-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NUUwp2nydVSQhPxPvMRRih4WoZaKGWCw/YGFewwG2W/y/F0gMNhUBY1XGV9yjU53 RD1x+deKqmwJBu+ls6MApw== 0000950116-97-001678.txt : 19970912 0000950116-97-001678.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950116-97-001678 CONFORMED SUBMISSION TYPE: S-11 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19970908 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESOURCE ASSET INVESTMENT TRUST CENTRAL INDEX KEY: 0001045425 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 232919819 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-11 SEC ACT: SEC FILE NUMBER: 333-35077 FILM NUMBER: 97676353 BUSINESS ADDRESS: STREET 1: 1521 LOCUST ST STREET 2: 6TH FL CITY: PHILADELPHIA STATE: PA ZIP: 19102 BUSINESS PHONE: 2155465119 MAIL ADDRESS: STREET 1: 1521 LOCUST ST STREET 2: 6TH FL CITY: PHILADELPHIA STATE: PA ZIP: 19102 S-11 1 As filed with the Securities and Exchange Commission on ______________, 1997. Registration No. _________ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-11 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 RESOURCE ASSET INVESTMENT TRUST (Exact name of registrant as specified in its governing instruments) 1521 Locust Street, Sixth Floor, Philadelphia, PA 19102 (Address of principal executive offices) Jay J. Eisner President and Chief Operating Officer Resource Asset Investment Trust 1521 Locust Street, Sixth Floor Philadelphia, PA 19102 (Name and address of agent for service) COPIES TO:
J. Baur Whittlesey, Esquire Robert B. Ott, Esquire Thurston R. Moore, Esquire Ledgewood Law Firm, P.C. Arnold & Porter Hunton & Williams 1521 Locust Street, 8th Floor 555 Twelfth Street, N.W. 951 East Byrd Street Philadelphia, PA 19102 Washington, D.C. 20004 Richmond, VA 23219
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [] Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
Calculation of Registration Fee - ------------------------------------------------------------------------------------------------------------------------------------ Title of securities Amount being Proposed maximum Proposed maximum Amount of being registered registered offering price per aggregate offering registration unit price(2) fee - ------------------------------------------------------------------------------------------------------------------------------------ Common Shares(1) 12,075,000 Shares $15.00 $181,125,000 $54,886.36 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes 1,500,000 Common Shares which the Underwriters have the option to purchase to cover over-allotments, if any, and 575,000 Common Shares issuable upon exercise of warrants granted to the Representative of the Underwriters. (2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(a) (with respect to Common Shares other than those relating to the Representative's warrants) and Rule 457(g)(2) (with respect to Common Shares relating to the Representative's warrants). The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED ______________, 1997 PROSPECTUS _________ Shares RESOURCE ASSET INVESTMENT TRUST Common Shares ---------- Resource Asset Investment Trust ("RAIT" and, together with its subsidiaries, the "Company") is a newly organized Maryland real estate investment trust. RAIT will elect to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). RAIT has formed two subsidiaries that will be the general partner and initial limited partner, respectively, of a newly-formed Delaware limited partnership, RAIT Partnership, L.P. (the "Operating Partnership"), through which substantially all of the Company's assets will be owned and operated. All of the ______________ common shares of beneficial interest of the Company (the "Common Shares") offered pursuant to this Prospectus (the "Offering") are being offered by the Company. In addition, ____________________ Common Shares will be sold by the Company to Resource America, Inc. ("RAI") upon the completion of this Offering at the initial public offering price net of any underwriting discounts or commissions. After that sale, RAI will own approximately 9.8% of the Company's outstanding Common Shares, assuming that the Underwriters do not exercise their over-allotment option. It is currently anticipated that the initial public offering price for the Common Shares will be $_____ per share. Prior to this Offering, there has been no market for the Common Shares. The public offering price will be determined by negotiation between the Company and the Underwriters. See "Underwriting." Application has been made for listing the Company's Common Shares on the Nasdaq Stock Market under the symbol "________." See "Risk Factors" beginning on page ______ for certain factors relevant to an investment in the Common Shares including, among others: o The Company has specified uses for only ______% of the net proceeds of the Offering (assuming the Underwriters do not exercise their overallotment option) and, accordingly, investors will not have an opportunity to evaluate a substantial portion of the Company's investments. o The Company's principal business activity will be to provide mortgage and debt financing in situations that, generally, will not conform to the underwriting standards of institutional lenders or sources that provide financing through securitization, and will emphasize wraparound loans and other forms of junior lien or subordinate financing. Financing provided by the Company, accordingly, will be subject to greater risks than institutional and senior lien financing. o The Company's investments will be sensitive to many economic factors over which the Company has no control. o The Company may incur debt in furtherance of its business activities and operations and, accordingly, will be subject to the risks associated with the use of leverage. o Ownership of the Common Shares by each shareholder other than RAI is limited to 8.5% of the outstanding Common Shares, which may deter third parties from seeking control of, or seeking to acquire, the Company. See "Description of Shares of Beneficial Interest - Restrictions on Ownership and Transfer." o The Company will be taxed as a regular corporation if it fails to qualify as a REIT. o There are certain conflicts of interest between the Company and RAI and its affiliates in connection with the Company's acquisition of investments and the management of properties. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
============================================================================================================================ Price to Underwriting Public Discount(1) Proceeds to Company(2) - ---------------------------------------------------------------------------------------------------------------------------- Per Share................................ $ $ $ Total(3)(4).............................. $ $ $ ============================================================================================================================
(1) Does not reflect: (i) reimbursement by the Company of certain out-of-pocket expenses incurred by the Underwriters, to a maximum of $_____; (ii) a warrant granted to -2- Friedman, Billings, Ramsey & Co., Inc., the representative of the Underwriters (the "Representative") to purchase up to _______ Common Shares at a price of $_____ per share, exercisable for a period of five years from the completion of the Offering; and (iii) a two year right granted to the Representative to be first offered the right to act as financial advisor to or lead underwriter for the Company with respect to certain transactions, including sales of assets, equity or debt securities, mergers, acquisitions and capital markets transactions. The Company also has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses in connection with the Offering, estimated at $__________, including the Underwriters' expenses referred to in (1), above, which will be payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to _________ additional Common Shares to cover over-allotments. If all such Common Shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company before expenses of this Offering will be $__________, $__________ and $__________, respectively. See "Underwriting." (4) The total Price to Public and the total Proceeds to Company reflect the sale of ___________ Common Shares to RAI net of the Underwriting Discount. The Common Shares are offered by the Underwriters, subject to receipt and acceptance by the Underwriters, approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offers and to reject orders in whole or in part. It is expected that delivery of the Common Shares will be made in New York, New York on or about _____________, 1997. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. The date of this Prospectus is __________, 1997. -3- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES, INCLUDING STABILIZATION, THE PURCHASE OF COMMON SHARES TO COVER SYNDICATE SHORT POSITIONS, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." -4- PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information included elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus assumes that (i) the transactions relating to the formation of the Company are consummated, (ii) the Underwriters' overallotment option is not exercised and (iii) the offering price (the "Offering Price") of the Common Shares is $____ per share. Unless the context otherwise requires, all references in this Prospectus to (i) the "Company" shall mean Resource Asset Investment Trust and (a) its wholly-owned subsidiaries, RAIT General, Inc. (the "General Partner") and RAIT Limited, Inc. (the "Initial Limited Partner") and (b) RAIT Partnership, L.P. (the "Operating Partnership"), in which the General Partner initially will own a 1% interest and the Initial Limited Partner initially will own a 99% interest; and (ii) the "Common Shares" shall mean the Company's common shares of beneficial interest, par value $.01 per share. Capitalized terms used but not defined herein shall have the meanings set forth in the Glossary beginning on page ______. The Company General. RAIT is a newly-formed Maryland real estate investment trust that will elect to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). The Company's principal business activity will be to provide mortgage or other debt financing ("Financing") in situations that, generally, do not conform to the underwriting standards of institutional lenders or sources that provide financing through securitization. The Company believes that its anticipated Financing activity provides it with an underserved niche market in the real estate finance industry. The Company will rely primarily on the relationships its management personnel have developed as a result of their many years of experience in the mortgage lending, real estate and real estate finance industries to generate financing opportunities. Investment Objectives and Policies. The Company intends to purchase or originate Financing relating to multi-family residential, office and other commercial properties. The Company believes that, under current market conditions, institutional lenders and lending sources that provide financing through securitization (which the Company believes are currently the principal sources of real property financing), require that loans made by them satisfy certain standard criteria. Typically, these lenders will require that the requested loan be within the institution's size parameters and bear a specified relation to the appraised value of the property securing the loan, that the property have historical operating results demonstrating a ratio of cash flow to projected debt service meeting standards established by the institution and that the loan be secured by a first lien on the property. These lenders frequently restrict the ability of the borrower to incur junior lien loans on the property without the lender's consent and impose substantial penalties on loan prepayment. Lenders may also establish guidelines with respect to type of property, type and amount of insurance, uses of funds, appraisals and loan documentation. The Company believes that borrowers or properties needing attention to specific or unique situations are frequently unable to obtain financing from these sources, or cannot obtain financing -5- adapted to their particular needs, providing the Company with a niche market with substantial growth potential. The Company also believes that the recent trend towards consolidation among regulated financial services providers has enhanced the opportunity for unregulated financial services providers, such as the Company, to compete in this niche. In providing Financing, the Company will emphasize wraparound loans and, to a lesser extent, other forms of junior lien and subordinated loans with principal amounts generally between $1 million and $8 million. The Company is not, however, limited in the type of Financing it may provide and, accordingly, may originate or acquire first lien loans. A wraparound loan is a junior lien or unsecured loan having a principal amount equal to the sum of the outstanding principal balances of loans with senior priority of lien plus the net amount advanced by the wraparound lender. From payments it receives on the wraparound loan, the wraparound lender pays principal and interest to holders of the senior lien loans. Wraparound loans (and other junior loans) offer the potential for higher yields than yields ordinarily obtained in senior lien financing (and, in the case of wraparound loans, the possibility of increasing yields as the principal amounts of senior loans are amortized). However, such loans carry a greater credit risk, including a substantially greater risk of non-payment of interest or principal, than senior lien financing. See "Risk Factors - Investment Activity Risks - Financing Considerations: Enhanced Credit Risks of Subordinate Financing." As compensation for the foregoing risks, the