<PAGE>
As filed with the Securities and Exchange Commission on May 18, 1998.
Registration No. 333-_________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
RESOURCE ASSET INVESTMENT TRUST
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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. [ ]
<PAGE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
<TABLE>
<CAPTION>
Calculation of Registration Fee
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<S> <C> <C> <C> <C>
Title of securities Amount being Proposed maximum Proposed maximum Amount of
being registered registered offering price per aggregate offering registration
unit price(2) fee
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Common Shares(1) 3,220,000 Shares $18.75 $60,375,000 $17,810.63
===================================================================================================================================
</TABLE>
(1) Includes 420,000 Common Shares which the Underwriters have the option
to purchase to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) based upon the average of the high and
low prices reported on the American Stock Exchange as of May 14, 1998
(a date within five business days prior to the date this registration
statement has been filed).
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 19, 1998
PROSPECTUS
2,800,000 Shares
RESOURCE ASSET INVESTMENT TRUST
Common Shares
-------------
Resource Asset Investment Trust ("RAS" 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 May
14, 1998, the last reported sales price of the Common Shares was $18.75 per
share. See "Price Range of Common Shares and Distribution Policy."
See "Risk Factors" beginning on page ______ 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
<PAGE>
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 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 in connection with the Company's
acquisition of investments and the management of properties.
o The Company will be taxed as a regular corporation if it fails to
qualify as a REIT.
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<PAGE>
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.
<TABLE>
<CAPTION>
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Price to Underwriting
Public Discount(1) Proceeds to Company(2)
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<S> <C> <C> <C>
Per Share................................ $ $ $
Total(3)................................. $ $ $
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</TABLE>
(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."
(2) Before deducting expenses in connection with the Offering, estimated
at $__________, 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 _____________, 1998.
------------------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
PIPER JAFFRAY INC.
GRUNTAL & CO., L.L.C.
The date of this Prospectus is __________, 1998.
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<PAGE>
<TABLE>
<S> <C>
AVAILABLE INFORMATION.............................................................................................
ADDITIONAL INFORMATION............................................................................................
PROSPECTUS SUMMARY................................................................................................
The Company..............................................................................................
Recent Developments .....................................................................................
Risk Factors.............................................................................................
Management of the Company................................................................................
Conflicts of Interest....................................................................................
The Offering.............................................................................................
Use of Proceeds..........................................................................................
Distribution Policy......................................................................................
Tax Status of the Company................................................................................
STRUCTURE OF THE COMPANY..........................................................................................
RISK FACTORS......................................................................................................
Investment Activity Risks................................................................................
Financing Considerations........................................................................
Value of Company's Loans Dependant on Conditions Beyond Company's Control..............
Longer Term, Subordinate and Non-Conforming Loans are Illiquid and Value May Decrease..
Lengthy Loan Commitment Periods May Reduce Company's Returns...........................
Investment in Subordinate Loans May Involve Increased Risk of Loss.....................
Investment in Non-Conforming Loans May Involve Increased Risk of Loss..................
Financing with High Loan-to-Value Ratios May Involve Increased Risk of Loss............
Interest Rate Changes May Adversely Affect Company's Investments.......................
Lack of Geographic Diversification Exposes Company's Investments to Higher Risk of
Loss Due to Regional Economic Factors..........................
Competition for Financing May Inhibit Company's Ability to Achieve Objectives..........
Appreciation Interests May Reduce Interest Rates Without Resulting in Additional
Returns........................................................
Loans Secured by Interests in Entities Owning Real Property May Involve Increased Risk
of Loss........................................................
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Usury Statutes May Impose Interest Ceilings and Substantial
Penalties for Violations.......................................
Discounted Loans May Have High Rates of Default........................................
Construction Financing May Increase Repayment Risk Real Property Considerations........
Value of Company's Property Interests Dependent on Conditions
Beyond Company's Control.......................................
Property Interests Are Illiquid and Value May Decrease.................................
Uninsured and Underinsured Losses May Affect Value of, or
Return from, Property Interests................................
Investments in Joint Ventures, Partnerships or Other Real Property Interests May
Result in Less Control by Company..............................
Compliance with Americans with Disabilities Act and Other Changes in Governmental Rules
and Regulations Will Decrease Returns on
Property Interests.............................................
Increases in Property Taxes Decrease Returns on Property Interests.....................
Real Properties with Environmental Problems May Create Liability for the Company.......
Other Investment Activity Considerations.................................................................
Recently-Formed Entity; Limited REIT Management Experience of Senior
Management.............................................................................
Importance of Key Personnel.....................................................................
Leverage Can Reduce Income Available for Distribution and Cause
Losses.................................................................................
Lack of Diversification in Investments Increases Company's Dependence
on Individual Investments..............................................................
Legal and Tax Risks......................................................................................
Failure to Maintain REIT Status Would Result in Company Being Taxed
as a Regular Corporation...............................................................
"Phantom Income" May Require Company to Borrow or Sell Assets to
Meet REIT Distribution Requirements....................................................
Origination Fees Which May Be Received by the Company Will Not Be
REIT Qualifying Income.................................................................
Income from Certain Loans May Not Be REIT Qualifying Income.....................................
Gain on Disposition of Assets Deemed Held for Sale in Ordinary
Course Subject to 100% Tax.............................................................
Loss of Investment Company Act Exemption Would Affect Company
Adversely..............................................................................
Investment in Common Shares by Certain Benefit Plans May Give Rise to
Prohibited Transaction under ERISA and the Code........................................
Board of Trustees May Change Policies Without Shareholder Consent...............................
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Limitation of Liability of Officers and Trustees................................................
Conflicts of Interest in the Business of the Company............................................
Ownership Limitation May Restrict Business Combination Opportunities............................
Preferred Shares May Prevent Change in Control..................................................
Maryland Anti-Takeover Statutes May Restrict Business Combination
Opportunities..........................................................................
Future Offerings of Capital Stock May Result in Dilution of the Book Value per Common Share.....
CONFLICTS OF INTEREST.............................................................................................
USE OF PROCEEDS...................................................................................................
INVESTMENT OBJECTIVES AND POLICIES................................................................................
General ................................................................................................
Types of Financing.......................................................................................
Loan Origination Sources.................................................................................
Certain Financial Guidelines.............................................................................
Location of Properties Relating to Loans.................................................................
Types of Properties Relating to Loans....................................................................
Acquisition of Loans at Discount.........................................................................
Lending Procedures ......................................................................................
Acquisition of Property Interests........................................................................
Leverage ................................................................................................
Portfolio Turnover.......................................................................................
Other Policies...........................................................................................
Existing Investments.....................................................................................
Certain Legal Aspects of Real Property Loans and Investments.............................................
General. .......................................................................................
Types of Mortgage Instruments...................................................................
Leases and Rents................................................................................
Condemnation and Insurance......................................................................
Foreclosure.....................................................................................
Bankruptcy Laws.................................................................................
Default Interest and Limitations on Prepayments.................................................
Forfeitures in Drug and RICO Proceedings........................................................
Environmental Matters...........................................................................
Applicability of Usury Laws.....................................................................
Americans With Disabilities Act. ...............................................................
THE COMPANY.......................................................................................................
Management...............................................................................................
Trustees and Executive Officers..........................................................................
Option Plan..............................................................................................
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Employment Agreements....................................................................................
Indemnification of Trustees and Executive Officers.......................................................
PRICE RANGE OF COMMON SHARES AND DISTRIBUTION POLICY..............................................................
Price Range of Common Shares.............................................................................
Distribution Policy......................................................................................
CAPITALIZATION....................................................................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION.......................................................
Overview ................................................................................................
Liquidity and Capital Resources..........................................................................
Results of Operations....................................................................................
Recent Developments......................................................................................
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST......................................................................
General ................................................................................................
Common Shares............................................................................................
Preferred Shares.........................................................................................
Restrictions on Ownership and Transfer...................................................................
