financial Statements -- (Continued)
March 31, 1998
NOTE 5 -- SENIOR INDEBTEDNESS
Senior indebtedness on properties underlying the Company's investments in
real estate loans consists of the following as of March 31, 1998 (unaudited):
<TABLE>
<S> <C>
Loan payable, secured by real estate, monthly installments
of $8,021, including interest at 9.75%, due July 1, 2005 ..... $ 873,309
Loan payable, secured by real estate, monthly installments
of $10,669, including interest at 10.5%, due February 1,
2002 ......................................................... 1,096,019
Loan payable, secured by real estate, monthly installments
of $10,317, including interest at 9.125%, due September 1,
2003 ......................................................... 1,255,030
Loan payable, secured by real estate, monthly installments
of $116,964, including interest at 9%, due April 1, 2003 ..... 12,984,323
Loan payable, secured by real estate, monthly installments
of $20,833 consisting of interest only at 10%, due Decem-
ber 31, 2002 ................................................. 2,500,000
-----------
Total senior indebtedness ................................. $18,708,681
===========
</TABLE>
The stated maturities of the senior indebtedness follows (unaudited):
1998 $ 196,606
1999 272,368
2000 285,407
2001 313,372
2002 3,860,788
Thereafter 13,780,140
-----------
$18,708,681
===========
NOTE 6 -- SHAREHOLDERS' EQUITY
RAIT filed a registration statement with respect to the public offering
and sale of 2,833,334 Common Shares that became effective January 8, 1998. The
public offering closed on January 14, 1998 (the Closing Date). In addition to
the public offering, Resource America, Inc. (RAI) purchased 500,000 Common
Shares, as sponsor of RAIT. Approximately 124,000 of the Common Shares sold in
the public offering were purchased by officers, directors and trustees of RAIT,
RAI, Brandywine Construction & Management, Inc. (Brandywine), an affiliate of
RAI, and related persons. These shares, along with the RAI shares, are subject
to restrictions on sale or disposal without the consent of the underwriters for
a period of 180 days following the Closing Date. The remaining Common Shares
were purchased separately and were freely tradable immediately upon issuance.
The initial public offering price of the Common Shares was $15.00 per share.
The 624,000 shares purchased by RAI and related persons were purchased at
$13.95 per share (a price equal to the public offering price net of
underwriting discounts and commissions). The net proceeds received by RAIT in
connection with the public offering were approximately $46,500,000. Total
offering costs approximated $5,230,000, including underwriting discounts.
RAIT issued warrants to purchase 141,667 Common Shares to the underwriters
at an exercise price of $15.00, the initial offering price. The warrants are
exercisable for a period of four years commencing one year from the Closing
Date.
F-10
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
Notes to Consolidated Financial Statements -- (Continued)
March 31, 1998
NOTE 7 -- EARNINGS PER SHARE
RAIT's calculation of earnings per share in accordance with SFAS No. 128
is as follows:
<TABLE>
<CAPTION>
Period Ended March 31, 1998 (unaudited)
----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------- ---------------- ---------------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders ......... $ 941,152 2,852,212 $ .33
Effect of dilutive securities
Options ............................................. 0 40,408 0
------------ --------- ----------
Diluted earnings per share
Net income available to common shareholders plus
assumed conversions ................................ $ 941,152 2,892,620 $ .33
============ ========= ==========
Period from August 20, 1997 (Date of Inception)
through December 30, 1997
-------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------ --------
Basic earnings per share
Net loss available to common shareholders ........... $ (45,617) 39 $(1,169.67)
Effect of dilutive securities
Options ............................................. -- -- --
------------- ------------ ----------
Diluted earnings per share
Net loss available to common shareholders plus
assumed conversions ................................ $ (45,617) 39 $(1,169.67)
============= ============ ==========
</TABLE>
NOTE 8 -- OPTION PLAN
In connection with the closing of the public offering, RAIT adopted a
qualified share option plan (the Option Plan), which provides for options to
purchase Common Shares. The maximum aggregate number of Common Shares that may
be issued pursuant to options granted under the Option Plan is 450,000. The
purpose of the Option Plan is to provide a means of performance-based
compensation in order to provide incentive for RAIT's key employees.
RAIT granted to certain of its officers options to acquire an aggregate of
385,000 Common Shares at an exercise price of $15.00 per share. The options are
not exercisable immediately; rather, 25% of each option becomes exercisable on
each of the first four anniversaries of the Closing Date. The options will
terminate on the tenth anniversary of the Closing Date. In addition, RAIT
granted to its Trustees options to acquire an aggregate of 2,500 Common Shares
under terms described above. As of December 31, 1997, no options were granted
under this Plan.
In addition, RAIT issued to the underwriters of the public offering
warrants to purchase up to 141,667 Common Shares at an exercise price of $15.00
per share. See Note 6 -- Shareholders' Equity.
F-11
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
Notes to Consolidated Financial Statements -- (Continued)
March 31, 1998
NOTE 8 -- OPTION PLAN -- (Continued)
Had compensation cost for the Option Plan been determined based on the
fair value of the options at the grant dates consistent with SFAS No. 123,
RAIT's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
(unaudited)
-------------------
<S> <C> <C>
Net income ..................................... As reported $941,512
Pro forma 927,512
Net income per common share -- basic ........... As reported .33
Pro forma .33
Net income per common share -- diluted ......... As reported .33
Pro forma .33
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in 1998: dividend yield of 12%; expected
volatility of 15%; risk-free interest rate of 5.36%; and expected lives of five
years.
A summary of the status of the Option Plan as of March 31, 1998 and the
changes during the three months ending on that date is presented below:
<TABLE>
<CAPTION>
March 31, 1998
(unaudited)
-------------------------
Weighted
average
exercise
Shares price
---------- ------------
<S> <C> <C>
Outstanding, January 1, 1998 ............................................. 0 $ 0
Granted .................................................................. 387,500 15
Exercised ................................................................ 0 0
-------
Outstanding, March 31, 1998 .............................................. 387,500 15
=======
Options exercisable at March 31, 1998 .................................... 0 0
Weighted average fair value of options granted during the period ......... $ .28
Weighted average remaining contractual life .............................. 8.45 years
</TABLE>
NOTE 9 -- COMMITMENTS
Lease Obligations
RAIT and its subsidiaries sub-lease office space under an operating lease
with JeffBanks, Inc. at an annual rental of $24,000 plus an allocation of
building operating expenses. The sub-lease expires May 14, 2008 and contains
two five-year renewal options. Rental expense was $3,000 for the three-month
period ended March 31, 1998 and no rental expense was paid for the period from
August 20, 1997 (date of inception) through December 31, 1997.