Company will seek to originate or acquire Financing that not only has current cash returns higher than those obtained in typical first lien institutional financing but that also has various features increasing the Company's potential return over the term of the Financing. These features may include participations in any appreciation of the value of the property underlying the Financing or participations in any increase in property revenues (in addition to any increase in yields resulting from amortization of the principal amount of senior debt). The Company will typically seek a minimum participation rate of 25%. There can be no assurance that the Company will be able to obtain that rate, or any participation interests at all. The Company's Financing will consist of direct loans to borrowers and the acquisition of existing loans. In its direct Financing, the Company will endeavor to adapt the financing terms to the needs of its borrowers, utilizing a variety of financing techniques such as staged payments, event specific loan advances, different rates of interest payment and interest accrual, deferred (or "balloon") principal payments and similar techniques. In acquiring existing Financing, the Company will focus on Financing that, because of one or more past problems (such as complex ownership situations with respect to the property underlying the Financing, lack of a strong operating history for the property, historical credit or cash flow problems or other factors) can be acquired at a discount to its outstanding balance and the appraised value of its underlying property. The Company will not acquire any such Financing unless material steps have been taken by prior lienholders (or others) to resolve the past problems. As appropriate, either as part of the Company's investment strategy or for tax planning purposes, the Company may acquire direct or indirect interests in real property including interests -6- in partnerships, joint ventures or limited liability companies owning real property ("Property Interests"). Although the Company will generally seek to obtain Property Interests which have preferences as to current distributions and return of capital, the Company is not limited as to the kinds of Property Interests it may acquire, and some or all of its Property Interests may not have a preferred position. The Company believes that acquiring Property Interests will be advantageous for three reasons. First, it will give the Company flexibility in addressing the financial needs and tax situations of borrowers in situations where debt financing may not be appropriate. Second, it will provide the Company with the possibility of capital appreciation in addition to the current income realized from its loan portfolio. Third, it will assist the Company in tax planning. It is anticipated that certain of the Financings made by the Company may result in recognition of income for federal income tax purposes in advance of the receipt of the related cash flow, which will increase the Company's distribution requirement in such year without a contemporaneous corresponding receipt of cash by the Company. Depreciation deductions associated with the Company's investments in Property Interests, however, should help offset such adverse tax effects. See "Risk Factors - Legal and Tax Risks - Tax Risks" and "Federal Income Tax Considerations - Requirements for Qualification: Distribution Requirements." The Company intends to fund its activities with the proceeds of this Offering and future equity offerings. Although the Company is permitted to incur debt to originate or acquire Financing or Property Interests, the Company generally will not do so unless it does not have immediately available capital sufficient to invest in a particular opportunity. The Company anticipates that, in normal operations, it will not exceed a debt to equity ratio of 0.5:1. However, the Company is not limited in the amount of debt which it may incur and, accordingly, may exceed that ratio in the future. See "Investment Objectives and Policies - Leverage" and "Risk Factors - Other Investment Activity Considerations: Use of Leverage." Initial Investments. The Company has identified 12 loans for acquisition and origination at an aggregate cost estimated at $41.3 million (the "Initial Investments"). Eleven loans, with an aggregate cost of $40.0 million, will be purchased from RAI (representing 97.0%, by cost, of the Initial Investments). Each of the acquired loans is being acquired at a discount to the outstanding balance due from the borrower on the loan. The aggregate outstanding balance was $90.5 million at June 30, 1997. The Company will also originate one loan which, at funding, will have an aggregate balance of $7.6 million. The Company's investment, on a cost basis, in the Initial Investments is 82% of the appraised value of the underlying properties, and ______% of the estimated replacement cost (as set forth in such appraisals) of such properties. There is an aggregate of $18.8 million of debt held by third parties which is secured by the properties underlying the Initial Investments and to which the Initial Investments are subordinated. Subsequent to the completion of the Offering, the Company intends to acquire $5.2 million of such senior debt. See "Investment Objectives and Policies - Initial Investments" and "Use of Proceeds." Management of the Company. The Company's senior management has many years of experience in the mortgage lending, real estate and real estate finance industries. Its Chairman and Chief Executive Officer, Betsy Z. Cohen, is the founder and current Chairman and Chief -7- Executive Officer of JeffBanks, Inc. ("JeffBanks"), a bank holding company with approximately $1.2 billion in assets as of June 30, 1997. The President, Jay J. Eisner, until he joined the Company, was the chief financial officer of several real estate investment, financing and development firms. The Chief Financial Officer, Ellen J. DiStefano, until she joined the Company, was the chief financial officer of a real estate development and management firm (which is an affiliate of RAI). See "The Company - Trustees and Executive Officers" and "Investment Objectives and Policies - Loan Origination Sources." Risk Factors An investment in the Common Shares involves various material risks. Prospective investors should carefully consider the matters set forth under "Risk Factors" in connection with an investment in the Common Shares. Such risks include, among others: o The Company is a newly-formed entity with no history of operations upon which to base an investment decision. o The Company has specified uses for only _____% of the net proceeds of this Offering (assuming the Underwriters do not exercise their overallotment option) and, accordingly, investors will not have an opportunity to evaluate a substantial portion of the Company's investments. o The Company's principal business activity will be to provide mortgage and other debt financing in situations that, generally, will not conform to the underwriting standards of institutional lenders or sources that provide financing through securitization. The Company intends to emphasize wraparound loans and, to a lesser extent, other forms of junior lien or subordinated financing. Financing provided by the Company will, accordingly, be subject to greater risks than institutional and senior lien financing. o The Company may be subject to intense competition in identifying suitable loans for acquisition or origination. o The value of the Company's portfolio of Financings and Property Interests, and the Company's income from them, may be adversely affected by economic factors over which the Company has no control. o Geographic concentration of the Company's Financings and Property Interests may subject them to regional economic fluctuations. o Environmental risks may adversely affect the value of the Company's Financings and Property Interests. -8- o The Company may incur debt in furtherance of its business activities and operations and, accordingly, will be subject to the risks associated with the use of leverage. o The Company's senior management lacks prior experience in managing a REIT. o The Company's investment policies may be revised by the Board of Trustees without shareholder approval. o If the Company fails to qualify or maintain its qualification as a REIT, the Company will be taxed as a regular corporation for federal income tax purposes which would materially adversely affect income available for distribution to shareholders. o The Company may provide Financing that may result in recognition of income for federal income tax purposes in advance of the receipt of the related cash flow, which will increase the Company's distribution requirement in that year without a contemporaneous corresponding receipt of cash by the Company. To the extent the Company does not acquire Property Interests generating sufficient non-cash tax deductions to offset such income, or does not generate funds for distribution to shareholders (through cash on hand, borrowings, asset sales, or otherwise) sufficient to meet REIT distribution requirements under the Code, the Company could lose its REIT qualification or could be subject to an excise tax, either of which would materially adversely affect shareholder distributions. o If the Company fails to qualify for an exemption from registration as an investment company under the Investment Company Act of 1940 (the "Investment Company Act"), the Company will be required to change the manner in which it conducts operations so as to avoid the registration requirement or register as an investment company, either of which could have an adverse effect on the Company. o There are certain conflicts of interest between the Company and RAI and its affiliates in connection with the Company's origination and acquisition of Financing and Property Interests, and with the management of properties underlying the Company's Financings or that may be included in the Company's Property Interests. o The amount of the outstanding Common Shares which any shareholder may own is limited (for purposes of maintaining REIT qualification) to 8.5% (except for shares owned by RAI), which may deter third parties from seeking control of, or seeking to acquire, the Company. -9- Conflicts of Interest RAI, which is the sponsor of the Company, will own 9.8% of the outstanding Common Shares upon consummation of this Offering, assuming the Underwriters do not exercise their overallotment option. RAI may acquire Common Shares after the Offering to a maximum of 15% of Common Shares outstanding. RAI, until such time as its ownership of outstanding Common Shares is less than 5%, has the right to nominate one member of the Board of Trustees. One of the Company's current trustees, Jonathan Z. Cohen, is serving as RAI's nominee. Mr. Cohen is the son of Betsy Z. Cohen, the Chairman and Chief Executive Officer of the Company, and her spouse, Edward E. Cohen. Edward E. Cohen is the Chairman, Chief Executive Officer and President of RAI. Of the Initial Investments, 97%, by cost, will be purchased by the Company from RAI which will also be reimbursed for $______ it has advanced to the Company for pre-Offering organization expenses. See "Investment Objectives and Policies - Initial Investments" and "The Company - Certain Relationships; Conflicts of Interest." The Company anticipates that, subject to the limitations referred to in the next paragraph, it will purchase additional investments from RAI. The Company also may from time to time (but is not obligated to) retain RAI to perform due diligence investigations on properties underlying proposed Financing (excluding Financings being acquired from RAI) or on Property Interests the Company is considering for acquisition. Brandywine Construction & Management, Inc. ("Brandywine"), an affiliate of RAI, will also provide real property management or management supervisory services to properties underlying the Company's Financings or included in the Company's Property Interests. In addition, Mrs. Cohen is the Chairman and Chief Executive Officer of JeffBanks, with which the Company may have banking relations and from which the Company may initially obtain loan administration services. Accordingly, the Company's relationship with RAI and its affiliates, and with JeffBanks, will be subject to various conflicts of interest. The Company has instituted certain procedures to mitigate the effects of any such conflicts, including (i) requiring that a majority of its Trustees be persons who, within the past two years, have not (a) been affiliates of RAI, Brandywine, or their affiliates, (b) been officers of the Company, or (c) had any material business or professional relationship with the Company, RAI, Brandywine, JeffBanks or their affilaites ("Independent Trustees"), (ii) requiring that the acquisition price of any investment acquired from RAI (or in which an officer or trustee of the Company has an interest) be determined based upon independent appraisal of the underlying property, (iii) limiting the investments which may be acquired from RAI to a maximum of 30% of the Company's investments (excluding the Initial Investments), based upon the Company's investment cost (the amount of the investment plus legal, filing and other related fees and expenses), (iv) requiring that any fees for services performed by RAI, Brandywine, JeffBanks or their affiliates be no greater than prevailing fees in the area for similar services provided by unrelated third parties, (v) requiring that any service arrangements with an affiliated entity provide that services will be rendered only as and to the extent requested by the Company from time to time and that, in any event, the arrangements be cancelable by the Company, without penalty, on no more than 30 days' notice, (vi) requiring that any investment acquisition or services arrangement, and every transaction