Dividend Reinvestment Plan
Reports to Shareholders..................................................................................
Transfer Agent and Registrar.............................................................................
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE DECLARATION OF TRUST AND BYLAWS...............................................................................
Board of Trustees........................................................................................
Business Combinations....................................................................................
Control Share Acquisitions...............................................................................
Amendment of the Declaration of Trust and Bylaws.........................................................
Meetings of Shareholders.................................................................................
Advance Notice of Trustee's Nominations and New Business.................................................
Dissolution of the Company...............................................................................
Indemnification; Limitation of Trustees' and Officers' Liability.........................................
Indemnification Agreements...............................................................................
Possible Anti-Takeover Effect of Certain Provisions of Maryland Law and of the
Declaration of Trust and Bylaws.................................................................
Maryland Asset Requirements..............................................................................
COMMON SHARES AVAILABLE FOR FUTURE SALE...........................................................................
OPERATING PARTNERSHIP AGREEMENT...................................................................................
General ................................................................................................
General Partner Not to Withdraw..........................................................................
Capital Contribution.....................................................................................
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Redemption Rights........................................................................................
Operations...............................................................................................
Distributions............................................................................................
Allocations..............................................................................................
Term ................................................................................................
Tax Matters..............................................................................................
FEDERAL INCOME TAX CONSIDERATIONS.................................................................................
Taxation of RAS..........................................................................................
Requirements for Qualification...........................................................................
Income Tests....................................................................................
Asset Tests.....................................................................................
Distribution Requirements.......................................................................
Recordkeeping Requirements......................................................................
Failure to Qualify.......................................................................................
Taxation of Taxable U.S. Shareholders Generally..........................................................
Taxation of Shareholders on the Disposition of the Common Shares.........................................
Capital Gains and Losses.................................................................................
Information Reporting Requirements and Backup Withholding................................................
Taxation of Tax-Exempt Shareholders......................................................................
Taxation of Non-U.S. Shareholders........................................................................
State and Local Taxes....................................................................................
Sale of RAS's Property...................................................................................
BENEFIT PLAN CONSIDERATIONS.......................................................................................
Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs..........................................
Status of the Company under ERISA's Plan Asset Rules.....................................................
UNDERWRITING......................................................................................................
LEGAL MATTERS.....................................................................................................
EXPERTS .........................................................................................................
GLOSSARY .........................................................................................................
</TABLE>
-8-
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING STABILIZATION, THE PURCHASE OF COMMON SHARES TO COVER SYNDICATE
SHORT POSITIONS, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
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-___________) (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.
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<PAGE>
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.
-10-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information included elsewhere in this Prospectus. Unless otherwise
indicated, the information contained in this Prospectus assumes that the
Underwriters' overallotment 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. (the "General Partner") and RAIT Limited,
Inc. (the "Initial Limited Partner") and (b) RAIT Partnership, L.P. (the
"Operating Partnership"), in which the General Partner 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___.
The Company
General. RAS 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 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 also may
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 million and $10 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 take-out financing, 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 (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.
-11-
<PAGE>
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, 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), can be acquired at a
discount to their outstanding balances and the appraised value of the
underlying properties. 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 direct or indirect
interests in real property including interests in partnerships, joint ventures
or limited liability companies owning real property (each a "Property
Interest"). Although the Company will generally seek to obtain Property
Interests which have preferences as to current distributions and return of
capital, the Company is not limited as to the kinds of Property Interests it
may acquire, and some or all of its Property Interests may not have a
preferred position. The Company believes that acquiring Property Interests 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. However, the Company is not
limited in the amount of debt which it may incur and, accordingly, may exceed
that ratio in the future. See "Investment Objectives and Policies - Leverage"
and "Risk Factors - Other Investment Activity Considerations - Leverage Can
Reduce Income Available for Distribution and Cause Losses."
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<PAGE>
In addition to indebtedness that may be incurred by the Company, the
properties underlying 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 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 $46.5 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."
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 $10,800,000 participation interest in the Loan. The
Company's secured interest in the Loan is subject to a senior secured interest
of RAI in the amount of $5,200,000 and is senior to a subordinated interest of
RAI in the amount of $1,300,000. Pursuant to the terms of the participation
agreement between the Company and RAI, the Company may, at any time, acquire
RAI's senior participation interest for its then outstanding principal
balance, plus accrued interest thereon, if any. It is the Company's intention
to acquire the senior participation interest as soon as possible. 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 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. See "Investment Objectives and Policies - Recent Developments."
Also in April 1998, the Company entered into a binding commitment to
permit partial repayment of one of its Loans and complete repayment of another
Loan, subject to certain conditions. The Company received a $250,000
restructuring fee deposit upon execution of the commitment, which deposit is
refundable (less the Company's attorneys fees and expenses) if the closing on
the loan prepayment and restructuring occurs on or before June 15, 1998. There
can be no assurance that the loan prepayments and restructuring will occur at
all or that the terms thereof will not be modified. See description of Loans
111 and 112 under "Investment Objectives and Policies - Existing Investments"
and "- Recent Developments."
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<PAGE>
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 other conditions are met. The eleventh loan is subject to a
confirmed plan of reorganization that provides similar remedies
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 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.
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<PAGE>
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.
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 at least 95% of its taxable
income, the Company could be subject to corporate income tax and
an excise tax, either of which would materially adversely affect
shareholder distributions.
o If the Company fails to qualify for an exemption from registration
as an investment company under the Investment Company Act of 1940
(the "Investment Company Act"), the Company will be required to
change the manner in which it conducts operations so as to avoid
the registration requirement or register as an investment company,
either of which could have an adverse effect on the Company.
-15-
<PAGE>
Management of the Company
The Company will be internally managed through its Board of Trustees
and senior officers. For a description of the background of such persons, see
"The Company - Trustees and Executive Officers."
Conflicts of Interest
The 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 ____% of the
outstanding Common Shares (____% 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 discussion of Loan 114 under
"Investment Objectives and Policies - Existing Investments;" also see " -
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. Brandywine also provides real property management
or management supervisory services to 46.0% (by book value) of the properties
underlying the Company's Loans or included in the Company's Property Interests
as of March 31, 1998. 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
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<PAGE>
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."
The Offering
<TABLE>
<S> <C>
Shares offered to the public(1)............................................................... 2,800,000
Shares to be outstanding after Offering(2).................................................... 6,133,434
Amex symbol................................................................................... RAS
</TABLE>
(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
-17-
<PAGE>
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."
-18-
<PAGE>
STRUCTURE OF THE COMPANY
RAS, 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 |
---------------------------
| ______% (1)
--------------------------- -------------------
| RAS |---------| RAI |
--------------------------- ___%(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 ____% and the public shareholders ____%
of the Company.
(2) RAS 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 RAS 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."
-19-
<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 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
4 and 10 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
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<PAGE>
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 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.
-21-
<PAGE>
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 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 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.
-22-
<PAGE>
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 real estate loans from banks, insurance
companies, savings and loan associations, mortgage bankers, pension funds,
investment bankers and others, including public or private REITs which have
been or may be formed with objectives similar in whole or in part to those of
the Company. This competition could reduce yields obtainable by the Company in
its Loans and adversely affect its ability to obtain Appreciation Interests in
the appreciation in the value of or revenues from properties subject to 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.
-23-
<PAGE>
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.
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 - Existing Investments."
Loans secured by interests in such entities may also not be deemed to be
"qualifying interests" for Investment Company Act purposes.
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<PAGE>
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 (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
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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
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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 Company. From time to time the Company
may acquire equity interests in entities which own real property, 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
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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 successfully the Company's operating strategies and policies.
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
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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 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 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 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.
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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 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 amortization of the OID and
the coupon interest associated with the investments. The Company will be
required to recognize as income in each year the portion of the OID that
accrues during that year, which in turn will increase the amount that the
Company must distribute to its shareholders in order to avoid corporate income
tax for that year, notwithstanding the fact that there may be no corresponding
contemporaneous receipt of cash by the Company. 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
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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 investments.