Employment Agreements
RAIT has entered into automatically renewing, one-year employment
agreements with its Chairman and Chief Executive Officer and its President and
Chief Operating Officer. Compensation under these agreements is $250,000 and
$150,000 per year, respectively, and includes the grant of options to purchase
225,000 Common
F-12
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
Notes to Consolidated Financial Statements -- (Continued)
March 31, 1998
NOTE 9 -- COMMITMENTS -- (Continued)
Shares and 75,000 Common Shares, respectively, upon the closing of the public
offering. In the event of termination other than for cause, the contracted
employee will receive a lump sum benefit equal to "average compensation" which
is defined as the average compensation in the three most highly compensated
years during the previous five years. In addition, upon termination, all
options to acquire Common Shares vest on the later of the effective date of
termination or six months after the options were granted.
NOTE 10 -- TRANSACTIONS WITH AFFILIATES
In connection with the offering, RAI, acquired 15% of RAIT's outstanding
Common Shares. The Chairman and Chief Executive Officer of RAIT is the spouse
of the Chairman, Chief Executive Officer and President of RAI. A trustee of
RAIT is their son, who is also employed by RAIT. RAI advanced approximately
$1,615,000 (of which approximately $1,579,000 was advanced as of December 31,
1997) to RAIT for organization, start-up and offering expenses. Simultaneously
with the closing of the public offering, RAIT purchased the Initial Investments
from RAI as described below. RAIT anticipates that it will purchase additional
investments from RAI subject to a maximum limit of 30% of RAIT's investments,
excluding the Initial Investments. RAIT may also from time to time retain RAI
to perform due diligence investigations on properties underlying proposed
investments (except investments acquired from RAI).
The 12 Initial Investments were acquired from RAI at Closing at an
aggregate investment of approximately $18,100,000 together with certain senior
debt relating to four of the Initial Investments from third parties at a cost
of approximately $2,500,000. Two of the Initial Investments were originated by
RAIT and were purchased from RAI at cost. Eight of the Initial Investments were
acquired at a discount to the outstanding balance due from the borrower on the
loan and to the appraised value of the underlying property. RAIT's investment
(based upon book value) in the Initial Investments is 66% of the appraised
value of the underlying properties. There is an aggregate of approximately
$18,700,000 of debt held by third parties that is secured by the properties
underlying certain of the Initial Investments and to which such Initial
Investments are subordinated. In addition, in one of the Initial Investments,
RAI has retained a $2,500,000 senior secured interest to which RAIT's interest
is subordinated.
Brandywine, an affiliate of RAI, may provide real estate management or
management supervisory services to properties underlying RAIT's investments.
Management fees and leasing commissions in the amount of $49,000 were paid by
the underlying properties to Brandywine for the quarter ended March 31, 1998.
RAIT places its temporary excess cash in short-term money market
instruments with JeffBanks, Inc. (JBI). The Chairman and Chief Executive
Officer of RAIT is the Chairman and Chief Executive Officer of JBI; she and her
spouse (who is also an officer and director of JBI) are principal shareholders
of JBI. As of March 31, 1998, RAIT had $11,030,000 in deposits at JBI, of which
approximately $10,930,000 is over the FDIC insurance limit.
Ledgewood Law Firm, P.C. (Ledgewood), which has acted as counsel to RAIT
in connection with its organization and the Offering, previously has acted as
counsel to RAI, Brandywine, JBI and their affiliates and anticipates that it
will continue to do so in the future.
F-13
<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
Available Information ........................... 5
Additional Information .......................... 5
Prospectus Summary .............................. 6
Structure of the Company ........................ 12
Risk Factors .................................... 13
Conflicts of Interest ........................... 24
Use of Proceeds ................................. 25
Investment Objectives and Policies .............. 26
The Company ..................................... 48
Security Ownership of Certain
Beneficial Owners and Management ............. 52
Price Range of Common Shares and
Distribution Policy .......................... 53
Capitalization .................................. 54
Management's Discussion and Analysis of
Financial Condition .......................... 55
Description of Shares of Beneficial Interest..... 56
Certain Provisions of Maryland Law and of
the Declaration of Trust and Bylaws .......... 59
Common Shares Available for Future Sale.......... 63
Operating Partnership Agreement ................. 63
Federal Income Tax Considerations ............... 66
Benefit Plan Considerations ..................... 78
Underwriting .................................... 80
Legal Matters ................................... 81
Experts ......................................... 81
Glossary ........................................ 82
Consolidated Financial Statements ............... F-1
--------------------------
Until _________, 1998, 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>
================================================================================
2,800,000 Shares
[GRAPHIC OMITTED]
Resource Asset Investment Trust
Common Shares
-----------------------------------
PROSPECTUS
-----------------------------------
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
PIPER JAFFRAY INC.
GRUNTAL & CO., L.L.C.
______________, 1998
================================================================================
<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................................. $17,810
AMEX listing fee..................................... 17,500
Printing and engraving expenses...................... 50,000*
Legal fees and expenses.............................. 400,000*
Accounting fees and expenses......................... 35,000*
Blue Sky fees and expenses........................... 0
Transfer agent and custodian fees.................... 10,000*
Miscellaneous........................................ 94,690*
---------------
Total........................................... $ 625,000*
===============
- ---------
*Estimated
Item 32. Sales to Special Parties
As part of the Company's initial public offering, completed January
14, 1998, the Company sold 124,280 Common Shares to persons affiliated or
associated with the Company, RAI, Brandywine and their affiliates or
associates at a purchase price equal to the public offering price, less
underwriting discounts and commissions. In addition, at the time of the
initial public offering, RAI purchased 500,000 shares in a private transaction
at the public offering price less underwriting discounts and commissions. RAI
was the sponsor of the Company, has one representative on the Company's Board
of Trustees and sold the Initial Investments to the Company. The sale of the
Common Shares to RAI was exempt from the registration requirements of the
Securities Act by reason of Section 4(2) thereof and, further, was not
integrated with the public offering by reason of Rule 152 promulgated under
the Securities Act. The Company also issued to Friedman, Billings, Ramsey &
Co., Inc., the underwriter of the initial public offering, warrants to
purchase up to 141,667 Common Shares at a price per share of $15 as additional
consideration for underwriting the offering. The warrants are exercisable for
a period of four years commencing one year after the closing date of the
public offering. Such sale was made in reliance of Section 4(2) of the
Securities Act.
II-1
<PAGE>
Item 33. Recent Sales of Unregistered Securities
See Item 32 above.
Item 34. Indemnification of Directors and Officers
Maryland law permits a Maryland REIT to include in its trust
agreement a provision limiting the liability of its trustees and officers to
the trust and its shareholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Declaration of
Trust of the Company contains such a provision which eliminates such liability
to the maximum extent permitted by Maryland law.