with RAI, Brandywine, JeffBanks and their affiliates, or relating to any property in which any such persons (including Mrs. Cohen) has an interest, -10- receive the prior approval of a majority of the Independent Trustees (who, in giving such approval, may rely upon information provided by RAI, Brandywine, JeffBanks or their affiliates), and (vii) with respect to real estate management or management supervisory services performed by Brandywine, requiring that the aggregate of the fee received by Brandywine and the manager being supervised may not exceed the normal and customary fee for similar property management services with respect to similar properties in the same area. The Company will not, however, be required to obtain the approval of the Independent Trustees to retain RAI to perform a due diligence investigation of a property where the amount of the fee for such services will not exceed the lesser of 1% of the property's appraised value or $10,000. Since each of the Company, RAI and JeffBanks seeks to originate or, in the case of the Company and RAI, acquire mortgage loans, there may be conflicts of interest among the Company, RAI and JeffBanks regarding the allocation of loan opportunities. The Company believes, however, that these conflicts are substantially mitigated since there are significant differences between the investment objectives of the Company, RAI and JeffBanks. RAI has advised the Company that it seeks to acquire loans which are either in default, or at risk of imminent default, requiring active intervention by RAI in the workout process. The Company, however, seeks to acquire loans where the workout process has already been initiated and there is no need for its active intervention. JeffBanks has advised the Company that it seeks to provide customary commercial lending services emphasizing (with respect to real estate loans) first lien financing that is subject to specified underwriting standards. The Company seeks to provide Financing that does not conform to JeffBanks' underwriting standards. The Company believes that conflicts are further mitigated because the anticipated sources of the Company's loan referrals (apart from loans acquired from RAI) are different from those of RAI and JeffBanks. To further limit conflicts between the Company and RAI, the Company and RAI have agreed that, for two years following the completion of the Offering, (i) RAI will not sponsor another REIT with investment objectives and policies which are the same as, or substantially similar to, those of the Company; (ii) if RAI originates a proposal to provide wraparound or other junior lien or subordinated Financing with respect to multifamily, office or other commercial properties to a borrower (other than to a borrower with an existing loan from RAI), RAI must first offer the opportunity to the Company; and (iii) if RAI desires to sell any loan it has acquired that conforms to the Company's investment objectives and policies with respect to acquired loans, it must first offer to sell it to the Company. The Offering Shares offered to the public(1)(2)........................... _____________ Shares to be outstanding after offering(1)(2)(3)............. _____________ Proposed Nasdaq symbol....................................... _____________ - ------------------------ (1) Assumes that the Underwriters' option to purchase up to an additional _________ shares to cover over-allotments is not exercised. (2) See "Description of Capital Shares" and "Capitalization." (3) Includes _______ shares that RAI has committed to purchase in connection with the Offering (see "Capitalization"), but excludes shares issuable pursuant to warrants granted to the Underwriters (see "Underwriting"). -11- Use of Proceeds The Company has contracted (subject to the approval of the Independent Trustees) to acquire or originate the Initial Investments upon completion of this Offering for an investment cost of approximately $41.3 million, which is equal to approximately ______% of the expected net proceeds of this Offering (_____% if the Underwriters exercise their overallotment option). The Initial Investments will consist of those Financings described at "Investment Objectives and Policies - Initial Investments." Of the Initial Investments, $40.0 million, by cost, will be acquired from RAI. In addition, the Company will reimburse RAI for $_____________ of organizational expenses advanced by RAI to the Company prior to the completion of the Offering. At the time of their acquisition, the Initial Investments being acquired from RAI will be subject to $12.5 million of loan participation interests or other debt that is senior to the loan interests acquired from RAI. The Company anticipates acquiring $5.2 million of such senior loan participation interests from the proceeds of this Offering. However, the Company also anticipates that, following acquisition, the Company will seek to sell participations in the loans as to which it has acquired the prior senior loan participation interests or that borrowers may seek to refinance some portion of the loans and, accordingly, that the Company will obtain the return of some portion or all of the funds utilized to acquire the senior loan participation interests. For certain information concerning the senior participations to be acquired (including interest rate and maturity date) see "Investment Objectives and Policies - Initial Investments." There can be no assurance, however, that any such sales or refinancings will occur. The balance of the Offering proceeds (including any funds obtained from sales of participations in or refinancings of loans as referred to above) will be invested in the manner described in "Investment Objectives and Policies." It is anticipated that the investment process will take up to 18 months after the Offering has been completed, although there can be no assurance that the process will not take longer. Pending such investment, the balance of the net proceeds will be invested in readily marketable, interest-bearing securities which, following the expiration of the one year investment period provided by the Code, will be limited to those securities allowing the Company to continue to qualify as a REIT. See "Federal Income Tax Considerations - Requirements for Qualification: Asset Tests." Distribution Policy The Company intends to distribute to its shareholders at least 95% of its net taxable income each year (subject to certain adjustments) so as to qualify for the tax benefits accorded to REITs under the Code. The Company intends to make distributions quarterly. It is anticipated that the first distribution to shareholders will be made promptly after the first full calendar quarter following completion of the Offering. -12- Tax Status of the Company The Company intends to qualify and will elect to be taxed as a REIT under sections 856 through 860 of the Code, commencing with its taxable year ending December 31, 1997. If the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income tax on its taxable income that is distributed to its shareholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 95% of its annual taxable income. Although the Company does not intend to request a ruling from the Internal Revenue Service (the "Service") as to its REIT status, counsel to the Company has rendered its opinion, based on certain assumptions and representations about the Company's ongoing businesses, investment activities and other matters, that the Company qualifies as a REIT. There can be no assurance that the Company will be able to comply with such assumptions and representations in the future. Furthermore, counsel's opinion is not binding on either the Service or any court. If the Company fails to qualify as a REIT in any taxable year, it would be subject to federal income tax at regular corporate rates and distributions to its shareholders would not be deductible. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain federal, state and local taxes on its income and property. The Company will adopt the calendar year as its taxable year. In connection with the Company's election to be taxed as a REIT, its Declaration of Trust imposes restrictions on the transfer and ownership of the Common Shares. See "Risk Factors - Legal and Tax Risks: REIT Tax Risks" and "Federal Income Tax Considerations - Taxation of the Company." -13- FORMATION AND STRUCTURE RAIT, the Operating Partnership, the General Partner of the Operating Partnership and the Initial Limited Partner of the Operating Partnership were each formed in August, 1997. The Operating Partnership will undertake the business of the Company, including the origination and acquisition of Financing and the acquisition of Property Interests. The following diagram illustrates the structure of the Company, the Operating Partnership, the General Partner and the Initial Limited Partner, and their relationship with RAI, assuming successful completion of the Offering: --------------------------- | Public Shareholders | --------------------------- | --------------------------- (1) ------------------- | RAIT ----------- RAI | --------------------------- ------------------- (2) | | (2) | - --------------------- --------------------- | | RAIT Limited, Inc.| | RAIT General, Inc.| | - --------------------- --------------------- | (3) | | (3) | ---------------------------- (4) | | RAIT Partnership, L.P. --------------- ---------------------------- (1) RAIT will sell approximately ________% of its common shares to RAI and approximately ____% to public investors. (2) RAIT has incorporated and capitalized the General Partner and the Initial Limited Partner. (3) The General Partner and the Initial Limited Partner have formed and will capitalize the Operating Partnership. The General Partner initially owns a 1% general partnership interest and the Initial Limited Partner initially owns a 99% limited partnership interest in the Operating Partnership. Because RAIT owns initially 100% of each of the General Partner, Initial Limited Partner and, indirectly, the Operating Partnership, they should not be treated as entities separate from RAIT for federal income tax purposes. See "Federal Income Tax Considerations - Requirements for Qualification." (4) RAI will sell certain of the Initial Investments to the Operating Partnership, and may sell additional investments to the Operating Partnership, for cash. See "The Company - Initial Investments." An affiliate of RAI may also provide certain property management services to properties underlying Financings or Property Interests held by the Operating Partnership. See "The Company - Certain Relationships; Conflicts of Interest." -14- RISK FACTORS An investment in the Common Shares involves various risks. Prospective investors should carefully consider the following risk factors, in addition to the other information set forth in this Prospectus, in connection with an investment in the Common Shares. The risk factors set forth below and elsewhere in this Prospectus should be read as accompanying forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology such as "may," "will," "should," "seek," "expect," "anticipate," "estimate" or "continue" or the negatives thereof or other comparable terminology. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the following risk factors and the other factors described elsewhere in this Prospectus. The Company undertakes no obligation to update any such forward-looking statements as a result of actual results of operations. Investment Activity Risks Financing Considerations General Credit Risks. The Company's principal portfolio assets are anticipated to be Financings, consisting primarily of loans relating to real property. In the event of a default on one or more of these loans, the Company's current return on its investments may be reduced or eliminated, adversely affecting the overall return on the Company's investment portfolio. Moreover, a default on a loan may require the Company to become involved in expensive and time-consuming proceedings, including bankruptcy, reorganization or foreclosure proceedings, in attempting to recover some portion or all of its investment. See "Certain Legal Aspects of Real Property Loans and Investments." In many cases, it is anticipated that the real property underlying the loan will be the primary or sole source of any recovery for the Company. Accordingly, the Company will be materially dependent upon the value of the real property underlying its loans, which value may be affected by numerous factors outside the control of the Company. See "Risk Factors - Investment Activity Risks - Real Property Considerations." The Company intends to make a material number of loans that will provide payment structures other than self-amortization, including structures that defer payment of some portion of accruing interest, or defer repayment of principal, until loan maturity. Where a borrower has an obligation to pay a loan balance in a large lump sum payment, its ability to satisfy this obligation may be dependent upon its ability to obtain suitable refinancing or otherwise to raise a substantial cash amount. In addition, in some jurisdictions, mortgage lenders can lose any priority of their lien to mechanics', materialmen's and other liens. For these and other reasons, the total amount which may be recovered by the Company may be less than the total amount of the Company's loan, or its cost of acquisition, with resultant loss to the Company. Risks Relating to Term of Financing. Because it is anticipated that the Company's Financings generally will have maturities between 4 and 10 years, the Company will be unable to vary its portfolio promptly in response to changing economic, financial and investment -15- conditions. Many of these risks may be intensified by existing and potential economic developments and uncertainties. See "Risk Factors - Investment Activity Risks - Real