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, 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.
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 commitment fees or loan processing costs,
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, of such date) are only indirectly
secured by real property. The Company may acquire or originate similar loans
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
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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,
foreclosure rights directly exercisable by the Company, 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 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.
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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 (x) an
initial 15% excise tax on the amount involved in any prohibited transaction
involving the assets of the Plan and (y) an excise tax equal to 100% of the
amount involved if any prohibited transaction is not corrected. Consequently,
the fiduciary of a Plan contemplating an investment in the Common Shares
should consider whether the Company, any other person associated with the
issuance of the Common Shares, or any affiliate of the foregoing is or might
become a "party in interest" or "disqualified person" with respect to the
Plan. In such a case, the acquisition or holding of Common Shares by or on
behalf of the Plan could be considered to give rise to a prohibited
transaction under ERISA and the Code. See "Benefit Plan Considerations -
Employee Benefits Plans, Tax-Qualified Retirement Plans and IRAs."
Board of Trustees May Change Policies Without Shareholder Consent.
The policies of the Company, including its investment policy and other
policies with respect to acquisition, financing, growth, operations, debt and
distributions, are determined by 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."
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
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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 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 _____% of the
outstanding Common Shares (_____% 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
Chairman 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 (including
the Initial Investments), constituting 77.8% of the initial book value of its
portfolio, 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 discussion 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. 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
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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 financing proposals which are not within JeffBanks' normal
underwriting criteria. The Company subleases office space from JeffBanks. Mr.
and Mrs. Cohen are principal stockholders of JeffBanks, Mrs. Cohen is the
Chairman and Chief Executive Officer of JeffBanks and Mr. Cohen is Chairman of
its Executive Committee.
Since each of the Company, RAI and JeffBanks seeks to originate or,
in the case of the Company and RAI, acquire mortgage loans, there may be
conflicts of interest among the Company, RAI and JeffBanks regarding the
allocation of loan opportunities. The Company believes, however, that these
conflicts are substantially mitigated 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
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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."
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INVESTMENT OBJECTIVES AND POLICIES
General
The Company originates and acquires Loans secured by mortgages 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 take-out
financing (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
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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.
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,
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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 subordinated 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 participations 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 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
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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 size of the Loan 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, (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, (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. Except for six Loans that exceed a loan-to-value ratio of 90% (all
of which were part of the Initial Investments), each of the Company's Loans at
March 31, 1998 conforms to the guidelines. 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
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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.
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."
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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."
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 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.
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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 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.
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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 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, an affiliate of RAI. 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 interests in a property, typically in the form of an interest in a
partnership, joint venture or limited liability company owning the property.
The Company anticipates that any such interests would be acquired either to
provide financing in situations where further debt financing cannot be used,
where further debt financing is inappropriate (as, for example, where senior
lienors have imposed covenants against further borrowing or against the
imposition of junior liens), or where the Company is seeking an equity
interest in a property (similar to an Appreciation Interest) 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."
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<PAGE>
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 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 enable it to acquire a particular investment.
The Company may also incur debt in order to prevent default under loans senior
to the Company's 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 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."
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
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<PAGE>
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. These policies may be
changed by majority vote of the Board of Trustees, including a majority of the
Independent Trustees. The Company, however, does not currently anticipate any
such changes.
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 tenant currently pays rent of $169,242 per year under a "triple
net" lease that terminates on February 28, 2008. 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 tenant's
affiliates.
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<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 Appraised Value
of Forbearance Type of Loan Including Amount of of Underlying
Loan Number (1) Agreement(2) Property Location Receivable(3) Senior Debt Senior Debt(5) Property(6)
- ---------------- --------------- -------- -------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
101 10/31/03 Multifamily Philadelphia, PA $ 1,624,391 $ 796,011 $ - $ 900,000
102 10/31/03 Multifamily Philadelphia, PA 1,488,523 1,149,054 - 1,200,000
103 12/31/04 Office Arlington, VA 5,857,460 2,563,831 873,309 2,800,000
104 08/31/04 Multifamily Philadelphia, PA 5,424,715 3,093,636 1,096,019 3,200,000
105 09/02/99 Multifamily Philadelphia, PA 1,620,917 747,267 - 800,000
106 12/02/99 Multifamily Philadelphia, PA 3,060,311 2,038,435 1,255,030 2,200,000
107 03/28/01 Multifamily Philadelphia, PA 726,963 583,926 - 600,000
108 01/01/02 Office Philadelphia, PA 55,891,549 17,884,324 12,984,323 34,000,000
109 10/31/99 Multifamily Philadelphia, PA 1,679,186 1,679,186 884,084 2,700,000
110 12/29/00 Multifamily Philadelphia, PA 4,684,094 4,675,675 3,172,022 5,725,000
111 12/31/02 Retail/Office Philadelphia, PA 7,530,000 7,385,073 2,500,000 8,400,000
112 12/31/02 Retail Philadelphia, PA 900,000 900,000 - 2,200,000
113 3/01/99 Retail Philadelphia, PA 1,150,000 1,150,000 - 2,320,000
114 -- Office Washington, DC 65,000,000 65,000,000 55,000,000 98,000,000
------------ ------------ ----------- ------------
Total Investments in Real Estate Loans $156,638,109 $109,646,418 $77,764,787 $165,045,000
============ ============ ============ ============
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>
[TABLE RESTUBBED FROM ABOVE]
<TABLE>
<CAPTION>
Monthly
Value of Ratio of Revenues from Ratio of
Investment Senior Debt Operations Cash Flow to
to Appraised to Appraised or Monthly Senior Debt
Loan Number (1) Value Value Debt Service(7) Service(8)
- --------------- ------------ ------------- --------------- ------------
<S> <C> <C> <C> <C>
101 88% 0% $ 6,158 n/a
102 96 0 9,985 n/a
103 92 31 15,376 2.92
104 97 34 15,024 2.41
105 93 0 7,756 n/a
106 93 57 9,178 1.89
107 97 0 5,199 n/a
108 53 38 64,487 2.33
109 62 33 12,324 3.01
110 82 55 23,307 1.83
111 88 30 40,230 3.11
112 41 0 7,950 n/a
113 50 0 9,583 n/a
114 66 56 83,333 1.43
--- --- -------- ----
Total Investments 66% 47% $309,891 1.79
=== === ======== ====
</TABLE>
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<PAGE>
(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.
(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 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 investment 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
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<PAGE>
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)
that there are no hidden conditions or environmental problems. As a
consequence of the foregoing, caution should be exercised in
evaluating appraisal results. An appraisal is only an estimate of
value and should not be relied upon as a precise measure of
realizable value.
(7) 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.
(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,
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<PAGE>
(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.
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 $873,308 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.
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<PAGE>
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 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. 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
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<PAGE>
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 $1,255,030. 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 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.
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
$13.0 million 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 million but less than $34 million and 35% of all collections in
excess of $34 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
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<PAGE>
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 $884,000. 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 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,
2000 when all principal, accrued interest and other amounts become due and
payable. The Company's purchase price for the Loan was $1,529,099. 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 $3,172,020. 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 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
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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 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 the prior repayments of RAI's 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 of the secured interest of
RAI's acquisition lender in the loan, the 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.
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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 and agreed to permit partial prepayment of Loan 111 and
complete repayment of Loan 112. The following is a description of certain of
the material terms of these transactions:
Loan 115. Participation in the amount of $10,800,000 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. The Company's participation interest in the loan (the "B Piece") is
subject to the senior secured interest of RAI in the amount of $5,200,000 (the
"A Piece") and is senior to the secured interest of RAI in the amount of
$1,300,000 (the "C Piece"). Pursuant to the terms of the participation
agreement between the Company and RAI, the Company may, at any time, acquire
RAI's A Piece for its then outstanding principal balance, plus accrued
interest thereon, if any. It is the Company's intention to acquire the A Piece
as soon as possible. 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
commencing in June 1998 (the other 20% is payable to the C Piece). (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 C Piece.) 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 C Piece) and (iii)
additional interest,
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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. The
borrower is required to obtain an independent appraisal of the property no
later than May 31, 1998. The Company has received a summary appraisal, in
advance of a full appraisal report, of a fair market value of $19,500,000.