The Declaration of Trust of the Company authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay
or reimburse reasonable expenses in advance of final disposition of a
proceeding to (1) any present or former trustee or officer or (2) any
individual who, while a trustee of the Company and at the request of the
Company, serves or has served another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise from and against any claim or
liability to which such person may become subject or which such person may
incur by reason of his status as a present or former trustee or officer of the
Company. The Declaration of Trust of the Company obligates it, to the maximum
extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (1) any
present or former trustee or officer who is made a party to the proceeding by
reason of his service in that capacity or (2) any individual who, while a
trustee of the Company and at the request of the individual who, while a
trustee of the Company and at the request of the Company, serves or has served
as an officer, director, trustee, partner or otherwise in another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
and who is made a party to the proceeding by reason of his service in that
capacity.
Maryland law requires a REIT (unless its trust agreement provides
otherwise, which the Company's Declaration of Trust does not) to indemnify a
trustee or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity. Maryland law permits a REIT to indemnify its present and
former trustees and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (1)
the act or omission of the trustee or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (2) the trustee or officer
actually received an improper personal benefit in money, property or services
or (3) in the case of any criminal proceeding, the trustee or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland REIT may not indemnify for an adverse judgment in a suit by or in the
right of the trust or for
II-2
<PAGE>
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 has entered into an Indemnification
Agreement (Exhibit 10.1 hereto) with each of its officers and trustees. The
Underwriting Agreement (Exhibit 1) also provides for indemnification by the
Underwriters of the Company, its trustees and officers and persons who control
the Company within the meaning of Section 15 of the Securities Act with
respect to certain liabilities, including liabilities arising under the
Securities Act.
ITEM 35. Treatment of Proceeds from Shares Being Registered
Not applicable.
ITEM 36. Financial Statements and Exhibits
(a) Financial Statements included in the Prospectus are:
Consolidated Financial Statements for the Company and
subsidiaries for the period August 20, 1997 (date of inception) through
December 31, 1997 and as of and for the quarter ended March 31, 1998. All other
schedules have been omitted because they are either not applicable, not required
or the information required has been disclosed in the financial statements and
related notes or otherwise in the Prospectus.
(b) Exhibits
<TABLE>
<S> <C>
1 Form of Underwriting Agreement
3.1* Form of Amended and Restated Declaration of Trust
3.1.1 Articles of Amendment of Amended and Restated Declaration of Trust
3.2* Bylaws of the Company
3.3* Articles of Incorporation of RAIT General, Inc.
3.4* By-laws of RAIT General, Inc.
3.5* Articles of Incorporation of RAIT Limited, Inc.
3.6* By-laws of RAIT Limited, Inc.
3.7* Certificate of Limited Partnership of RAIT Partnership, L.P.
3.8* Limited Partnership Agreement of RAIT Partnership, L.P.
4* Form of Certificate for Common Shares of the Company
5.1 Opinion of Ledgewood Law Firm, P.C.
5.2 Opinion of Arnold & Porter
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
8 Opinion of Ledgewood Law Firm, P.C. (as to tax matters)
10.1* Form of Indemnification Agreement
10.2* Form of Agreement between Company and Resource America, Inc.
21 Subsidiaries of the registrant (included in the Prospectus)
23.1 Consent of Ledgewood Law Firm, P.C. (contained in Exhibits 5.1 and
8)
23.2 Consent of Arnold & Porter (contained in Exhibit 5.2)
23.3 Consent of Grant Thornton LLP
23.4 Consent of Johnson, McClellan, Sullins & Page
23.5 Consent of Joseph Dennis Pasquarella & Co.
23.6 Consent of M. Richard Cohen
23.7 Consent of John Poole and Associates
23.8 Consent of Louis A. Iatarola Realty Appraisal Group, Ltd.
23.9 Consent of CB Commercial Real Estate Group, Inc.
</TABLE>
- ---------
* Included as an exhibit to the Company's registration statement on
Form S-11, registration no. 333-35077. Each such exhibit is hereby
incorporated herein by reference to such registration statement.
ITEM 37. Undertakings
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the provisions referenced in
Item 34 of this Registration Statement or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policies as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes 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 pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-11 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Philadelphia, Commonwealth of
Pennsylvania, on the 5th day of June, 1998.
RESOURCE ASSET INVESTMENT TRUST
By: /s/ Betsy Z. Cohen
----------------------------------------------------
Betsy Z. Cohen, Chairman and Chief Executive Officer
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Betsy Z. Cohen Chairman, Chief Executive June 5, 1998
Officer and Trustee
(Principal Executive Officer)
Jay J. Eisner President and Chief Operating June 5, 1998
Officer
Ellen J. DiStefano Chief Financial Officer June 5, 1998
Jonathan Z. Cohen Secretary and Trustee June 5, 1998
Jerome S. Goodman Trustee June 5, 1998
Joel R. Mesznik Trustee June 5, 1998
</TABLE>
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Daniel Promislo Trustee June 5, 1998
Jack L. Wolgin Trustee June 5, 1998
By: /s/ Betsy Z. Cohen
----------------------
Betsy Z. Cohen, as
attorney-in-fact for
each such person pursuant
to power of attorney
previously filed as part
of this registration statement.
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
Exhibit
No. Description
- ------- -----------
<S> <C>
1 Form of Underwriting Agreement
3.1* Form of Amended and Restated Declaration of Trust
3.1.1 Articles of Amendment of Amended and Restated Declaration of Trust
3.2* Bylaws of the Company
3.3* Articles of Incorporation of RAIT General, Inc.
3.4* By-laws of RAIT General, Inc.
3.5* Articles of Incorporation of RAIT Limited, Inc.
3.6* By-laws of RAIT Limited, Inc.
3.7* Certificate of Limited Partnership of RAIT Partnership, L.P.
3.8* Limited Partnership Agreement of RAIT Partnership, L.P.
4* Form of Certificate for Common Shares of the Company
5.1 Opinion of Ledgewood Law Firm, P.C.
5.2 Opinion of Arnold & Porter
8 Opinion of Ledgewood Law Firm, P.C. (as to tax matters)
10.1* Form of Indemnification Agreement
10.2* Form of Agreement between Company and Resource America, Inc.
21 Subsidiaries of the registrant (included in the Prospectus)
23.1 Consent of Ledgewood Law Firm, P.C. (contained in Exhibits 5.1 and
8)
23.2 Consent of Arnold & Porter (contained in Exhibit 5.2)
23.3 Consent of Grant Thornton LLP
23.4 Consent of Johnson, McClellan, Sullins & Page
23.5 Consent of Joseph Dennis Pasquarella & Co.
23.6 Consent of M. Richard Cohen
23.7 Consent of John Poole and Associates
23.8 Consent of Louis A. Iatarola Realty Appraisal Group, Ltd.
23.9 Consent of CB Commercial Real Estate Group, Inc.
</TABLE>
- ---------
* Included as an exhibit to the Company's registration statement on
Form S-11, registration no. 333-35077. Each such exhibit is hereby
incorporated herein by reference to such registration statement.