Property Considerations." Moreover, certain of the Company's Financing commitments may provide for a substantial period of time between the commitment date and the date of funding. Such commitments may involve additional risks, including the risk that the Financing may not be funded due to borrower default or the ability of the borrower to secure more favorable financing. Additionally, a commitment may require the Company to fund a Financing notwithstanding an adverse change in the financial condition of the borrower, although the Company does not anticipate issuing commitments so limited. Although the Company will attempt to obtain participation features in its loans to provide it with additional compensation and a hedge against inflation, economic and other factors may have a material adverse effect upon the value of any participation feature obtained or its ability to provide an inflation hedge. Enhanced Credit Risks of Subordinate Financing. The Company will emphasize wraparound loans and, to a lesser extent, other junior lien loans or subordinated financing. Because of their subordinate position, these loans carry a greater credit risk, including a substantially greater risk of non-payment of interest or principal, than senior lien financing. Where, as part of a financing structure, the Company has an equity or other unsecured position, the risk of loss may be materially increased. A decline in the real estate market where the property underlying the Financing is located could adversely affect the value of the property such that the aggregate outstanding balances of senior liens and the Company's Financing may exceed the value of the underlying property. See "Risk Factors - Investment Activity Risks - Real Property Considerations." In the event of a default on a senior loan, the Company may elect to make payments, if it has the right to do so, in order to prevent foreclosure on the senior loan. In the event of such foreclosure, the Company will only be entitled to share in the proceeds after satisfaction of the amounts due to senior lienors, which may result in the Company not being able to recover the full amount or, indeed, any of its investment. It is also possible that in some cases, a "due on sale" clause included in a senior mortgage, which accelerates the amount due under the senior mortgage in case of the sale of the property, may apply to the sale of the property upon foreclosure by the Company of its Financing, and may accordingly increase the risks to the Company in the event of a default by the borrower on the Company's Financing. See "Certain Legal Aspects of Real Property Loans and Investments." When the Company acquires a loan, it may not acquire the right to service the senior loans. The servicers of the senior loans are responsible to the holders of such loans, whose interests will likely not coincide with those of the Company, particularly in the event of a default. Accordingly, the senior loans may not be serviced in a manner which is most advantageous to the Company. Certain of the Initial Investments are loans which are not collateralized by recorded or perfected liens and certain future Financings may not be collateralized by such liens. Such loans are subject to many of the same factors that interfere with or affect the ability of a lender to exercise its remedies against a borrower as mortgage loans. In addition, such loans generally will be subject and subordinate not only to existing prior liens encumbering the underlying property, -16- but also to future judgment liens that may arise from litigation against a borrower. Furthermore, in a bankruptcy, the holders of such loans have materially fewer rights than secured creditors and their rights are subordinate to the lien-like rights of the bankruptcy trustee. Moreover, enforcement of such loans against the underlying properties generally involves a longer and more complex legal process than enforcement of a mortgage loan. Management believes that, with respect to any such loans that are part of the Initial Investments, the following matters serve to mitigate the Company's risks as an unsecured lender. First, the tenants of the underlying properties generally will pay their rents directly to a lockbox controlled by the Company. Second, future liens encumbering the underlying properties are generally prohibited by the lenders of existing senior lien loans on these properties. Finally, the Company generally will hold a deed-in-lieu of foreclosure that may enable it to enforce its rights against the underlying property in an expedited fashion. However, none of these factors will assure that these loans are collected. Moreover, filing a deed-in-lieu of foreclosure with respect to these loans may (and, with respect to the applicable Initial Investments, will) constitute an event of default under related senior debt. Any such default would require the Company to acquire or pay off the senior debt in order to protect its investment. For a discussion of the collateral or other security pertaining to these loans, see "Investment Objectives and Policies - Initial Investments." Risks Relating to Interest Rate Changes. The resale value of loans in the Company's portfolio will be affected by changes in interest rates. In general, the resale value of a loan will change in inverse relation to an interest rate change. Accordingly, in a period of rising interest rates, the resale value of the loan will decrease. Moreover, in a period of declining interest rates, real estate loans may benefit less than other fixed income securities due to prepayments. Interest rate changes will also affect the Company's return on new loans that it makes. In particular, during a period of declining rates, the amounts becoming available to the Company for investment due to repayment of its Financings may be invested at lower rates than the Company had been able to obtain in prior investments, or than the rates on the repaid Financings. Also, increases in interest on debt, if any, incurred by the Company in originating or acquiring Financing or Property Interests, may not be reflected in increased rates of return on the Financing or Property Interests funded or acquired through such debt, thereby adversely affecting the Company's return on such investments. Accordingly, interest rate changes may materially affect the total return on the Company's investment portfolio, which in turn will affect the amount available for distribution to the Company's shareholders. Credit Risk of Non-Conforming Loans. The Company anticipates that a material portion of its financing will be extended to borrowers or in situations that do not conform to conventional loan criteria (see "Investment Objectives and Policies - General" for a general description of conforming loans) due to complex ownership situations with respect to the properties underlying the Financings, lack of a strong operating history for the properties, historical credit or cash flow problems or other factors. As a consequence, these loans may be subject to a higher risk of default than conventional loans. -17- Illiquidity of Non-Conforming Loans. Investments in non-conforming loans are relatively illiquid and, accordingly, the Company may not be able to vary its Financing portfolio in response to changes in economic or other conditions. Lack of Geographic Diversification. The Company intends to emphasize Financing with respect to properties located in metropolitan areas of the United States, and has identified certain areas in which it may concentrate its investments. In particular, the Company anticipates that a material portion of its loans will relate to properties located in the Philadelphia, Pennsylvania metropolitan area (11 of the 12 Initial Investments relate to properties located in this area). See "Investment Objectives and Policies - Locations of Properties Securing Loans." The Company does not expect to set specific limitations on the aggregate percentage of its portfolio relating to properties located in any one area (whether by state, zip code or other geographic measure). Any lack of geographic diversification that may occur could result in the Company's investment portfolio being more sensitive to, and the Company being less able to respond to, economic developments of a primarily regional nature, which may not have as significant an impact on a more geographically diverse investment portfolio. Competition for Financing. The Company may encounter significant competition in seeking to originate or acquire suitable real estate loans from banks, insurance companies, savings and loan associations, mortgage bankers, pension funds, investment bankers and others, including public or private REITs which have been or may be formed with objectives similar in whole or in part to those of the Company. These entities or persons may have substantially greater assets than the Company, and thus an ability to make larger loans or have a more diversified loan portfolio. An increase in the general availability of funds to lenders, or a decrease in the amount of borrowing activity, may increase competition for making loans and may reduce the yields available thereon or increase the credit risk inherent in the available loans. Risks of Participations. In structuring its Financings, the Company will seek to obtain agreements from borrowers to pay, in addition to the specified rate of interest, additional interest measured by the appreciation of the property subject to such loan or by increases in such property's revenues. The Company may, in certain cases, accept a lower minimum interest rate in order to obtain such a participation and the potentially greater benefit that could result from a share in the appreciation in value or revenues of the property. The value of any such participation will depend on the factors inherent in any real estate investment and, accordingly, there can be no assurance that any benefits will be realized from participations. See "Risk Factors - Investment Activity Risks - Real Property Considerations." The Company does not anticipate that amounts (if any) it may receive as a result of participations will be significant in the early years of any investment. Moreover, there can be no assurance that the Company will be able to negotiate participation provisions in any of its loans. There may be uncertainty as to the treatment of participations for purposes of state usury laws, and, accordingly, any such provisions obtained by the Company in connection with its Financings may increase the possibility that a loan may be deemed to be usurious. See "Risk -18- Factors - Investment Activity Risks - Financing Considerations: Interest Ceilings Under Usury Statutes." Additionally, as a result of the Company's interest in revenues from or proceeds of a sale, financing or refinancing of a property underlying a Financing, a court in a bankruptcy, arrangement or similar situation could treat the Company as a partner of, or joint venturer with, the borrower, and the Company would, accordingly, lose the priority of any security interest it might otherwise have in such situations. Risks Relating to Loans Secured by Interests in Entities Owning Real Property. The Company may originate or acquire Financing which is secured by interests in entities that own real properties rather than a direct security interest in the underlying property. Although the Company does not anticipate that it will originate or acquire a material number of Financings so secured, to the extent it does so, it will be subject to the risk that the interests pledged as security will be illiquid, or otherwise have features that may make it difficult for the Company to obtain a return of its investment in the event of a default on its Financing. See "Risk Factors Investment Activity Risks - Real Property Considerations: Investments in Joint Ventures, Partnerships or Other Real Properties." Loans secured by interests in such entities may also not be deemed to be "Qualified Interests" for Investment Company Act purposes. See "Risk Factors - Legal and Tax Risks: Investment Company Act Risks." Interest Ceilings Under Usury Statutes. Interest charged on loans made by the Company (which may include amounts received in connection with participations) may be subject to state usury laws imposing maximum interest rates and penalties for violation, including restitution of excess interest and unenforceability of debt. The Company will seek to structure its Financings so as not to violate applicable usury laws, but uncertainties in determining the legality of rates of interest and other borrowing charges under some statutes may result in inadvertent violations. Acquisition of Loans at Discount. The Company anticipates that it will acquire loans at purchase prices that represent a discount from both the outstanding balance of principal and accrued interest on the loan, as well as from the appraised value of the property underlying the loan. These discounts typically will arise from problems involving the loans or their underlying properties, including an inability to generate sufficient revenues to service loans in accordance with their original terms. Accordingly, acquiring loans at a discount may involve a substantially higher degree of risk of collection than loans which conform to institutional underwriting criteria. The Company does not presently intend to acquire a loan unless the prior loan holder (or some other party or parties) has taken material steps toward resolving problems to which the loan, or its underlying property, are subject. However, there can be no assurance that the loans or their underlying properties will not be subject to recurrence of previously existing problems, or that other problems will not arise. Risks Relating to Financing in Construction Situations. Although the Company does not anticipate making construction loans, the Company anticipates making loans in situations