Loans 111 and 112. In April 1998, the Company entered into a binding
commitment to permit 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 will pay to the Company (w) the $50,000 additional interest required
upon repayment of the Loan, (x) $176,250 in satisfaction of the Company's
participation in the appreciation on the underlying property, (y) all accrued
and unpaid interest, and (z) prepayment of 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, will be paid in full and the
borrower will make a yield maintenance payment to the Company, in advance, in
an amount equal to $900,000 multiplied by 5.6% for the period beginning on the
date of the prepayment and ending on September 25, 1999. In addition, the
Company will receive 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 will execute a new note in the original principal amount
of $2,000,000 bearing interest at the rate of 15%. The note will mature in 42
months and will not be prepayable. In addition, the Company will release the
second mortgage liens on the underlying properties and the first mortgage lien
on the property underlying Loan 112. The Company will continue to hold a
deed-in-lieu of foreclosure which may be recorded upon default by the borrower
and tenants of the property will pay rents directly to the Company. The
Company received a $250,000 restructuring fee deposit upon execution of the
commitment, which deposit is refundable (less the Company's attorneys fees and
expenses) if the closing on the loan prepayment and restructuring occurs on or
before June 15, 1998. RAI's senior participation interest in Loan 111 will be
repaid in full at the time of such closing. There can be no assurance that the
loan prepayments and restructuring will occur 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 or
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
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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, 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 14 Loans (80.2% of the Company's
portfolio, by book value) are secured by mortgages. A mortgage creates a lien
upon, or grants a title interest in, the real property covered thereby, and
represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on the terms of the mortgage and, in some cases, on the
terms of separate subordination agreements or intercreditor 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 (excluding three first mortgage Loans in which the Company holds a
subordinate position) and eight (89.5% of the Company's portfolio, by book
value) were subordinate mortgage Loans. 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 existing Loans
(Loan 114) is secured by a deed of trust.
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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 that amount that
would be needed to service the debt if the leases on the property are at
below-market rents, the market rents have fallen since the original financing,
vacancies have increased, or as a result of excessive or increased
maintenance, repair or other obligations to which a lender succeeds as
landlord. 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 awards to any indebtedness secured by the mortgage or deed of
trust, in such order as the mortgagee or beneficiary may determine. Thus, in
the event improvements on the property are damaged or destroyed by fire or
other casualty, or in the event the property is taken by condemnation, the
mortgagee or beneficiary under the senior mortgage or deed of trust will have
the prior right to collect any insurance proceeds payable under a hazard
insurance policy and any award of damages in connection with the condemnation
and to apply the same to the indebtedness secured by the senior mortgage or
deed of trust. Proceeds in excess of the amount of senior mortgage
indebtedness will, in most cases, be applied to the indebtedness of a junior
mortgage or trust deed to the extent the junior mortgage or deed of trust so
provides (subject, however, to any inter-creditor agreements). The laws of
certain states may limit the ability of mortgagees or beneficiaries to apply
the proceeds of hazard insurance and partial condemnation awards to the
secured indebtedness. In such states, the mortgagor or trustor must be allowed
to use the proceeds of hazard insurance to repair the damage unless the
security of the mortgage or 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.
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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
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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 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.
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Bankruptcy Laws. Operation of the Bankruptcy Code and related state
laws may interfere with or affect the ability of a lender to realize upon
collateral or to enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) to collect a debt are automatically stayed
upon the filing of the bankruptcy petition and, often, no interest or
principal payments are made during the course of the bankruptcy case. The
delay and the consequences thereof caused by such automatic stay can be
significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor may stay the senior lender from
taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and
procedural safeguards protective of the lender are met, the amount and terms
of a mortgage loan secured by a lien on property of the debtor may be modified
under certain circumstances. For example, the outstanding amount of the loan
may be reduced to the then-current value of the property (with a corresponding
partial reduction of the amount of lender's security interest) pursuant to a
confirmed plan or lien avoidance proceeding, thus leaving the lender a general
unsecured creditor for the difference between such value and the outstanding
balance of the loan. Under certain circumstances, a plan can be confirmed
which provides for little or no payment for the unsecured claim for
deficiency. Other modifications may include a reduction in the amount of each
scheduled payment, by means of a reduction in the rate of interest or
alteration of the repayment schedule (with or without affecting the unpaid
principal balance of the loan), and by an extension (or shortening) of the
term to maturity.
Federal bankruptcy law may also have the effect of interfering with
or affecting the ability of the secured lender to enforce the borrower's
assignment of rents and leases related to the mortgaged property. Under
section 362 of the Bankruptcy Code, the lender will be stayed from enforcing
the assignment, and the legal proceedings necessary to resolve the issue could
be time-consuming, with resulting delays in the lender's receipt of the rents.
In addition, the Bankruptcy Code has been amended to provide that a lender's
perfected pre-petition security interest in leases, rents and hotel revenues
continues in the post-petition leases, rents and hotel revenues, unless a
bankruptcy court orders to the contrary "based on the equities of the case."
In a bankruptcy or similar proceeding, action may be taken seeking
the recovery, as a preferential transfer, of any payments made by the
mortgagor under the related mortgage loan to the owner of such mortgage loan.
Payments on long-term debt may be protected from recovery as preferences to
the extent the lender is oversecured or if they are payments in the ordinary
course of business made on debts incurred in the ordinary course of business.
Whether any particular payment would be protected depends upon the facts
specific to a particular transaction.
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
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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
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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 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
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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.
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
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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.
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THE COMPANY
RAS 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. 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, an affiliate of RAI. 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
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(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 Officer of Asbell & Association, 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.
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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),
a founder of the Pennsylvania Real Estate Investment Trust, a past director
and member of the Executive
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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>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
Securities
Name and Underlying
Principal Position Salary Bonus Options All Other
- ------------------ ------ ----- ----------- ---------
<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) 50,000 4,200 (2)
Executive Vice
President
Ellen J. DiStefano 125,000 (1) 35,000 16,400 (2)
Chief Financial Officer
</TABLE>
- ------------------------
(1) Bonuses may be paid in the discretion of the Board of Trustees. No such
bonuses have been provided for as of the date hereof.
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(2) Automobile allowance.
Except for Mrs. Cohen, all executive officers of the Company are
required to devote substantially all of their business time to the Company's
operations. Mrs. Cohen is required to devote only so much of her time as may
be required for the effective discharge of her duties. Mrs. Cohen currently
has substantial business interests apart from the Company which the Company
anticipates will require a material amount of her time. 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.
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 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.
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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 Company's Declaration of Trust and Bylaws - Indemnification; Limitation of
Trustees' and Officers' Liability" and "- Indemnification Agreements."
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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 May 12, 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 or return on capital, although (as referred to in the previous
paragraph) a portion of such distributions may constitute long-term capital
gain or a return of capital. The Company will furnish annually to each of its
shareholders a statement setting forth distributions paid during the preceding
year and their federal income tax status. For a discussion of the federal
income tax treatment of distributions by the Company, see "Federal Income Tax
Considerations - Taxation of RAS" 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
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operations. The Company intends to make future distributions quarterly.
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 $18.75 per share (the closing price on May 14, 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 93,042,079
Accumulated Deficit.................................................... (4,132) (4,132)
------------ ------------
Total Shareholder's Equity............................... $ 44,111,781 $93,099,281
------------ ------------
Total Capitalization..................................... $ 62,820,462 $111,807,962
============ ============
</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 March 25, 1998, there were 3,333,434, Common Shares
outstanding, owned by approximately 490 beneficial owners.