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
__________ Shares of Beneficial Interest
UNDERWRITING AGREEMENT
___________, 1998
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
PIPER JAFFRAY INC.
GRUNTAL & CO., L.L.C.
as Representatives 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., Piper Jaffray Inc. and Gruntal & Co., L.L.C. and each of the other
Underwriters listed on Schedule I hereto (collectively, the "Underwriters"), for
whom Friedman, Billings, Ramsey & Co., Inc., Piper Jaffray Inc. and Gruntal &
Co., L.L.C. are acting as representative (in such capacity, the
"Representatives"), 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 _______ shares
of Common Shares to cover over-allotments, if any. The _________ Common Shares
to be purchased by the Underwriters (the "Initial Shares") and all or any part
of the _______ Shares subject to the option described in Section 1(b) hereof
(the "Option Shares") are hereinafter called, collectively, the "Shares". The
Company acknowledges that at its request, the Underwriters have reserved up to
_______ of the Initial Shares for sale to certain persons listed in Schedule IV
hereto at the 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.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-11 (No. 333-53067) 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
<PAGE>
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 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 Representatives in their sole discretion shall
make to eliminate any sales or purchases of fractional shares.
(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 Representatives 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 Representatives, 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,
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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 Representatives in their sole discretion shall make to
eliminate any sales or purchases of fractional shares.
(c) Terms of Public Offering. The Company is advised by you
that the Shares are to be offered to the public initially at $_____ per share
(the "Public Offering Price") and to certain dealers selected by you at a price
that represents a concession not in excess of $___ per share under the Public
Offering Price, and that any Underwriter may allow, and such dealers may
reallow, a concession, not in excess of $____ per share, to any Underwriter or
to certain other dealers. The Underwriters may from time to time increase or
decrease the Public Offering Price of the Shares after the initial public
offering to such extent as the Underwriters may determine.
2. Payment and Delivery:
(a) Initial Shares. 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 Ledgewood Law Firm, P.C. located at 1521
Locust Street, Philadelphia, Pennsylvania (unless another place shall be agreed
upon by the Representatives and the Company) against delivery of the
certificates for the Initial Shares to the Representatives for the respective
accounts of the Underwriters. 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 another
time, not later than ten business days after such date, shall be agreed to by
the Representatives 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 Representatives in
definitive form registered in such names and in such denominations as the
Representatives shall specify. For the purpose of expediting the checking of the
certificates for the Initial Shares by the Representatives, the Company agrees
to make such certificates available to the Representatives 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 Ledgewood Law Firm, P.C. located at
1521 Locust Street, Philadelphia, Pennsylvania (unless another place shall be
agreed upon by the Representatives and the Company), against delivery of the
certificates for the Option Shares to the Representatives 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 Representatives in definitive form registered
in such names and in such denominations as the Representatives shall specify.
For the purpose of expediting the checking of the certificates for the Option
Shares by the Representatives, the Company agrees to make such
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certificates available to the Representatives 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") 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, and the other
agreements described in the Prospectus and listed on Schedule III attached
hereto, if any (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 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 described in the
Registration Statement and the Prospectus requires such qualification, except
where the failure to be in good standing could be reasonably expected to not
have a material adverse effect on the assets, operations, business or condition
(financial or otherwise) of the Company and the Subsidiaries taken as a whole;
(c) the Company and the Subsidiaries are in compliance in all
material respects with all applicable laws, rules, regulations, orders, decrees
and judgments;
(d) 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 to not have a
material adverse effect on the assets, operations, business 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
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<PAGE>
execution, delivery and performance of this Agreement and the Other Transaction
Documents, 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 to not have a material adverse
effect on the assets, operations, business 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;
(e) 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;
(f) 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;
(g) 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
5
<PAGE>
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 American Stock Exchange;
(h) 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;
(i) 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 or the sale and
delivery of the Shares by the Company as contemplated hereby 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 listing of the Shares on the American Stock
Exchange 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;
(j) 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 to not have, individually or in the aggregate, a material
adverse effect on the assets, operations, business 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 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;
(k) 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
6
<PAGE>
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 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;
(l) 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 Representatives 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);
(m) 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;
(n) 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;
(o) 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, arbitration panel
or agency which could reasonably be expected to result in a judgment, decree,
award or order having a material adverse effect on the
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assets, operations, business 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;
(p) 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 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;
(q) 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;
(r) 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 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) except in
accordance with its ordinary practice as disclosed in the Registration Statement
and the Prospectus, 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;
(s) 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;
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(t) 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
"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;
(u) all of the issued and outstanding shares of capital stock
of RAIT General, Inc., a Delaware corporation ("RAIT General"), and RAIT
Limited, Inc., a Delaware 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;
(v) immediately after the Closing Time, all of the issued and
outstanding units of partnership interest in the Partnership ("Common Units") or
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);
(w) 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;
(x) 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
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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;
(y) the Company has not relied upon the Representatives or
legal counsel for the Representatives for any legal, tax or accounting advice in
connection with the offering and sale of the Shares;
(z) any certificate signed by any officer of the Company or
any Subsidiary delivered to the Representatives 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;
(aa) 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;
(ab) neither the purchase nor the origination, as the case may
be, of the Loans, as such term is defined in the Prospectus, 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 Loan, 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 priority over any such Loan
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 Loan;
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(ac) 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;
(ad) 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 Securities Act
to be described in the Registration Statement and the Prospectus which is not so
described;
(ae) 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 or condition (financial or
otherwise) of the Company or any Subsidiary;
(af) 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 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;
(ag) 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
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;
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(ah) 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 Loan (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. ss. 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 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;
(ai) 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
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aggregate, reasonably be deemed to have a material adverse effect on the assets,
operations, business or condition (financial or otherwise) of the Company and
the Subsidiaries, taken as a whole;
(aj) 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;
(ak) 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;
(al) 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;
(am) 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;
(an) the Company is organized in conformity with the
requirements for qualification as a real estate investment trust under the
Internal Revenue Code of 1986, as amended (the "Code"), and the Company's
proposed method of operation will enable it to meet the requirements for
taxation as a real estate investment trust under the Code; the Partnership will
be treated as a partnership for federal income tax purposes and not as a
corporation or association taxable as a corporation;
(ao) the Shares have been approved for listing, upon official
notice of issuance, on the American Stock Exchange;
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(ap) 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;
(aq) 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;
(ar) 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
(as) 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 Representatives 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 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 Representatives promptly and, if
requested by the Representatives, will confirm such advice in writing, when such
post-effective amendment has become effective;
(c) to prepare the Prospectus in a form approved by the
Underwriters and file such Prospectus with the Commission pursuant to Rule
424(b) within the time period prescribed by law, on the day following the
execution and delivery of this Agreement and to furnish promptly (and with
respect to the initial delivery of such Prospectus, not later than 10:00 a.m.