where construction is involved, generally either (i) as financing that repays a third party's construction -19- loan, or (ii) where the loan is secured by property with a pre-construction value that is within the Company's investment guidelines. However, the Company is permitted to depart from its guidelines and, accordingly, if pre-construction property value is not within the Company's guidelines, the Company may require other assurances of payment, such as personal guarantees from the developers. See "Investment Objectives and Policies - Certain Financial Guidelines" and "- Types of Properties Relating to Financings." Loans in construction situations may involve a higher degree of risk than other lending, to the extent that repayment is dependent upon successful completion of the project, or as a result of the lack of an operating history on the project as constructed or rehabilitated upon which to base a loan's underwriting, difficulties in estimating construction costs and timing, and other reasons. Real Property Considerations General. Although the Company will emphasize originating or acquiring Financing, the Company will also acquire Property Interests. See "Investment Objectives and Policies Acquisition of Real Property Interests." Real property investments are subject to varying degrees of risk. The yields available from real properties depend on the amount of income earned and capital appreciation generated by the related properties as well as the expenses incurred in connection therewith. If the properties do not generate income sufficient to meet operating expenses, including debt service and capital expenditures, the ability to make distributions to the Company's shareholders could be adversely affected. Income from, and the value of, the properties may be adversely affected by general and local economic conditions, neighborhood values, competitive overbuilding, weather, casualty losses and other factors beyond the Company's control. Revenues from, and values of real properties are also affected by such factors as the cost of compliance with regulations and the potential for liability under applicable environmental laws, changes in interest rates and the availability of financing. Income from a property would be adversely affected if a significant number of tenants were unable to pay rent or if available space could not be rented on favorable terms. Certain significant expenditures associated with an investment in real property (such as mortgage payments, real estate taxes and maintenance costs) generally are not reduced when circumstances cause a reduction in income from the investment. Illiquidity of Real Estate. Real estate investments are relatively illiquid and, therefore, the Company may be limited in its ability to vary its portfolio of Property Interests quickly in response to changes in economic or other conditions. In addition, a prohibition in the Code and related regulations on a REIT holding property primarily for sale in the ordinary course of business may affect the Company's ability to sell Property Interests without adversely affecting distributions to the Company's shareholders. See "Federal Income Tax Considerations." Uninsured and Underinsured Losses. The Company intends to maintain (or cause to be maintained) comprehensive insurance on the properties underlying its Property Interests (as well as on properties underlying its Financings), including liability and fire with extended coverage, in amounts sufficient to permit the replacement of the properties in the event of a total loss, subject to applicable deductibles. There are certain types of losses, however, generally of a -20- catastrophic nature, such as earthquakes, floods and hurricanes, that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace a property if it is damaged or destroyed. Under such circumstances, the insurance proceeds received by the Company might not be adequate to restore its economic position with respect to the affected property. Investments in Joint Ventures, Partnerships or Other Real Property Interests. The Company anticipates that, from time to time, its investment activities may take the form of an equity interest in entities which own real property, rather than acquiring or making a real property loan or acquiring a property directly. While the Company anticipates that any equity interest it acquires will be senior in right of payment to existing and future equity interests, the Company is not limited as to the kind of equity interests it may acquire, and it may acquire equity interests which are not senior or preferred interests. Since an equity interest is subordinate to all creditors, where the Company purchases equity interests, the Company's risk of loss may be increased. Moreover, acquisition of equity interests provides certain risks not present in real property loans or direct property ownership. For example, there is the possibility that the other equity owners in the entity holding the property might have economic or business interests or goals which are inconsistent with the business interests or goals of the Company or be in a position to take action contrary to the instructions or requests of the Company or contrary to its policies or objectives. While the Company will seek to obtain sufficient contractual rights with respect to a property in which it obtains an equity interest to allow it to protect the value of its interest, there can be no assurance that any rights obtained will, in fact, enable it to do so. Moreover, in limited partnerships, even if the Company is a limited partner, if its rights under the partnership agreement allow it sufficient control over the partnership or its property, it might be deemed to be a general partner and, in such a case, could incur liability for the debts of the partnership beyond the amount of its investment. Compliance with Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations. Under the Americans with Disabilities Act of 1990 (the "ADA"), all public properties are required to meet certain federal requirements related to access and use by disabled persons. Properties acquired by the Company (or properties underlying Financings which may be made or acquired by the Company) may not be in compliance with the ADA. If a property is not, the Company (or its borrowers) will be required to make modifications to such property to bring it into compliance, or face the possibility of an imposition of fines or an award of damages to private litigants. In addition, changes in other governmental rules and regulations, including changes to building codes and fire and life-safety codes, may occur. If the Company (or its borrowers) were required to make substantial modifications to the properties to comply with the ADA or other changes in governmental rules and regulations, the Company's ability to make expected distributions to its shareholders could be adversely affected. Property Taxes Decrease Returns on Real Property. All properties included in the Company's Property Interests or underlying its Financings will be subject to real, and in some instances, personal property taxes. Such real and personal property taxes may increase or -21- decrease as property tax rates change and as the properties are assessed or reassessed by taxing authorities. An increase in property taxes on these properties could materially adversely affect the Company's income and ability to make distributions to its shareholders. Environmental Risks May Adversely Affect Value of Underlying Properties Contamination of real property by hazardous substances or toxic wastes may give rise to a lien on that property to assure payment of the cost of remediation or, in certain circumstances, result in liability of the owners or operators of, or lenders to, the property for that cost under various federal, state and local environmental laws. Many of these laws impose liability whether or not such persons knew of, or were responsible for, the contamination, and such liability may be substantial. Accordingly, environmental contamination could materially adversely affect the value of the property and its cash flow. It is possible that such costs could become a liability of the Company, reducing the return to holders of the Company's Common Shares if such remedial costs were incurred or if property vacancy resulted. See "Certain Legal Aspects of Real Property Loans and Investments - Environmental Risks." Other Investment Activity Considerations Partially Unspecified Use of Proceeds. Other than the Initial Investments, the Financing and Property Interests to be originated or acquired by the Company have not been identified. Investors must rely upon the ability of Company management to identify appropriate investment opportunities, and will not have an opportunity to evaluate relevant economic, financial and other information regarding the Company's future investments at the time they are made. There can be no assurance that the Company will identify Financing or Property Interests that meet its investment criteria, or that any such assets, once acquired, will produce a return on the Company's investment. A delay may occur between the time the Common Shares are sold in this Offering and the time the proceeds of this Offering are utilized by the Company, which could result in a delay in the receipt by a shareholder of the benefits, if any, of an investment in the Company. Pending investment in Financing and Property Interests, the Offering proceeds will be held in temporary investments that the Company believes will have low investment risk but which the Company does not anticipate will produce substantial investment returns. See "Use of Proceeds." Management Experience. The Company is a newly-formed entity with no prior operating history, and its operating strategies and policies are untried. The Company will be dependent for the monitoring of its day-to-day operations, including, but not limited to, the selection, structuring and monitoring of its investments and associated borrowings (if any), on the diligence and skill of its senior management. Although senior management has extensive experience in the mortgage lending, real estate and real estate finance industries, none of such persons has any prior experience in managing a REIT. There can be no assurance that the Company and its management will be able to implement successfully the policies and strategies the Company intends to pursue. -22- Importance of Key Personnel. The Company's future success will depend upon the continued services of the Company's senior management (Mrs. Cohen, Mr. Eisner and Ms. DiStefano). The unexpected loss of the services of any of these persons could have a material adverse effect upon the Company. See "The Company - - Trustees and Executive Officers." While the Company anticipates that it will enter into employment agreements with its Chairman and Chief Executive Officer, Mrs. Cohen, and its President and Chief Operating Officer, Mr. Eisner, it will not maintain key person life insurance on any officer. Use of Leverage. The Company is permitted to leverage its portfolio through borrowings although, in general, it will not do so unless it does not have immediately available capital sufficient to make a particular investment. If and when used, the Company's leverage ratio will vary depending on the Company's estimate of the stability of the portfolio's cash flow. To the extent that changes in market conditions cause the cost of such financing to increase relative to the income that can be derived from the investments acquired, the Company may reduce the amount of leverage it utilizes. The Company may also borrow to the extent necessary to meet REIT distribution requirements imposed by the Code. See "Federal Income Tax Considerations Requirements for Qualification: Distribution Requirements" and "Risk Factors - Legal and Tax Risks: Tax Risks." In general, the Company expects that the ratio of the Company's overall indebtedness to its equity will not exceed 0.5 to 1. See "Investment Objectives and Policies Leverage." However, the Company's Declaration of Trust does not limit the amount of indebtedness the Company can incur, and the Board of Trustees has the discretion to deviate from or change this indebtedness policy at any time, without consent from or notice to the Company's shareholders. Leverage creates an opportunity for increased net income, but at the same time creates risks. For example, leverage can reduce the net income available for distributions to shareholders in periods of rising interest rates where the increase in rates paid by the Company on its borrowings is not matched by corresponding increases in the rates of return on its investments. The Company will leverage assets only when there is an expectation that the use of leverage will enhance returns, although there can be no assurance that the Company's use of leverage will prove to be beneficial. The Company may be required to mortgage or otherwise pledge some portion or all of its assets as collateral security in order to obtain debt financing. There can be no assurance that the Company will be able to meet its debt service obligations on any debt financing so secured and, to the extent that it cannot, the Company risks the loss of some or all of its assets. Legal and Tax Risks REIT Tax Risks. The Company intends to operate in a manner that permits it to qualify as a REIT for federal income tax purposes. Although the Company does not intend to request a ruling from the Service as to its REIT status, it has received an opinion of counsel that, based on certain assumptions and representations, it so qualifies. Investors should be aware, however, that opinions of counsel are not binding on the Service or any court. The opinion only represents the view of counsel based on counsel's review and analysis of existing law. Furthermore, both the validity of the opinion and the