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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.
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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 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 $10.8
million participation interest in a $17.3 million loan. In addition, the
Company entered into a binding commitment to permit partial prepayment of Loan
111 and complete prepayment of Loan 112, subject to certain conditions. 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) 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
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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. 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
set the preferences, conversion and other rights, voting powers, restrictions,
limitations and restrictions on ownership, limitations as to dividends or
other distributions, qualifications and terms or conditions of redemption for
each such class or series.
Preferred Shares
Preferred Shares may be issued from time to time, in one or more
series, as authorized by the Board of Trustees. No Preferred Shares are
currently issued or outstanding. Prior to the issuance of shares of each
series, the Board of Trustees is required to fix for each series the terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to distributions, qualifications and terms or conditions of
redemption, as permitted by Maryland law.
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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 ________% of the
outstanding Common Shares at the conclusion of the Offering; _____% 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
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to a particular shareholder if it determines that such ownership will not
jeopardize the Company's status as a REIT and the Board of Trustees otherwise
decides such action would be in the best interest of the Company. As a
condition of such waiver, the Board of Trustees may require an opinion of
counsel satisfactory to it or undertakings or representations from the
applicant with respect to preserving the REIT status of the Company. No such
waiver or opinion has been required with respect to RAI's ownership rights,
which are established as part of the Declaration of Trust.
The 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
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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 Market Price on the date the Company,
or its designee, accepts such offer. The Company may accept the offer until
the trustee has sold the shares. Upon that sale, the interest of the
Beneficiary in the shares terminates and the trustee must distribute the net
sale proceeds to the Prohibited Transferee or Prohibited Owner.
All certificates evidencing Common Shares will bear a legend
referring to the restrictions described above. The foregoing ownership
limitations could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for the Common Shares or
otherwise be desired by shareholders.
Under the Declaration of Trust, every owner of a specified percentage
(or more) of the outstanding Common Shares must file a completed questionnaire
with the Company containing 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
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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.
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
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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.
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A person who has made or proposes to make a Control Share
Acquisition, upon satisfaction of certain conditions (including an undertaking
to pay expenses), may compel the Board of Trustees to call a special meeting
of shareholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the Company may
itself present the question at any shareholders' meeting.
If voting rights are not approved at the shareholders' meeting or if
the acquiring person does not deliver an acquiring person statement as
required by the MGCL, then, subject to certain conditions and limitations, the
Company may redeem any or all of the Control Shares (except those for which
voting rights have previously been approved) for fair value determined,
without regard to the absence of voting rights for the Control Shares, as of
the date of the last Control Share Acquisition by the acquiror or of any
meeting of shareholders at which the voting rights of such shares are
considered and not approved. If voting rights for Control Shares are approved
at a shareholders' meeting and the acquiror becomes entitled to vote a
majority of the shares entitled to vote, all other shareholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the Control Share Acquisition. The Control Share Acquisition
statute does not apply to shares acquired in a merger, consolidation or share
exchange if the Company is a party to the transaction or to acquisitions
approved or exempted by the Declaration of Trust or Bylaws. Under the MGCL the
Company may "opt out" of the control share provisions. The Bylaws 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
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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 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
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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.
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Maryland Asset Requirements
To maintain its qualification as a Maryland real estate investment
trust, Maryland law requires at least 75% of the value of the Company's assets
to be held, directly or through other entities, in real estate assets,
mortgages or mortgage related securities, government securities, cash and cash
equivalent items, including high-grade short term securities and receivables.
Maryland law also prohibits the Company from using or applying land for
farming, agricultural, horticultural or similar purposes.
COMMON SHARES AVAILABLE FOR FUTURE SALE
Upon 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.
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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 RAS. Because RAS indirectly owns 100% of the partnership
interests in the Operating Partnership, the Operating Partnership will be
disregarded as a separate entity from RAS 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.
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, RAS 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.
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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
RAS 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 RAS through which RAS 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 RAS
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.
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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 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 RAS 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.
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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.
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
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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 RAS
RAS 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. RAS 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 RAS 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 RAS 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 RAS in a timely fashion, RAS will qualify to be taxed as a REIT
under the Code, and RAS'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
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operations, as set forth below in this discussion. Moreover, such
qualification and taxation as a REIT depends upon RAS's ability to meet on a
continuing basis, through actual annual operating results, distribution
levels, and diversity of share ownership, the various qualification tests
imposed under the Code discussed below, the results of which will not be
reviewed by Counsel. Accordingly, no assurance can be given that the actual
results of 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 RAS 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, RAS will be subject to federal income tax in the following
circumstances:
o RAS will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains.
o Under certain circumstances, RAS may be subject to the "alternative
minimum tax" on its undistributed items of tax preference, if any.
o If RAS has (i) net income from the sale or other disposition of
"foreclosure property" (defined generally as property acquired by RAS
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 RAS 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 RAS 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 RAS fails the 75% or 95% gross income test,
multiplied by (ii) a fraction intended to reflect RAS's
profitability.
o If RAS 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, RAS would be
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subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed.
o If RAS 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 RAS's hands is
determined by reference to the basis of the asset (or any other asset)
in the hands of the C corporation and RAS 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 RAS over the adjusted basis
in such asset at such time), RAS 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 RAS will elect
pursuant to IRS Notice 88-19 to be subject to the rules described in
the preceding sentence if it were to make any such acquisition.
Requirements for Qualification
The Code defines a REIT as a corporation, trust or association (i)
that is managed by one or more trustees or directors, (ii) the beneficial
ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (iii) that would be taxable as a domestic
corporation but for Sections 856 through 860 of the Code; (iv) that is neither
a financial institution nor an insurance company subject to certain provisions
of the Code; (v) the beneficial ownership of which is held by 100 or more
persons; (vi) not more than 50% in value of the outstanding shares of which is
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of each taxable year
other than its first taxable year (the "5/50 Rule"); (vii) that makes an
election to be a REIT (or has made such election for a previous taxable year)
and satisfies all relevant filing and other administrative requirements
established by the Service that must be met in order to elect and maintain
REIT status; (viii) that uses a calendar year for federal income tax purposes
and complies with the recordkeeping requirements of the Code and Treasury
Regulations promulgated thereunder; and (ix) that meets certain other tests,
described below, regarding the nature of its income and assets. The Code
provides that conditions (i) to (iv), inclusive, must be met during the entire
taxable year and that condition (v) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of
less than 12 months. Conditions (v) and (vi) will not apply until after the
first taxable year for which an election is made by RAS 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
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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.
RAS 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 RAS 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
RAS. 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 RAS 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 RAS 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 RAS or a qualified REIT
subsidiary of RAS, a proportionate share of the assets and gross income of the
Operating Partnership will be treated as assets and gross income of RAS for
purposes of applying the requirements described in this section.
Income Tests. In order for RAS to qualify and to maintain its
qualification as a REIT, two requirements relating to RAS's gross income must
be satisfied annually. First, at least 75% of RAS'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 RAS's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
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property, mortgages 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 RAS'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 mortgages
on a property exceed its fair market value. In such a situation, the Service
may contend that the lender is actually the owner of the property for tax
purposes. Since RAS has acquired (and may continue to acquire) loans the face
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 RAS 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 RAS'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 RAS 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 RAS purchased the mortgage loan, the interest income will
be apportioned between the real property and the other property, which
apportionment may cause RAS 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 RAS derives from its investments in loans generally will be
qualifying interest income for purposes
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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, RAS 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 RAS 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. 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. RAS will
take appropriate steps to ensure that it will always have sufficient
qualifying income to meet the 75% and 95% gross income tests.
In the case of wraparound loans 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.
RAS may originate or acquire mortgage loans that have shared
appreciation provisions. RAS may be required to recognize income from a shared
appreciation provision over the term of the related loan using the constant
yield method pursuant to certain Treasury Regulations. This method generally
will result in RAS recognizing at least some taxable income in advance of the
cash flow.