(New York City time) on the day following the execution and delivery of this
Agreement) to the Underwriters as many copies of the Prospectus (or of the
Prospectus as amended or supplemented if the Company shall have made any
amendments or supplements thereto after the effective date of the Registration
Statement) as the Underwriters may reasonably request for the purposes
contemplated by the Securities Act
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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 Representatives promptly and (if requested
by the Representatives) 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 Representatives 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 Representatives promptly of any
proposal to amend or supplement the Registration Statement or Prospectus and to
file no such amendment or supplement to which the Representatives 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 Representatives 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 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 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;
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(i) to furnish promptly to the Representatives 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 listing
of the Shares on the American Stock Exchange and to file with the American Stock
Exchange all documents and notices required by the American Stock Exchange of
companies that have securities that are listed on the American Stock Exchange;
(n) except in the ordinary course of business in connection
with the acquisition of assets, to refrain during a period of 180 days from the
date of the Prospectus, without the prior written consent of the
Representatives, 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
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, or (B) 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) 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
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<PAGE>
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 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;
(p) 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;
(q) 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;
(r) the Company will comply with all of the provisions of any
undertakings in the Registration Statement;
(s) 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;
(t) 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
Representatives' 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 Representatives advising the
Company to the effect set forth above, to forthwith prepare, consult with the
Representatives concerning the substance of, and disseminate a press release or
other public statement, reasonably satisfactory to the Representatives,
responding to or commenting on such rumor, publication or event; and
(u) 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.
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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 whether or
not the transactions contemplated hereunder are consummated or this Agreement
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 Representatives' 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
Representatives, and the Company's road show costs and expenses.
(b) 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:
(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 meet 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
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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 (A) 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 (B) 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, 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 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 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
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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 or condition
(financial or otherwise) of the Company and the Subsidiaries taken as a
whole;
(iv) except as disclosed in the Prospectus, no
Subsidiary is prohibited or restricted 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) 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 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 or
condition (financial or otherwise) of the Company and the Subsidiaries
taken as a whole;
vii) the execution, delivery and performance of this
Agreement, and the Other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated under this
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
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<PAGE>
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 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, 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 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;
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 transactions
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
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<PAGE>
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 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 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;
xiii) the Shares have been duly authorized and, when
the Shares have been issued and duly delivered against payment therefor
as contemplated by this Agreement, the 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 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 or the
Partnership, as the case may be, and the Common Units by the Company or
the Partnership, as the case may be, 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 Loans, nor the execution and delivery of, or
performance by the borrowers thereunder of any mortgage,
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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 Loan 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 Loan;
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 Loans, 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 Loans;
xviii) to such 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;
xix) the form of certificate used to evidence the
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 American
Stock Exchange;
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," "Price Range of Common Shares and
Distribution Policy," "Prospectus Summary - Tax Status of the Company,"
"Certain Provisions of Maryland Law and of the Declaration of Trust and
Bylaws," "Description of Shares of Beneficial Interest," "Common Shares
Available for Future Sale," "Federal Income Tax Considerations,"
"Benefit Plan Considerations " and "Certain Legal Aspects of Real
Property Loans and Investments," in the Registration
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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 listing on the
American Stock Exchange;
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, arbitration panel or
agency that are required to be described in the Prospectus but are not
so described;
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 Loans which are specifically addressed in Section 6(d)(iv)) are
legal, valid and binding obligations of the Company or the
Subsidiaries, as the case may be, enforceable in accordance with their
respective terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and by general principles of equity;
xxvi) the Company is organized in conformity with the
requirements for qualification as a real estate investment trust
pursuant to Sections 856 through 860 of the Code, and the Company's
proposed method of operation will enable it to meet the requirements
for qualification and taxation as a real estate investment trust under
the Code; the Partnership will be treated as a partnership for federal
income tax purposes and not as a corporation or an association taxable
as a corporation;
xxvii) neither the Company nor any of the Subsidiaries
is, or solely as a result of the 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 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 or
condition (financial or otherwise) of any such entity, respectively.
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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
(xxii) and (xxiii) 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 financial statements
and other financial and statistical data included in the Registration Statement,
Preliminary Prospectus or Prospectus).
(c) The Company shall furnish to the Underwriters at the
Closing Time and on each Date of Delivery an opinion of Arnold & Porter, special
counsel for the Company, addressed to the Underwriters and dated the Closing
Time and each Date of Delivery and in form satisfactory to Hunton & Williams,
counsel for the Underwriters, stating that, as a matter of Maryland law:
i) the statements under the captions "Certain
Provisions of Maryland Law and of the 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 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 by the Company;
iii) the Company has been duly incorporated and is
validly existing and in good standing under the laws of the state of
Maryland with the requisite corporate power and authority to own its
properties and to conduct its business as described in the Registration
Statement and Prospectus and to execute, deliver and perform this
Agreement and the Other Transaction Documents and to consummate the
transactions described in each such agreement;
iv) 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
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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; and
v) 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.
(d) The Representatives 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
Representatives as representatives of the Underwriters and in form and substance
satisfactory to the Representatives.
(e) 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 Representatives and
in form and substance satisfactory to the Representatives.
(f) No amendment or supplement to the Registration Statement
or Prospectus shall have been filed to which the Underwriters shall have
objected in writing.
(g) 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.
(h) 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 Representatives, 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.
(i) At the Closing Time, the Other Transaction Documents shall
have been entered into and delivered by all required parties.
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(j) At the Closing Time, the Shares shall have been approved
for listing on the American Stock Exchange.
(k) The NASD shall not have raised any objection with respect
to the fairness and reasonableness of the underwriting terms and arrangements.
(l) The Company will, at the Closing Time and on each Date of
Delivery, deliver to the Underwriters a certificate of two principal executive
officers or, in the case of the Partnership two principal executive officers of
RAIT General, 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 (g), (h), (i) and (j) have been met and
are true and correct as of such date.
(m) 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 statements of the Company contained herein, and the performance
by the Company of its covenants contained herein, and the fulfillment of any
conditions contained herein, as of the Closing Time or any Date of Delivery as
the Underwriters may reasonably request.
(n) 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.
(o) The Company shall perform such of its obligations under
this Agreement are to be performed by the terms hereof and thereof at or before
the Closing Time or the relevant Date of Delivery.
The several obligations of the Underwriters to purchase Option
Shares hereunder are subject to the delivery to the Representatives 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 Option Shares.