continued qualification of the Company as a REIT will depend on the Company's satisfaction of certain asset, income, organizational, distribution and -23- shareholder ownership requirements on a continuing basis. If the Company were to fail to qualify as a REIT in any taxable year, it would be subject to federal income tax (including any applicable alterative minimum tax) on its taxable income at regular corporate rates, and distributions to shareholders would not be deductible by the Company in computing its taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to shareholders, which in turn could have an adverse impact on the value of, and trading prices for, the Common Shares. Unless entitled to relief under certain Code provisions, the Company also would be disqualified from taxation as a REIT for the four taxable years following the year during which it ceased to qualify as a REIT. Risks of "Phantom Income." The Company must distribute at least 95% of its annual net taxable income (excluding any net capital gain) in order to avoid corporate income taxation of the earnings that it distributes. In addition, the Company will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of (i) 85% of its ordinary income for that year, (ii) 95% of its capital gain net income for that year, and (iii) 100% of its undistributed taxable income from prior years. The Company intends to make distributions to its shareholders to comply with the 95% distribution requirement and to avoid the nondeductible excise tax. However, the Company may originate or acquire Financings that may be deemed to have original issue discount ("OID") for federal income tax purposes, which is generally equal to the difference between an obligation's issue price and its redemption price. For example, mortgages with participation features generally will be considered to have OID and will accrue OID at a rate based on the expected overall yield on the mortgage, which generally will exceed the stated rate. The income generated by such instruments for federal income tax purposes will consist of amortization of the OID discount and the coupon interest associated with the instruments. The Company will be required to recognize as income in each year the portion of the OID that accrues during that year, which will increase the REIT distribution requirement for that year, notwithstanding the fact that there may be no corresponding contemporaneous receipt of cash by the Company. In addition, the Company may acquire or originate wraparound loans pursuant to which it will receive payments of principal and interest that do not coincide with the payments of principal and interest on underlying senior liens. Even if, as expected, there is positive cash flow to the Company from the transaction, it may be that the amount of principal the Company is required to pay on the senior obligations will exceed the amount of principal it receives from the obligor on the wraparound loan, and that the amount of interest it receives from the obligor will exceed the amount of interest it pays on the senior obligations. This could create a situation where the Company's taxable income exceeds the Company's cash flow from the investments. REIT taxable income in excess of cash received may also arise in certain property sales, participations and where a "significant" modification is made to a loan. See "Federal Income Tax Consequences - Distribution Requirements." The occurrence of any such situation could have the effect of requiring the Company, in order to meet the 95% distribution requirement and to avoid the nondeductible excise tax, (i) to borrow funds, (ii) to sell assets at times which may not be advantageous to the Company, (iii) to distribute amounts that represent a return of capital, or (iv) to distribute amounts that would otherwise be spent on future acquisitions, unanticipated capital -24- expenditures, or repayment of debt. To offset these risks, the Company intends, as appropriate, to invest in Property Interests so that the non-cash depreciation deductions associated with Property Interest investments may help offset any non-cash income. Risks Relating to Sales of Assets. With respect to any sale of assets by the Company, there is risk that the sale will be deemed to be the disposition of an asset held primarily for sale to customers in the ordinary course of business. Gain from the sale of any asset so characterized generally will be subject to a 100% tax. Whether an asset is held "primarily for sale to customers in the ordinary course of a trade or business" depends on the facts and circumstances in effect from time to time, including those related to a particular asset. Nevertheless, the Company will attempt to comply with the terms of safe-harbor provisions in the Code prescribing when asset sales will not be so characterized. Complete assurance cannot be given, however, that the Company can comply with the safe-harbor provisions of the Code or avoid owning property that may be characterized as property held "primarily for sale to customers in the ordinary course of a trade or business." See "Federal Income Tax Considerations - Income Tests." Investment Company Act Risks. The Company believes that it will not be, and intends to conduct its operations so as not to become, regulated as an investment company under the Investment Company Act. The Investment Company Act exempts entities that, directly or through majority-owned subsidiaries, are "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" ("Qualified Interests"). Under current interpretations by Securities and Exchange Commission (the "Commission"), in order to qualify for this exemption, the Company, among other things, must maintain at least 55% of its assets in Qualifying Interests and also may be required to maintain an additional 25% in Qualifying Interests or other assets related to real property. The assets that the Company may acquire, therefore, may be limited by the provisions of the Investment Company Act. In connection with its origination or acquisition of Financing, the Company will seek, where appropriate, to obtain foreclosure rights with respect to the underlying property, although there can be no assurance that it will be able to do so on acceptable terms. If the Company does not obtain such rights, the Financing may not constitute a Qualifying Interest for the purpose of the Investment Company Act. If the Company obtains such rights, the Company believes that the Financing will constitute a Qualifying Interest for the purpose of the Investment Company Act. The Company does not intend, however, to seek an exemptive order, no-action letter or other form of interpretive guidance from the Commission on this position. If the Commission were to take a different position with respect to whether any such Financing constitutes a Qualifying Interest, the Company could, among other things, be required either (a) to change the manner in which it conducts its operations to avoid being required to register as an investment company under the Investment Company Act or (b) to register as an investment company, either of which could have an adverse effect on the Company and the market price for the Common Shares. Benefit Plan Risks. The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and section 4975 of the Code prohibit certain transactions that involve (i) certain pension, profit-sharing, employee benefit, or retirement plans or individual retirement accounts -25- (each a "Plan") and (ii) the assets of a Plan. A "party in interest" or "disqualified person" with respect to a Plan will be subject to (x) an initial 15% excise tax on the amount involved in any prohibited transaction involving the assets of the Plan and (y) an excise tax equal to 100% of the amount involved if any prohibited transaction is not corrected. Consequently, the fiduciary of a Plan contemplating an investment in the Common Shares should consider whether the Company, any other person associated with the issuance of the Common Shares, or any affiliate of the foregoing is or might become a "party in interest" or "disqualified person" with respect to the Plan. In such a case, the acquisition or holding of Common Shares by or on behalf of the Plan could be considered to give rise to a prohibited transaction under ERISA and the Code. See "Benefit Plan Considerations - Employee Benefits Plans, Tax Qualified Retirement Plans and IRAs." Ability of Board of Trustees to Change Certain Policies Without Shareholder Consent. The policies of the Company, including its investment policy and other policies with respect to acquisition, financing, growth, operations, debt and distributions, are determined by its Board of Trustees. The Board of Trustees may amend or revise these and other policies, or approve transactions that deviate from these policies, from time to time, without a vote of the shareholders. The effect of any such changes may be positive or negative. The Company cannot change its policy of seeking to maintain its qualification as a REIT without the approval of the holders of two-thirds of the outstanding Common Shares. Limitation of Liability of Officers and Trustees of the Company. The Declaration of Trust of the Company contains a provision which, subject to certain exceptions, eliminates the liability of a trustee or officer to the Company or its shareholders for monetary damages for any breach of duty as a trustee or officer. This provision does not eliminate the liability of a trustee to the extent that it is proved that the trustee actually received an improper benefit in money, property or services or engaged in active and deliberate dishonesty established by a final judgment as being material to the cause of action. See "Certain Provisions of Maryland Law and of the Company's Declaration of Trust and Bylaws." Conflicts of Interest in the Business of the Company. The Company will be subject to various conflicts of interest arising from its relationship with RAI, Brandywine, JeffBanks and their affiliates. See "The Company - Certain Relationships; Conflicts of Interest." Risk that Market for Common Shares Will Not Develop. Prior to this Offering, there has been no public market for the Common Shares offered hereby. The initial public offering price will be determined by the Company and Friedman, Billings, Ramsey & Co., Inc., as the representative of the Underwriters (the "Representative"). There can be no assurance that the price at which the Common Shares will sell in the public market after the Offering will not be lower than the price at which they are sold by the Underwriters. Application has been made to list the Common Shares on the Nasdaq Stock Market. There can be no assurance that such application will be approved or that, even if approved, an active market will develop for the Common Shares. In addition, one of the requirements for continued listing is the presence of two market makers for the Common Shares. The Company has been advised by the Representative -26- that it and certain of the Underwriters intend to make a market in the Common Shares. However, neither the Representative nor any other Underwriter is obligated to do so and market making by any of them may be interrupted or discontinued at any time without notice at their sole discretion. Accordingly, there can be no assurance of the continued presence of two market makers for the Common Shares or as to the development or liquidity of any market for the Common Shares. Ownership Limitation May Restrict Business Combination Opportunities. In order for the Company to maintain its qualification as a REIT, not more than 50% in value of its outstanding capital shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of each taxable year, other than the Company's taxable year ending December 31, 1997. For the purpose of preserving the Company's REIT qualification, the Declaration of Trust generally prohibits direct or indirect ownership of more than 8.5% (or, with respect to RAI, 15%) of the outstanding Common Shares (the "Ownership Limitation"). The Ownership Limitation will likely have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of the Common Shares might receive a premium for their Common Shares over the then prevailing market price or which such holders might believe to be otherwise desirable. See "Description of Shares of Beneficial Interest - Restrictions on Ownership and Transfer" and "Federal Income Tax Considerations - Requirements for Qualification." Preferred Shares May Prevent Change in Control. The Company's Declaration of Trust authorizes the Board of Trustees to issue preferred shares ("Preferred Shares"), to establish the preferences and rights of any Preferred Shares issued, to classify any unissued Preferred Shares and reclassify any previously classified but unissued Preferred Shares. Although the Company has no current intention to issue any series of Preferred Shares in the foreseeable future, the issuance of any series of Preferred Shares could have the effect of delaying or preventing a change in control of the Company (apart from the Ownership Limitation) even if a majority of the Company's shareholders believe such change of control is desirable. See "Description of Shares of Beneficial Interest - Preferred Shares." Maryland Anti-Takeover Statutes May Restrict Business Combination Opportunities. As a Maryland real estate investment trust, the Company is subject to various provisions of Maryland law which impose certain restrictions and require certain procedures with respect to certain takeover offers and business combinations, including, but not limited to, combinations with interested holders and share repurchases from certain holders. While the Company has elected to "opt out" of these provisions, the Board of Trustees has the right to rescind such election at any time without notice to the shareholders. See "Certain Provisions of Maryland Law and the Company's