RAS 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 RAS will not be qualifying
income for purposes of the gross income tests. It is not anticipated that RAS
will receive a significant amount of such fees. RAS 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 RAS 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
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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 RAS, or a direct or indirect owner of 10%
or more of RAS, 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," RAS 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 RAS derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent
the services provided by RAS 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, RAS 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 RAS's direct
costs for the services.
RAS 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 RAS's status as a REIT. In addition,
RAS has represented that, to the extent that it receives rent from a Related
Party Tenant, such rent will not cause RAS to fail to satisfy either the 75%
or 95% gross income test. RAS 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 RAS to fail to satisfy either the 75% or 95%
gross income test. Finally, RAS 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 RAS's status as a REIT.
REITs generally are subject to tax at the maximum corporate rate on
any income from foreclosure property (other than income that would be
qualifying income for purposes of the 75% gross income test), less expenses
directly connected with the production of such income. "Foreclosure property"
is defined as any real property (including interests in real property) and any
personal property incident to such real property (i) that is acquired by a
REIT as the result of such REIT having bid in such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or
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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 RAS establishes that an extension is
necessary for the orderly liquidation of RAS'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 RAS. RAS 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 RAS does
receive any such income, RAS will make an election to treat the related
property as foreclosure property.
If property is not eligible for treatment as foreclosure property
("Ineligible Property") because the related loan was acquired by the REIT at a
time when default was imminent or anticipated, income received with respect to
such Ineligible Property may not be qualifying income for purposes of the 75%
or 95% gross income test. RAS 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 RAS 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 RAS'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, RAS 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 RAS 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 RAS's failure to meet such
tests is due to reasonable cause and not due to willful neglect, RAS 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
RAS would be entitled to the benefit of those relief provisions. As discussed
above in "Federal Income Tax Considerations - Taxation of RAS," 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 RAS fails
the 75% or 95% gross income test, multiplied by (ii) a fraction intended to
reflect RAS's profitability.
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Asset Tests. At the close of each quarter of each taxable year, RAS
must satisfy two tests relating to the nature of its assets. First, at least
75% of the value of RAS's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where RAS 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 RAS's receipt of such
capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the principal balance of
a mortgage does not exceed the fair market value of the associated real
property, and shares of other REITs. For purposes of the 75% asset test, the
term "interest in real property" includes an interest in mortgage loans or
land and improvements thereon, such as buildings or other inherently permanent
structures (including items that are structural components of such buildings
or structures), a leasehold of real property, and an option to acquire real
property (or a leasehold of real property). To the extent that the fair market
value of the real property securing a mortgage loan equals or exceeds the
outstanding principal balance of the loan, the loan will qualify as a real
estate asset. However, if the outstanding principal balance of a mortgage loan
exceeds the fair market value of the real property securing the loan, such
loan may not be a qualifying real estate asset to the extent that the loan
amount exceeds the value of the associated real property, although the matter
is not free from doubt. An "interest" in real property also generally includes
an interest in mortgage loans secured by controlling equity interests in
entities treated as partnerships for federal income tax purposes that own real
property, to the extent that the principal balance of the mortgage does not
exceed the fair market value of the real property that is allocable to the
equity interest. In addition, RAS 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 RAS 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 31, 1998 (19.8% by book value) that
are indirectly secured by real estate, all are collateralized with
deeds-in-lieu of foreclosure. 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% asset test. Second, of the
investments not included in the 75% asset class, the value of any one issuer's
securities owned by RAS may not exceed 5% of the value of RAS's total assets,
and RAS 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).
RAS expects that any loans, real properties and temporary investments
that it acquires generally will be qualifying assets for purposes of the 75%
asset test, except to the extent that the principal balance of any loan
exceeds the value of the associated real property, or to the extent the asset
is a loan that is not deemed to be an interest in real property. In the case
of wraparound loans, it is uncertain whether the entire wraparound mortgage
amount or only the amount of RAS's investment that is in excess of the
principal amount of the underlying loans will
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be considered an asset of RAS. RAS 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 RAS 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 RAS'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, RAS still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose. RAS 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, RAS 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 RAS 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 RAS may make with respect to deemed distributions of long-term
capital gain). Furthermore, if RAS should fail to distribute during each
calendar year (or, in the case of a distribution with declaration and record
dates falling in the last three months of the calendar year, by the end of the
January immediately following such year) at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain income
for such year, and (iii) any undistributed taxable income from prior periods,
RAS would be subject to a 4% nondeductible excise tax on the excess of such
required distribution over the amounts actually distributed. If RAS 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. RAS intends to make timely distributions sufficient to satisfy the
annual distribution requirements.
It is possible that, from time to time, RAS 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, RAS 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, RAS may be required to
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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, RAS 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 RAS's tax basis in
such obligations), although such proceeds often will be used to make
non-deductible principal payments on related borrowings. RAS 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, RAS may recognize net capital
gain attributable to the sale of depreciated property that exceeds its cash
receipts from the sale. RAS 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 RAS's basis
in the original loan. Finally, capital losses recognized by RAS may not be
deducted from its REIT taxable income. Therefore, RAS 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, RAS 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, RAS 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 RAS's deduction
for dividends paid for the earlier year. Although RAS 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 RAS to a penalty of $25,000
($50,000 for intentional violations).
Failure to Qualify
If RAS fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, RAS will be subject to tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. Distributions to RAS's shareholders in any year in which RAS
fails to qualify will not be deductible by RAS nor will they be required to be
made. In such event, to the extent of RAS's current and accumulated
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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, RAS also will be
disqualified from taxation as a REIT for the four taxable years following the
year during which RAS ceased to qualify as a REIT. It is not possible to state
whether in all circumstances RAS would be entitled to such statutory relief.
Taxation of Taxable U.S. Shareholders Generally
As long as RAS qualifies as a REIT, distributions made to RAS'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 RAS'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. RAS may elect to retain and pay income tax on net long-term capital
gains it receives during the taxable year. If RAS 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 RAS, (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 RAS) 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 RAS 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 RAS during
January of the following calendar year.
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Shareholders may not include in their individual income tax returns
any net operating losses or capital losses of RAS. Instead, any such losses
are carried over by RAS for potential offset against its future income
(subject to certain limitations). Taxable distributions from RAS 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 RAS 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. RAS will notify shareholders after the close of RAS's taxable year as
to the portions of the distributions attributable to that year that constitute
ordinary income or capital gain dividends.
RAS'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 RAS 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 RAS that would be less than the after-tax rate
of return on an investment with an identical before-tax rate of return that
did not generate phantom income. For example, if an investor subject to an
effective income tax rate of 30% purchased a bond (other than a tax-exempt
bond) with an annual interest rate of 10% for its face value, 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 RAS 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 RAS's
phantom income. In general, as the ratio of RAS's phantom income to its total
income increases, the after-tax rate of return received by a taxable
shareholder of RAS will decrease. RAS will consider the potential effects of
phantom income on its taxable shareholders in managing its investments.
Taxation of Shareholders on the Disposition of the Common Shares
In general, any gain or loss realized upon a taxable disposition of
the Common Shares by a shareholder who is not a dealer in securities will be
treated as long-term capital gain or loss if the Common Shares have been held
for more than 12 months (subject to a reduction in tax rate if the Common
Shares have been held for more than 18 months; see "Federal Income Tax
Considerations - Capital Gains and Losses") and otherwise as short-term
capital gain or loss. However, any loss upon a sale or exchange of Common
Shares by a shareholder who has held
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such shares for six months or less (after applying certain holding period
rules) will be treated as a long-term capital loss to the extent of
distributions from RAS 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
RAS 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 RAS 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, RAS
may be required to withhold a portion of capital gain distributions to any
shareholders who fail to certify their nonforeign status to RAS. 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."