7. Termination: The obligations of the several Underwriters
hereunder shall be subject to termination in the absolute discretion of the
Representatives, 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 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 Representatives, 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 the NASD or if trading generally on the New York Stock
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Exchange, the American 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 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 Representatives has a
material adverse affect or will have a material adverse affect on the assets,
operations, business 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 Representatives 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 Representatives, impracticable to
market or deliver the Shares on the terms and in the manner contemplated in the
Prospectus.
If the Representatives 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 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 Representatives 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
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non-defaulting Underwriters; and (ii) if the total number of Defaulted Shares
exceeds 10% of such total, the Representatives 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 Representatives with the approval of
the Company or selected by the Company with the approval of the
Representatives).
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, 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 Representatives 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
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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 Representatives 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 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
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statement of a material fact contained in and in conformity with information
furnished in writing by such Underwriter through the Representatives 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 Representatives to the Company for purposes of
Section 3(l) 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 Representatives in writing of the
institution of such action and the Representatives, 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 Representatives in connection with the defense of
such action or the Representatives 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 Representatives 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 Underwriter shall be liable for any settlement of any such
claim or action effected without the written consent of the Representatives.
(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)
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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 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.
32
<PAGE>
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 1845 Walnut Street, Tenth Floor, Philadelphia, Pennsylvania 19103;
and, if to the Partnership, shall be sufficient in all respects if delivered to
the Partnership at the offices of the Partnership at 1845 Walnut Street, Tenth
Floor, Philadelphia, Pennsylvania 19103.
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.
33
<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:
34
<PAGE>
Accepted and agreed to as
of the date first above written:
FRIEDMAN, BILLINGS, RAMSEY &
CO., INC.
- -------------------------------------
By: James R. Kleeblatt
Its: Managing Director
For themselves and as Representatives
of the other Underwriters named on
Schedule I hereto.
35
<PAGE>
Schedule I
Number of Initial
Underwriter Shares to be Purchased
Friedman, Billings, Ramsey & Co., Inc.
Piper Jaffray Inc.
Gruntal & Co., L.L.C.
36
<PAGE>
Schedule II
Subsidiaries of the Company
RAIT General, Inc.
RAIT Limited, Inc.
RAIT Partnership, L.P.
37
<PAGE>
Schedule III
Other Transaction Documents
38
<PAGE>
Schedule IV
Persons For Whom Shares Have Been Reserved
NAME SHARES
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
ARTICLES OF AMENDMENT
OF
AMENDED AND RESTATED DECLARATION OF TRUST
Resource Asset Investment Trust, a Maryland real estate investment
trust (the "Trust") under Title 8 of the Corporations and Associations Article
of the Annotated Code of Maryland, desiring to amend its Amended and Restated
Declaration of Trust as currently in effect hereby states:
FIRST: That at a meeting of the Board of Trustees of the Trust,
resolutions were duly adopted setting forth a proposed amendment of the Amended
and Restated Declaration of Trust of the Trust, declaring said amendment to be
advisable and directing that the proposed amendment be put to a vote of the
stockholders of the Trust.
SECOND: That thereafter, the proposed amendment was adopted by a
Consent in Writing of the Sole Stockholder, in lieu of a meeting, in accordance
with Section 2-505 of the General Corporation Law of the state of Maryland,
which Consent in Writing was signed by the holders of the outstanding stock of
the Corporation having not less than the minimum number of votes that would be
necessary to adopt the amendment at a meeting at which all shares entitled to
vote thereon were present and voted.
THIRD: That the amendment adopted by the Trust, set forth in
full, is as follows:
<PAGE>
Article VII Section 1(A)(13), Section 1(J)(3) and Section 5 are hereby
amended so that each and every reference in each such Section to "8.5%"
shall be stricken and "8.3%" inserted in its place.
IN WITNESS WHEREOF, this Articles of Amendment of Amended and Restated
Declaration of Trust has been signed as of the 29th day of December, 1997, by
the undersigned Chairman of the Board of Trustees of the Trust and witnessed by
the undersigned Secretary of the Trust, each of whom acknowledges that this
document is his/her free act and deed, and that to the best of his/her
knowledge, information and belief, the matters and facts set forth herein are
true in all material respects and that the statement is made under the penalties
for perjury.
RESOURCE ASSET INVESTMENT TRUST
ATTEST:
- -------------------------- ----------------------------------
Jay J. Eisner, Secretary Betsy Z. Cohen, Chairman
IN WITNESS WHEREOF, this Articles of Amendment of Amended and Restated
Declaration of Trust has been signed as of the 29th day of December, 1997, by
the undersigned Trustees of the Trust each of whom acknowledges that this
document is his/her free act and deed, and that to the best of his/her
knowledge, information and belief, the matters and facts set forth herein are
true in all material
<PAGE>
respects and that the statement is made under the penalties for perjury.
TRUSTEES:
- --------------------------- ----------------------------
Betsy Z. Cohen Jonathan Z. Cohen
- --------------------------- ----------------------------
Jerome S. Goodman Joel R. Mesznik
- --------------------------- ----------------------------
Daniel Promislo Jack L. Wolgin
3
<PAGE>
June 5, 1998
Resource Asset Investment Trust
1845 Walnut Street; 10th Floor
Philadelphia, PA 19103
Gentlemen/Ladies:
We have acted as counsel to Resource Asset Investment Trust (the
"Company") in connection with the preparation and filing by the Company of a
registration statement, as amended to date (the "Registration Statement"), on
Form S-11 (No. 333-53067) under the Securities Act of 1933, as amended (the
"Act"), with respect to the offering by the Company of its common shares of
beneficial interest (the "Common Shares"). In connection therewith, you have
requested our opinion as to certain matters referred to below.
In our capacity as such counsel, we have familiarized ourselves with
the actions taken by the Company in connection with the registration of the
Common Shares. We have examined the originals or certified copies of such
records, agreements, certificates of public officials and others, and such other
documents, including the Registration Statement, as we have deemed relevant and
necessary as a basis for the opinions hereinafter expressed. In such
examination, we have assumed the genuineness of all signatures on original
documents and the authenticity of all documents submitted to us as originals,
the conformity to original documents of all copies submitted to us as conformed
or photostatic copies, and the authenticity of the originals of such latter
documents. We are attorneys admitted to practice in the Commonwealth of
Pennsylvania and, accordingly, we express no opinion with respect to matters
governed by the laws of any jurisdiction other than the Commonwealth of
Pennsylvania, the general corporation laws and partnership laws of the State of
Delaware and the federal laws of the United States of America. As to matters
governed by the laws of the State of Maryland, we have relied upon the opinion
of Arnold & Porter, a copy of which has been delivered to you.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is a real estate investment trust which has been duly
formed and is validly subsisting under the laws of the State of Maryland.