Declaration of Trust and Bylaws - Business Combinations" and "- Control Share Acquisitions." USE OF PROCEEDS The Company has contracted (subject to the consent of the Independent Trustees) to acquire or originate the Initial Investments upon completion of this Offering for an investment -27- cost of approximately $41.3 million, which is equal to approximately ______% of the expected net proceeds of this Offering (_____% if the Underwriters exercise their overallotment option). The Initial Investments will consist of those Financings described at "Investment Objectives and Policies - Initial Investments." Of the Initial Investments, $40.0 million, by cost, will be acquired from RAI. The purchase price for each of the Initial Investments was negotiated based upon the appraised value of the property underlying the loan, current yield, lien position of the loan and the Company's analysis of the long-term prospects for the property. In addition, the Company will reimburse RAI for $__________ of organizational expenses advanced by RAI to the Company prior to the completion of the Offering. At the time of their acquisition, the Initial Investments being acquired from RAI will be subject to $12.5 million of loan participation interests or other debt that is senior to the loan interests acquired from RAI. The Company anticipates acquiring $5.2 million of such senior loan participation interests from the proceeds of this Offering. However, the Company also anticipates that, following acquisition, the Company will seek to sell participations in the loans as to which it has acquired the prior senior loan participation interests or that borrowers may seek to refinance some portion of the loans and, accordingly, that the Company will obtain the return of some portion or all of the funds utilized to acquire the senior loan participation interests. For certain information concerning the senior participations to be acquired (including interest rate and maturity date) see "Investment Objectives and Policies - Initial Investments." There can be no assurance, however, that any such sales or refinancings will occur. The balance of the Offering proceeds (including any funds obtained from sales of participations in or refinancings of loans as referred to above) will be invested in the manner described in "Investment Objectives and Policies." It is anticipated that the investment process will take up to 18 months after the Offering has been completed, although there can be no assurance that the process will not be longer. Pending such investment, the balance of the net proceeds will be invested in readily marketable, interest-bearing securities which, following the expiration of the one year investment period provided by the Code, will be limited to those securities allowing the Company to continue to qualify as a REIT. See "Federal Income Tax Considerations - Requirements for Qualification: Asset Tests." -28- INVESTMENT OBJECTIVES AND POLICIES General The Company's principal business activity will be to provide mortgage or other debt financing in situations that do not conform to the underwriting standards of institutional lenders or sources which provide financing through securitization. The Company's Financing will consist of direct loans to borrowers and the acquisition of existing loans. The Company anticipates that it also will acquire Property Interests. The Company will seek to generate income for distribution to its shareholders from a combination of interest, rents, distributions in respect of rents (where the Company owns an equity interest in a real property), proceeds from participations and proceeds from the sale of portfolio investments. The Company believes that, under current market conditions, institutional lenders and lending sources that provide financing through securitization (which the Company believes are currently the principal sources of real property financing), require that loans made by them satisfy certain standard criteria. Typically, these lenders will require that the requested loan be within the institution's size parameters and bear a specified relation to the appraised value of the property securing the loan, that the property have historical operating results demonstrating a ratio of cash flow to projected debt service meeting standards established by the institution and that the loan be secured by a first lien on the property. These lenders frequently restrict the ability of the borrower to incur junior lien loans on the property without the lender's consent and impose substantial penalties on loan prepayment. Lenders may also establish guidelines with respect to type of property, type and amount of insurance, uses of funds, appraisals and loan documentation. The Company believes that borrowers or properties needing attention to specific or unique situations are frequently unable to obtain financing from these sources, or cannot obtain financing adapted to their particular needs, providing the Company with a niche market with substantial growth potential. The Company also believes that the recent trend towards consolidation among regulated financial services providers has enhanced the opportunity for unregulated financial services providers, such as the Company, to compete in this niche. The Company believes that its tax and corporate structure as a REIT will provide it with an advantage over certain other financial institutions and commercial mortgage originators. As a REIT, the Company generally will be able to pass through earnings as dividends to shareholders without payment of corporate level federal income tax. Thus, the Company expects to be able to pay higher dividends than traditional commercial mortgage lending institutions, which are subject to corporate level federal income tax. In addition, management believes that the Company, as an unregulated company, provides a more attractive method of investing in loans than regulated financial institutions, and more flexibility in pursuing investment opportunities, because the Company will not be subject to the costs and restrictions associated with federal and state regulations imposed upon insured financial institutions. -29- Types of Financing The Company will emphasize wraparound mortgage loans and, to a lesser extent, other forms of junior lien and subordinated financing. The Company is not, however, limited as to the types of financing it may provide, and it may also acquire or provide first lien financing. In originating new Financing, the Company will endeavor to adapt the terms of its financing to the needs of its borrowers, utilizing a variety of financing techniques such as staged payments, event specific loan advances, different rates of interest payment and interest accrual, deferred (or "balloon") principal payments and similar techniques. The Company will also from time to time provide subordinated financing through a direct purchase of a Property Interest. See "Investment Objectives and Policies - - Acquisition of Real Property Interests." It is not anticipated that the Company's financings will be insured by the Federal Housing Administration or guaranteed by the Veterans Administration or otherwise guaranteed (except by borrowers or their affiliates, in certain cases) or insured. Wraparound and other junior lien loans and subordinated financing generally will be secured by mortgages on properties already subject to the liens of other mortgage loans. A wraparound loan is a junior lien loan having a principal amount equal to the sum of the outstanding principal balances of senior loans plus the net amount advanced by the wraparound lender. From payments it receives on the wraparound loan, the wraparound lender pays principal and interest to the holders of the senior loans, but ordinarily only to the extent that payments are received from the borrower. Wraparound loans (and other junior loans) offer the potential for higher yields than yields ordinarily obtained in senior lien financing (and, in the case of wraparound loans, the possibility of increasing yields as the principal amounts of senior loans are amortized). However, such loans carry greater credit risk, including substantially greater risk of non-payment of interest or principal, than senior lien financing. See "Risk Factors - Investment Activity Risks - Financing Considerations: Enhanced Credit Risks of Subordinate Financing." The Company will seek to originate or acquire Financing that not only has current cash returns higher than those obtained in typical first lien institutional financing but that also has various features designed to increase the return over the term of the Financing. In particular, the Company will seek to obtain participations. These participations typically will be one of two types, as follows: (i) a grant of an interest in the appreciated value of the financed real property (that is, an interest in the value of the property, typically determined by sales price, refinancing amount or appraisal, which exceeds a specified amount, usually the appraised value of the property at the time of the Company's Financing or the principal amount of the Financing), payable at the maturity of the loan or the time the property is sold or refinanced, or (ii) a grant of an interest in the revenues from the property, whether or not in excess of a specified amount. The Company typically will seek not less than a 25% participation rate, and may seek to obtain either or both types of participations. The Company believes that obtaining participations may be advantageous to it since the Company will thus have the opportunity of participating in the growth in value of the real property being financed (and, therefore, the opportunity of gaining additional compensation). However, obtaining participations may limit or, possibly, reduce the amount of interest which the Company might otherwise be able to obtain on a loan. There can -30- be no assurance that the Company will be able to obtain participations in any loan, or as to the final terms (including the participation rate) under which they may be granted. Moreover, since participations are more usually associated with subordinated loans to compensate the lender for its subordinated position, the Company may not be able to find borrowers willing to give participations in first mortgage loans (to the extent acquired by the Company) on terms acceptable to the Company. Loan Origination Sources To generate loan originations, the Company will rely primarily upon the relationships senior management has developed as a result of its experience in the mortgage lending, real estate and real estate finance industries with developers, commercial real estate brokers, mortgage bankers, real estate investors and other direct borrowers or referral sources. See "The Company Trustees and Executive Officers." For sources of loans for acquisition (in addition to RAI), the Company will focus on senior management's existing knowledge of and relationships with institutional holders (primarily banks and insurance companies) who may wish to dispose of underperforming loans in their existing portfolios that meet the Company's Financing criteria. The Company's focus on smaller properties makes it a niche buyer for loans held by these institutions as the Company believes that others seeking to purchase subordinated loan positions typically will focus on large size loans or pools of loans. These institutional lenders may also refer to the Company loan opportunities presented to them that they do not wish to underwrite. Certain Financial Guidelines The Company has established financial guidelines for use in evaluating financing proposals subsequent to the Initial Investments. The Company may depart from one or more of the guidelines in underwriting any particular Financing, provided that the Company's Financing portfolio, in the aggregate, is in compliance. The guidelines provide as follows: (i) the property underlying the Financing will have a current appraised value of not less than 25% below the property's appraised replacement cost, (ii) the size of the Financing will be between $1 million and $8 million, (iii) the ratio of current cash flow to debt service on senior lien loans with respect to the underlying property will be at least 1.25 to 1, (iv) the ratio of current cash flow to debt service on both senior loans and the Company's Financing will be at least 1.1 to 1, (v) the cash flow from the underlying property will be sufficient to yield a current return on the Company's investment of no less than 10% per year, (vi) the aggregate of all outstanding senior debt may not exceed 75% of the appraised value of the underlying property, and (vii) the aggregate of outstanding senior debt plus the amount of the Company's Financing may not exceed 90% of the appraised value of the underlying property. In departing from a particular guideline for any Financing, the Company will typically consider factors that would cause the underlying property to be in compliance with the guideline within a reasonable time following initial funding of the Financing. For example, the Company may depart from the cash flow guidelines where the borrower can demonstrate (through new lease placements or otherwise) that historical cash flow will not be representative of cash flow during the term of the loan, and may depart from loan-to-value guidelines where the borrower can demonstrate that the application of the loan proceeds -31- will result in an increase in property value. Notwithstanding the foregoing, these guidelines may be changed by the Board of Trustees of the Company without notice to or approval by the shareholders. Location of Properties Relating to Financing The Company intends to finance properties located in metropolitan areas of the United States where there is a significant amount of small, multi-family residential, office and other commercial properties. Initially, the Company anticipates that