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Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject
to taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, in a published ruling the Service
stated that dividend distributions from a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee
pension trust. Based on that ruling, amounts distributed by RAS 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 RAS 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 RAS as UBTI. In addition, in certain circumstances, a
pension trust that owns more than 10% of RAS's shares is required to treat a
percentage of the dividends from RAS as UBTI (the "UBTI Percentage"). The UBTI
Percentage is the gross income derived by RAS from an unrelated trade or
business (determined as if RAS were a pension trust) divided by the gross
income of RAS for the year in which the dividends are paid. The UBTI rule
applies to a pension trust holding more than 10% of RAS's shares only if (i)
the UBTI Percentage is at least 5%, (ii) RAS 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 RAS in proportion to their actuarial
interests in the pension trust, and (iii) RAS is a "pension-held REIT" (that
is, either (A) one pension trust owns more than 25% of the value of RAS's
shares or (B) a group of pension trusts individually holding more than 10% of
the value of RAS's shares collectively owns more than 50% of the value of
RAS'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 ________% 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, RAS should not be a pension-held REIT and,
accordingly, no pension trust should be required to treat a percentage of the
dividends from RAS as UBTI.
Taxation of Non-U.S. Shareholders
The rules governing United States federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships, and
other foreign shareholders (collectively, "Non-U.S. Shareholders") are
complex. The following discussion provides only a summary of such rules.
PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS
TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH
REGARD TO AN INVESTMENT IN THE COMMON SHARES, INCLUDING ANY REPORTING
REQUIREMENTS.
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Distributions to Non-U.S. Shareholders that are not attributable to
gain from sales or exchanges by RAS of United States real property interests
and are not designated by RAS 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 RAS. 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). RAS 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 RAS or (ii)
the Non-U.S. Shareholder files an IRS Form 4224 with RAS claiming that the
distribution is effectively connected income. The Treasury Department has
issued new regulations that, for payments made after December 31, 1998, modify
the manner in which RAS complies with the withholding requirements.
Distributions in excess of current and accumulated earnings and
profits of RAS 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 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 RAS. In August 1996, the U.S.
Congress passed the Small Business Job Protection Act of 1996, which requires
RAS to withhold 10% of any distribution in excess of RAS's current and
accumulated earnings and profits. Consequently, although RAS intends to
withhold at a rate of 30% on the entire amount of any distribution, to the
extent that RAS 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 RAS qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges by RAS 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).
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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. RAS is required to withhold 35% of any distribution that
is designated by RAS 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 RAS 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 RAS will be a
"domestically controlled REIT." In addition, a Non-U.S. Shareholder that owns,
actually or constructively, not more than 5% of RAS'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
RAS, the General Partner, the Initial Limited Partner, the Operating
Partnership and RAS'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 RAS 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 RAS's Property
Any gain realized by RAS 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 RAS's ability to
satisfy the income tests for REIT status. See "Federal Income Tax
Considerations - Requirements for Qualification Income Tests." RAS, however,
does not presently intend to acquire or hold a material amount
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of property that represents inventory or other property held primarily for
sale to customers in the ordinary course of its trade or business.
BENEFIT PLAN CONSIDERATIONS
The following summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended, and the
prohibited transaction provisions of section 4975 of the Code, does not
purport to deal with all aspects of ERISA or section 4975 of the Code that may
be relevant to particular shareholders (including plans subject to Title I of
ERISA, other retirement plans and individual retirement accounts ("IRAs")
subject to the prohibited transaction provisions of section 4975 of the Code,
and governmental plans or church plans that are exempt from ERISA and section
4975 of the Code but that may be subject to state law requirements) in light
of their particular circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON SHARES ON
BEHALF OF A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A
TAX-QUALIFIED RETIREMENT PLAN, OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR
REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE
CODE AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF THE
COMMON SHARES BY SUCH PLAN OR IRA.
Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs
Each fiduciary of a 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.
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A fiduciary of an IRA or of an employee benefit plan that is not
subject to Title I of ERISA because it is a governmental or church plan or
because it does not cover common law employees (a "Non-ERISA Plan") should
consider that such an IRA or Non-ERISA Plan may only make investments that are
authorized by the appropriate governing documents and under applicable law.
Fiduciaries of Plans and persons making investment decisions for an
IRA or other Non-ERISA Plan also should consider the application of the
prohibited transaction provisions of ERISA and the Code in making their
investment decision. A "disqualified person" (within the meaning of section
4975 of the Code) with respect to a Plan, or an IRA subject to Code section
4975, is subject to (i) an initial 15% excise tax on the amount involved in
any prohibited transaction involving the assets of the Plan or IRA and (ii) an
excise tax equal to 100% of the amount involved if any prohibited transaction
is not corrected. In general, if the disqualified person who engages in the
transaction is the individual on behalf of whom an IRA is established (or his
beneficiary), the IRA will lose its tax-exempt status and its assets will be
deemed to have been distributed to such individual in a taxable distribution
(and no excise tax will be imposed) on account of the prohibited transaction.
In addition, a fiduciary who permits a Plan to engage in a transaction that
the fiduciary knows or should know is a prohibited transaction may, among
other things, be liable to the Plan for any loss the Plan incurs as a result
of the transaction or for any profits earned by the fiduciary in the
transaction.
Status of the Company under ERISA's Plan Asset Rules
Regulations of the DOL defining "plan assets" (the "Plan Asset
Regulations") generally provide that when a Plan, Non-ERISA Plan or IRA
subject to section 406 of ERISA or section 4975 of the Code acquires a
security that is an equity interest in an entity and the security is neither a
"publicly-offered security" nor a security issued by an investment company
registered under the Investment Company Act, the Plan's or Non-ERISA Plan's or
IRA's assets include both the equity interest and an undivided interest in
each of the underlying assets of the issuer of such equity interest, unless
one or more exceptions specified in the Plan Asset Regulations are satisfied.
The Plan Asset Regulations define a publicly-offered security as a
security that is "widely-held," "freely-transferable," and either part of a
class of securities registered under the 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
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events beyond the issuer's control. The Company anticipates that upon
completion of this Offering, the Common Shares will be "widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment
is $10,000 or less (as is the case with this offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as ordinarily not affecting that finding include:
(i) any restriction on or prohibition against any transfer or assignment that
would result in the termination or reclassification of an entity for federal
or state tax purposes, or that otherwise would violate any federal or state
law or court order, (ii) any requirement that advance notice of a transfer or
assignment be given to the issuer, (iii) any administrative procedure that
establishes an effective date, or an event (such as completion of an
offering), prior to which a transfer or assignment will not be effective, and
(iv) any limitation or restriction on transfer or assignment that is not
imposed by the issuer or a person acting on behalf of the issuer. The Company
believes that the restrictions imposed under the Declaration of Trust on the
transfer of the Company's Common Shares will not result in the failure of the
Common Shares to be "freely transferable." The Company also is not aware of
any other facts or circumstances limiting the transferability of the Common
Shares that are not identified in the Plan Asset Regulations as factors that
ordinarily do not adversely affect a finding that securities are freely
transferable. However, no complete assurances can be given that the DOL or the
Treasury Department would not reach a contrary conclusion.
Assuming that the Common Shares will be "widely held" and that no
other facts and circumstances other than those referred to in the preceding
paragraph exist that restrict transferability of the Common Shares, the Common
Shares should be publicly offered securities and the assets of the Company
should not be deemed to be "plan assets" of any Plan, IRA or Non-ERISA Plan
that invests in the Common Shares. However, no assurances can be given that
the Company's assets will not be deemed to be plan assets.
If the assets of the Company were to be deemed to be "plan assets"
under ERISA, (i) the prudence standards and other provisions of Part 4 of
Title I of ERISA would be applicable to any transactions involving the
Company's assets, (ii) persons who exercise any authority over the Company's
assets, or who provide investment advice to the Company, would (for purposes
of the fiduciary responsibility provisions of ERISA) be fiduciaries of each
Plan that acquires Common Shares, (iii) a fiduciary exercising his investment
discretion over the assets of a Plan to cause it to acquire or hold the Common
Shares could be held liable under Part 4 of Title I of ERISA for transactions
entered into by the Company that do not conform to ERISA standards of prudence
and fiduciary responsibility, and (iv) certain transactions that the Company
might enter into in 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................................ =================
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.