<PAGE>
Resource Asset Investment Trust
June 5, 1998
Page 2
2. The Company's subsidiaries, RAIT General, Inc. and RAIT Limited,
Inc., are corporations which have been duly formed and are validly subsisting
under the laws of the State of Delaware.
3. RAIT Partnership, L.P. is a limited partnership which has been duly
formed and is validly subsisting under the laws of the State of Delaware.
4. When issued and paid for, the Common Shares will be duly authorized,
validly issued, fully paid and non-assessable.
We consent to the references to this opinion and to Ledgewood Law Firm,
P.C. in the Prospectus included as part of the Registration Statement, and to
the inclusion of this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ Ledgewood Law Firm, P.C.
LEDGEWOOD LAW FIRM, P.C.
<PAGE>
June 5, 1998
Resource Asset Investment Trust
1845 Walnut Street, 10th Floor
Philadelphia, Pennsylvania 19103
Attn: Jay J. Eisner
Re: Registration Statement on Form S-11
Registration No. 333-53067
--------------------------
Ladies and Gentlemen:
We have acted as special Maryland counsel to Resource Asset Investment
Trust, a Maryland real estate investment trust (the "Company"), in connection
with certain matters of Maryland law arising out of the registration of up to
3,220,000 common shares of beneficial interest, par value $.01 per share (the
"Common Shares") covered by the above-referenced Registration Statement, and all
amendments thereto (the "Registration Statement"). Unless otherwise defined
herein, capitalized terms used herein shall have the meanings assigned to them
in the Registration Statement.
In connection with rendering the opinions set forth in this letter, we
have examined such corporate records of the Company and made such investigation
of matters of fact and law and examined such other documents as we deem
necessary for rendering the opinions hereinafter expressed.
The opinions set forth herein are subject to the following
qualifications, which are in addition to any other qualifications contained
herein:
A. We have assumed without verification the genuineness of all
signatures on all documents, the authority of the parties (other than the
Company) executing such documents, the authenticity of all documents submitted
to us as originals, and the conformity to original documents of all documents
submitted to us as copies.
B. The opinions set forth herein are based on existing laws,
ordinances, rules, regulations, court and administrative decisions as they
presently have been interpreted and we can give no assurances that our opinions
would not be different after any change in any of the foregoing occurring after
the date hereof.
C. We have assumed without verification the accuracy and completeness
of all corporate records made available to us by the Company.
D. The foregoing opinion is limited to the laws of the State of
Maryland and we do not express any opinion herein concerning any other law. As
to matters governed by the laws specified in the foregoing sentence, we have
relied exclusively on the latest standard compilations of such statutes and laws
as reproduced in commonly accepted unofficial
<PAGE>
publications available to us. We express no opinion as to compliance with the
securities (or "blue sky") laws or the real estate syndication laws of the State
of Maryland.
Based on the foregoing, upon the assumptions that there will be no
material changes in the documents we have examined and the matters investigated
referred to above, we are of the opinion that the Common Shares have been duly
authorized and, when and if delivered against payment therefor in accordance
with the resolutions of the Board of Trustees of the Company authorizing their
issuance, will be validly issued, fully paid and nonassessable.
This letter does not address any matters other than those expressly
addressed herein. This letter speaks only as of the date hereof. We undertake no
responsibility to update or supplement it after such date.
We hereby consent to your filing of this opinion as an exhibit to the
Registration Statement, and to reference to our firm under the caption "Legal
Opinion" contained in the Prospectus included therein. In giving such consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act.
Very truly yours,
ARNOLD & PORTER
By /s/ Steven Kaplan
------------------------------
<PAGE>
June 5, 1998
Resource Asset Investment Trust
1845 Walnut Street - 10th Floor
Philadelphia, PA 19103
Re: Resource Asset Investment Trust Qualification as
Real Estate Investment Trust
Ladies and Gentlemen:
We have acted as counsel to Resource Asset Investment Trust, a Maryland
real estate investment trust (the "Company"), in connection with the preparation
of a Form S-11 registration statement (the "Registration Statement"), filed with
the Securities and Exchange Commission on May 19, 1998 (No. 333-53067), as
amended through the date hereof, with respect to the offering and sale (the
"Offering") of up to 2,800,000 shares of beneficial interest, par value $0.01
per share of the Company (the "Common Shares"), and the Company's contribution
of the net proceeds of the Offering to its wholly-owned subsidiaries, RAIT
General, Inc., a Delaware corporation (the "General Partner"), and RAIT Limited,
Inc., a Delaware corporation (the "Limited Partner"), and the contribution of
such proceeds by the General Partner and the Limited Partner to RAIT Limited
Partnership, L.P., a Delaware limited partnership (the "Partnership"). You have
requested our opinion regarding certain U.S. federal income tax matters in
connection with the Offering.
The Partnership will invest the balance of the proceeds contributed by
the General Partner and the Limited Partner in short-term interest-bearing
securities until the Partnership identifies additional real estate-related
assets for acquisition.
In giving this opinion letter, we have examined the following:
1. the Company's Declaration of Trust, as duly filed with the Secretary
of State of the State of Maryland on August 14, 1997;
2. the Company's Restated and Amended Declaration of Trust, as duly
filed with the Secretary of State of the State of Maryland on November 19, 1997
and as amended by the Articles
<PAGE>
Resource Asset Investment Trust
June 5, 1998
Page 2
of Amendment of Amended and Restated Declaration of Trust, duly filed with the
Secretary of State of the State of Maryland on January 7, 1998;
3. the Company's Bylaws;
4. the Registration Statement, including the prospectus contained as
part of the Registration Statement (the "Prospectus");
5. the Articles of Incorporation of the General Partner and the Limited
Partner;
6. the Limited Partnership Agreement of the Partnership (the
"Partnership Agreement") between the General Partner and the Limited Partner, in
the form filed as an exhibit to the Registration Statement; and
7. such other documents as we have deemed necessary or appropriate for
purposes of this opinion.
In connection with the opinions rendered below, we have assumed, with
your consent, that:
1. each of the documents referred to above has been duly authorized,
executed, and delivered; is authentic, if an original, or is accurate, if a
copy, and has not been amended;
2. during its taxable year ending December 31, 1998 and future taxable
years, the Company will operate in a manner that will make the representations
contained in a certificate, dated June 5, 1998 and executed by a duly appointed
officer of the Company (the "Officer's Certificate"), true for such years;
3. the Company will not make any amendments to its organizational
documents, the General Partner's or the Limited Partner's organizational
documents, or the Partnership Agreement after the date of this opinion that
would affect its qualification as a real estate investment trust (a "REIT") for
any taxable year; and
4. no action will be taken by the Company, the General Partner, the
Limited Partner, or the Partnership after the date hereof that would have the
effect of altering the facts upon which the opinions set forth below are based.
In connection with the opinions rendered below, we also have relied
upon the correctness of the representations contained in the Officer's
Certificate. No facts have come to our attention,
<PAGE>
Resource Asset Investment Trust
June 5, 1998
Page 3
however, that would cause us to question the accuracy and completeness of the
facts contained in the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, or the Prospectus in a
material way. In addition, to the extent that any of the representations
provided to us in the Officer's Certificate are with respect to matters set
forth in the Internal Revenue Code of 1986, as amended (the "Code"), or the
Treasury regulations thereunder (the "Regulations"), we have reviewed with the
individuals making such representations the relevant portion of the Code and the
applicable Regulations.
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussion in
the Prospectus under the caption "Federal Income Tax Considerations" (which is
incorporated herein by reference), we are of the opinion that:
(a) commencing with the Company's taxable year ending December 31,
1998, the Company will qualify to be taxed as a REIT pursuant to
sections 856 through 860 of the Code, and the Company's
organization and proposed method of operation will enable it to
continue to meet the requirements for qualification and taxation
as a REIT under the Code; and
(b) the descriptions of the law and the legal conclusions contained in
the Prospectus under the caption "Federal Income Tax
Considerations" are correct in all material respects, and the
discussion thereunder fairly summarizes the federal income tax
considerations that are likely to be material to a holder of the
Common Shares.
We will not review on a continuing basis the Company's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Officer's Certificate. Accordingly, no assurance can be given that the
actual results of the Company's operations for any given taxable year will
satisfy the requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the Code and
the Regulations, published administrative interpretations thereof, and published
court decisions. The Internal Revenue Service has not issued Regulations or
administrative interpretations with respect to various provisions of the Code
relating to REIT qualification. No assurance can be given that the law will not
change in a way that will prevent the Company from qualifying as a REIT.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the reference to Ledgewood Law Firm,
P.C. under the caption "Federal Income Tax Considerations" in the Prospectus. In
giving this consent, we do not admit that we are in the category of persons
whose consent is required by Section 7 of the Securities Act of
<PAGE>
Resource Asset Investment Trust
June 5, 1998
Page 4
1933, as amended, or the rules and regulations promulgated thereunder by the
Securities and Exchange Commission.
The foregoing opinions are limited to the U.S. federal income tax
matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to update
the opinions expressed herein after the date of this letter.
Very truly yours,
/s/ Ledgewood Law Firm, P.C.
-------------------------------
LEDGEWOOD, LAW FIRM, P.C.
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 5, 1998 accompanying the
consolidated financial statements of Resource Asset Investment Trust and
Subsidiaries appearing in the 1997 Annual Report on Form 10-K for the year ended
December 31, 1997 which are contained in Amendment No. 1 of the Registration
Statement (File No. 333-53067) and Prospectus. We consent to the use of the
aforementioned report in such Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts."
/s/ Grant Thornton
- -------------------------------
GRANT THORNTON LLP
Philadelphia, Pennsylvania
June 5, 1998
<PAGE>
June 4, 1998
Mr. Jay Eisner, President
Resource Asset Investment Trust
1845 Walnut Street; 10th Flr.
Philadelphia, PA 19103
Dear Mr. Eisner:
The undersigned hereby consents to the use, in the Registration
Statement on Form S-11 to be filed by Resource Asset Investment Trust with the
Securities and Exchange Commission, of its name and reference to the property
valuation provided by it as follows:
Property Valuation Date
- -------- --------------
Firehouse Square July 14, 1997
Sincerely,
JOHNSON, McCLELLAN, SULLINS & PAGE
By: /s/ Richard E. McClellan
-------------------------------
<PAGE>
June 4, 1998
Mr. Jay Eisner, President
Resource Asset Investment Trust
1845 Walnut Street; 10th Flr.
Philadelphia, PA 19103
Dear Mr. Eisner:
The undersigned hereby consents to the use, in the Registration
Statement on Form S-11 to be filed by Resource Asset Investment Trust with the
Securities and Exchange Commission, of its name and reference to the property
valuation provided by it as follows:
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.
By: /s/ Joseph Dennis Pasquarella
-------------------------------
<PAGE>
June 5, 1998
Mr. Jay Eisner, President
Resource Asset Investment Trust
1845 Walnut Street; 10th Flr.
Philadelphia, PA 19103
Dear Mr. Eisner:
The undersigned hereby consents to the use, in the Registration
Statement on Form S-11 to be filed by Resource Asset Investment Trust with the
Securities and Exchange Commission, of its name and reference to the property
valuation provided by it as follows:
Property Valuation Date
- -------- --------------
Lincoln Court September 10, 1997
1826-30 Green Street September 15, 1997
1845 Walnut Street February 1, 1997
Sincerely,
/s/ M. Richard Cohen
---------------------
M. Richard Cohen
<PAGE>
June 5, 1998
Mr. Jay Eisner, President
Resource Asset Investment Trust
1845 Walnut Street; 10th Flr.
Philadelphia, PA 19103
Dear Mr. Eisner:
The undersigned hereby consents to the use, in the Registration
Statement on Form S-11 to be filed by Resource Asset Investment Trust with the
Securities and Exchange Commission, of its name and reference to the property
valuation provided by it as follows:
Property Valuation Date
- -------- --------------
Evening Star Building March 7, 1998
Sincerely,
JOHN POOLE & ASSOCIATES
By:/s/ John R. Poole, MAI
-------------------------------
<PAGE>
June 4, 1998
Mr. Jay Eisner, President
Resource Asset Investment Trust
1845 Walnut Street; 10th Flr.
Philadelphia, PA 19103
Dear Mr. Eisner:
The undersigned hereby consents to the use, in the Registration
Statement on Form S-11 to be filed by Resource Asset Investment Trust with the
Securities and Exchange Commission, of its name and reference to the property
valuation provided by it as follows:
Property Valuation Date
- -------- --------------
126-132 South 18th Street October 6, 1997
220-50 S. 5th Street March 19, 1998
1805-09 Walnut Street April 29, 1997
Sincerely,
LOUIS A. IATAROLA
Realty Appraisal Group, Ltd.
By: /s/ Louis A. Iatarola
------------------------------
<PAGE>
June 4, 1998
Mr. Jay Eisner, President
Resource Asset Investment Trust
1845 Walnut Street; 10th Flr.
Philadelphia, PA 19103
Dear Mr. Eisner:
The undersigned hereby consents to the use, in the Registration
Statement on Form S-11 to be filed by Resource Asset Investment Trust with the
Securities and Exchange Commission, of its name and reference to the property
valuation provided by it as follows:
Property Valuation Date
- -------- --------------
Amberwood Apartments April 20, 1998
Sincerely,
CB COMMERCIAL REAL ESTATE GROUP, INC.
By: /s/ Jerrold Harvey
----------------------------