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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.
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.
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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. and John Poole and Associates 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 means the Board of Trustees of RAS.
"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 RAS.
"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 RAS.
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"Company" shall mean Resource Asset Investment Trust, a Maryland real
estate investment trust, together with its subsidiaries, unless the context
indicates otherwise.
"Company Expenses" shall mean all administrative costs and expenses
of the Company and the General Partner.
"Control Share Acquisitions" shall mean transactions causing the
voting strength of any person acquiring beneficial ownership of shares to meet
or exceed certain threshold percentages (20%, 33 1/3% or 50%) of the total
votes entitled to be cast for the election of trustees.
"Counsel" shall mean Ledgewood Law Firm, P.C., counsel to the Company.
"Declaration of Trust" shall mean the Declaration of Trust of RAS.
"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.
"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 RAS General, Inc., as the sole general
partner of the Operating Partnership.
"Independent Trustee" shall mean a trustee who, within the last two
years, has not (i) been an affiliate of RAI, JeffBanks, Brandywine or their
affiliates, (ii) been an officer of the Company, or (iii) had any material
business or professional relationship with the Company, RAI, Brandywine,
JeffBanks or their affiliates.
"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.
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"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 RAS Limited, Inc., as limited
partner of the Operating Partnership.
"Interested Shareholder" shall mean any holder of more than 10% of
any class of outstanding voting shares of the Company.
"Investment Company Act" shall mean the Investment Company Act of 1940.
"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 RAS Partnership, L.P.
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"Operating Partnership Agreement" shall mean the agreement of limited
partnership of the Operating Partnership, as amended from time to time.
"Option Plan" shall mean the qualified share option plan that the
Company intends to adopt to provide options to officers and trustees of the
Company.
"Ownership Limitation" shall mean the restriction on ownership (or
deemed ownership by virtue of the attribution provisions of the Code) of (a)
more than 8.3% 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 direct or indirect interest in a
property acquired by the Company, including an interest in a partnership,
joint venture or limited liability company owning real property as all or
substantially all of its assets.
"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 RAS, or a direct
or indirect owner of 10% or more of RAS, 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.
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"Registration Statement" shall mean the registration statement filed
with the Commission (File No. 333-_________) 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.
"Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc. and
each of the underwriters for whom Friedman, Billings, Ramsey & Co., Inc. is
acting as Representative.
"Underwriting Agreement" shall mean the agreement pursuant to which
the Underwriters will underwrite the Common 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.
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Report of Independent Certified Public Accountants
Board of Trustees
Resource Asset Investment Trust
We have audited the accompanying consolidated balance sheet of
Resource Asset Investment Trust 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
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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.
-120-
<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.
-121-
<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.
-122-
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
and Subsidiaries
Consolidated Statement of Cash Flows
<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>
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.
-123-
<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
-124-
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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 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
-125-
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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.
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 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.
-126-
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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 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.
-127-
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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.
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):
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 December 31, 2002 2,500,000
-----------
Total senior indebtedness $18,708,681
===========
The stated maturities of the senior indebtedness follows (unauudited):
-128-
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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.
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
======= ========= -----
</TABLE>
<TABLE>
<CAPTION>
Period from August 20, 1997 (Date of Inception)
through December 30, 1997
----------------------------------------------------
Income Shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
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>
-129-
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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.
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.
Three months ended
March 31, 1998
(unaudited)
------------------
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
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:
-130-
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
March 31, 1998
(unaudited)
Weighted
average
exercise
Shares price
------ -----
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
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 the 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 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
-131-
<PAGE>
RESOURCE ASSET INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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. For the quarter ended March 31, 1998,
approximately $78,000 was paid to Ledgewood pertaining to the acquisition and
orgination of the Company's investments and other legal matters. Fees paid to
Ledgewood in connection with the public offering were approximately $544,000
for the period August 20, 1997 (date of inception) through December 31, 1997.
-132-
<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...........................................................
Additional Information..........................................................
Prospectus Summary..............................................................
Structure of the Company .......................................................
Risk Factors....................................................................
Conflicts of Interest...........................................................
Use of Proceeds.................................................................
Investment Objectives and Policies..............................................
The Company.....................................................................
Price Range of Common Shares and Distribution Policy............................
Capitalization..................................................................
Management's Discussion and Analysis of Financial Condition.....................
Description of Shares of Beneficial Interest....................................
Certain Provisions of Maryland Law and of the Declaration of Trust and Bylaws ..
Common Shares Available for Future Sale.........................................
Operating Partnership Agreement.................................................
Federal Income Tax Considerations...............................................
Benefit Plan Considerations.....................................................
Underwriting....................................................................
Legal Matters...................................................................
Experts.........................................................................
Glossary........................................................................
Consolidated Financial Statements...............................................
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
[LOGO]
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.....................................
Printing and engraving expenses...................... *
Legal fees and expenses.............................. *
Accounting fees and expenses......................... *
Blue Sky fees and expenses........................... *
Transfer agent and custodian fees.................... *
Miscellaneous........................................ *
---------------
Total........................................... $
===============
- ---------
*Estimated
Item 32. Sales to Special Parties
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
3.2** Bylaws of the Company
3.3** Articles of Incorporation of RAS General, Inc.
3.4** By-laws of RAS General, Inc.
3.5** Articles of Incorporation of RAS Limited, Inc.
3.6** By-laws of RAS Limited, Inc.
3.7** Certificate of Limited Partnership of RAS Partnership, L.P.
3.8** Limited Partnership Agreement of RAS 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.
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.
24 Power of Attorney (included on signature page)
</TABLE>
- ---------
* To be filed by amendment.
** 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.
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 19th day of May, 1998.
RESOURCE ASSET INVESTMENT TRUST
By: /s/ Betsy Z. Cohen
----------------------------------------------------
Betsy Z. Cohen, Chairman and Chief Executive Officer
II-5
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below in so signing also makes,
constitutes and appoints Betsy Z. Cohen and Jay J. Eisner, and each of them
acting alone, his or her true and lawful attorney-in-fact, with full power of
substitution, for him or her in any and all capacities, to execute and cause
to be filed with the Securities and Exchange Commission any and all amendments
and post-effective amendments to this Registration Statement with exhibits
thereto and other documents in connection therewith, and hereby ratifies and
confirms all that said attorney-in-fact or said attorney-in-fact's substitute
or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Betsy Z. Cohen Chairman, Chief Executive May 19, 1998
- ------------------------------- Officer and Trustee
Betsy Z. Cohen (Principal Executive Officer)
/s/ Jay J. Eisner President and Chief Operating May 19, 1998
- ------------------------------- Officer
Jay J. Eisner
/s/ Ellen J. DiStefano Chief Financial Officer May 19, 1998
- -------------------------------
Ellen J. DiStefano
/s/ Jonathan Z. Cohen Secretary and Trustee May 19, 1998
- -------------------------------
Jonathan Z. Cohen
/s/ Jerome S. Goodman Trustee May 19, 1998
- -------------------------------
Jerome S. Goodman
/s/ Joel R. Mesznik Trustee May 18, 1998
- -------------------------------
Joel R. Mesznik
</TABLE>
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Daniel Promislo Trustee May 19, 1998
- -------------------------------
Daniel Promislo
/s/ Jack L. Wolgin Trustee May 19, 1998
- -------------------------------
Jack L. Wolgin
</TABLE>
II-7
<PAGE>
Exhibit 23
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 the Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts."
/s/ Grant Thornton
- -------------------------------
GRANT THORNTON LLP
Philadelphia, Pennsylvania
May 19, 1998