it will focus its financing activities in Philadelphia, Pennsylvania and the Baltimore/Washington corridor, with a particular emphasis on the Philadelphia metropolitan area as a result of senior management's existing experience and relationships. Of the 12 loans included within the Company's Initial Investments, 11 relate to properties located in the Philadelphia metropolitan area, and one is located in the Washington, D.C. metropolitan area. See "Investment Objectives and Policies - Initial Investments." The Company is not, however, limited as to the geographic areas in which it may provide Financing and, accordingly, it may provide Financing in metropolitan areas other than Philadelphia and the Baltimore/Washington corridor, in metropolitan areas that do not readily fit the Company's targeted characteristics, or in geographic areas that are outside of metropolitan areas, as appropriate opportunities are identified, and such Financings may (although it is not currently anticipated that they will) constitute a material portion of the Company's investment portfolio. Types of Properties Relating to Financings The Company will focus its financing activities on multi-family residential, office and other commercial properties with property values generally between $2 million and $20 million. The Company may, in appropriate circumstances as determined by the Board of Trustees, provide financing to properties with values outside this range, as is the case with one of the loans included within the Company's Initial Investments. See "Investment Objectives and Policies Initial Investments." It is not anticipated, however, that a significant number of properties will be outside the targeted range. The Company will not normally finance undeveloped property or make loans in situations where construction is involved except where the underlying property (and any additional real property collateral which the Company may require as security) meets the Company's loan-to-value guidelines. See "Investment Objectives and Policies - Certain Financial Guidelines" and "Risk Factors - Investment Activity Risks." In situations where an underlying property does not meet the Company's cash flow guidelines, the Company will typically require that the developers and their controlling persons personally guarantee the Financing, and that some or all of such persons have net worth sufficient to repay the Financing in the event of default. Any such Financing may also condition funding of the Financing upon the satisfaction of certain property income or occupancy criteria. The Company is not limited in the amount or percentage of its assets it may lend against any category of property. The Company does not, however, intend to make loans or investments (including Property Interest investments) the amount of which (together with all other loans or investments by the Company) exceeds (i) with respect to any one property, 5% of its total assets, or (ii) with respect to any one person or his or its affiliates, 10% of its total assets in subordinated Financings to and Property -32- Interests controlled by such person or his or its affiliates, excluding from each such guideline the Initial Investments. One of the Initial Investments (loan 109) exceeds such limitations, and will constitute _____% of the Company's total assets, by cost, upon completion of this Offering (assuming the Underwriters do not exercise their over-allotment option). Acquisition of Loans at Discount In acquiring existing Financing, the Company will focus on Financing that, because of one or more past problems, can be acquired at a discount to its outstanding balance and the appraised value of its underlying property due to complex ownership situations with respect to the underlying property, lack of a strong operating history for the underlying property, historical credit or cash flow problems, or other factors. The Company will not acquire any such loan, however, unless the prior loanholder, property owner or some other party or parties, have taken material steps to resolve the problems to which the loan and its underlying property have been subject and where completion of the resolution process will not involve active intervention by the Company. The Company will seek to acquire loans for which completion of the resolution process will enhance the Company's total return through increased yields or realization of some portion or all of the discount at which they were acquired. The Company anticipates that a substantial portion of the loans it acquires will be obtained from RAI, the Company's sponsor, which specializes in acquiring and resolving mortgage loans. However, the investments that may be acquired from RAI are limited to a maximum of 30% of the Company's investments based upon the Company's cost (excluding the Initial Investments, of which $40.0 million, by cost, will be acquired from RAI). See "The Company - Certain Relationships; Conflicts of Interest," "Use of Proceeds" and "Investment Objectives and Policies Initial Investments." Lending Procedures Prior to making or acquiring any Financing, the Company will conduct an acquisition review. The value of the underlying property will be estimated by the Company based upon a recent independent appraisal obtained by the borrower, an independent appraisal obtained by the Company, or upon valuation information obtained by the Company and thereafter confirmed by an independent appraisal. The Company will make an on-site inspection of the property and, where appropriate, the Company will require further inspections by engineers, architects or property management consultants. The Company may also retain environmental consultants to review potential environmental issues. See "Risk Factors - Investment Activity Risks - Financing Considerations: Environmental Risks May Adversely Affect Value of Underlying Properties." The Company will obtain and review available rental, expense, maintenance and other operational information regarding the property and prepare cash flow and debt service analyses. For acquired loans, the Company will also evaluate the adequacy of the loan documentation (for example, the existence and adequacy of notes, mortgages, collateral assignments of rents and leases, and title policies insuring lien positions) and other available information (such as credit and collateral files), and will evaluate the status and efficacy of programs to resolve problems to which the loan -33- or its underlying property may have been subject. The amount which the Company is willing to lend, or the amount of the Company's offer to purchase, will be based upon the foregoing evaluations and analyses. The Company may modify these procedures as it deems appropriate in particular situations. After originating or acquiring any Financing, the Company will follow specified procedures to monitor Financing performance and compliance. On performing Financing originated by the Company, the borrower will be required to supply monthly operating statements and yearly certification of compliance with the terms of the loan. With respect to acquired loans, or non-performing Company-originated Financing (and in addition to the above procedures), the Company generally will require that all revenues from the underlying property be paid into an operating account on which the Company is the sole signatory. All expenditures with respect to a property (including debt service, taxes, operational expenses and maintenance costs) will be paid from that account and will be subject to review and approval by the Company prior to payment. The Company may also require that its approval be obtained before any material contract or commercial lease with respect to the property is executed and that the borrower prepare a budget for the property not less than sixty days prior to the beginning of a year, which must be reviewed and approved by the Company. Acquisition of Real Property Interests As appropriate, either as part of the Company's investment strategy or for tax planning purposes, the Company may acquire Property Interests. The Company believes that acquiring Property Interests will be advantageous for three primary reasons. First, it gives the Company flexibility in addressing the financial needs and tax situations of borrowers in situations where debt financing may not be appropriate. Second, it will provide the Company with the possibility of capital appreciation in addition to the current income realized from its loan portfolio. Third, it will assist the Company in its tax planning. It is anticipated that certain of the Financings made by the Company may result in timing differences between (i) the actual receipt of income and the actual payment of deductible expenses and (ii) the inclusion of that income and deduction of such expenses in arriving at its REIT taxable income. This may increase the REIT distribution requirement in such year, although there may be no contemporaneous corresponding receipt of cash by the Company. Depreciation deductions associated with the Company's investments in Property Interests, however, should help offset such adverse tax effects. See "Risk Factors Legal and Tax Risks - Tax Risks" and "Federal Income Tax Considerations - Requirements for Qualification: Distribution Requirements." The Company is not limited in the amount it may invest in Property Interests, although the Company will not make loans or investments (including Financings) the amount of which (together with all other loans or investments by the Company) exceeds (i) with respect to any one property, 5% of its total assets, or (ii) with respect to any one person or his or its affiliates, 10% of its total assets in Property Interests controlled by and subordinated Financings to such person or his or its affiliates, excluding from each such guideline the Initial Investments. One of the Initial Investments (loan 109) exceeds such limitations, and will constitute ____% of the -34- Company's total assets, by cost, upon completion of this Offering (assuming that the Underwriters do not exercise their over-allotment option). See "Investment Objectives and Policies - Initial Investments." Each acquisition of a Property Interest will be supported by an appraisal prepared by an independent appraiser. Prior to acquisition, the Company will require satisfactory evidence (generally in the form of title insurance) that the Company (if the Company is acquiring the Property Interest directly), or the entity owning the property in which the Company is acquiring an interest, has or will acquire good and marketable title to the property subject only to such encumbrances as are acceptable to the Company. The Company will not manage any such Property Interests, but will retain the services of third-party management companies, including (subject to approval by a majority of the Company's Independent Trustees) Brandywine, an affiliate of RAI. See "The Company - Certain Relationships; Conflicts of Interest". Brandywine may also be retained by the Company to supervise a local property manager. In instances where Brandywine is managing or supervising a local manager, the fees paid to Brandywine and the local manager, in the aggregate, may not exceed the amount customarily charged by property managers in the area for management of comparable properties. In addition to acquiring a property directly, the Company may also acquire interests in a property, typically in the form of an interest in a partnership, joint venture or limited liability company owning the property. The Company anticipates that any such interests would be acquired either to provide Financing in situations where further debt financing cannot be used, where further debt financing is inappropriate (as, for example, where senior lienors have imposed covenants against further borrowing or against the imposition of junior liens), or where the Company is seeking an equity interest in a property (similar to a participation) as part of a financing package. The Company will typically require that its interests in any property or entity be preferred over the interests of other owners both as to current distributions and repayment of invested capital. The Company will also typically require that the owners incur no further debt and issue no equity interest of equal rank with or senior to the Company's interest without the Company's consent. However, the Company is not limited in the kinds of equity interests that it may acquire and can, accordingly, acquire interests that are not preferred or permit co-owners of the properties to incur further debt without the Company's consent. See "Risk Factors - Real Property Considerations: Investments in Joint Ventures, Partnerships or Other Real Property Interests." Leverage The Company intends to finance its investment activity with the proceeds of this Offering and future equity offerings. Although the Company is permitted to incur debt to originate Financing or acquire Property Interests (including seller or purchase money debt for both acquired loans and Property Interests), the Company generally will not do so unless it does not have immediately available capital sufficient to enable it to acquire a particular investment. The Company may also incur debt in order to prevent default under loans senior to the Company's Financing or to discharge senior loans entirely if this becomes necessary to protect the Company's -35- Financing. This may occur if foreclosure proceedings are instituted by the holder of a mortgage interest which is senior to the Company's Financing. The Company may incur indebtedness in order to assist in the operation of any property financed by the Company and as to which the Company has subsequently taken over operations as a result of default, or to protect its Financing. The Company may also borrow to the extent the Company deems it necessary to meet REIT distribution requirements imposed by the Code. See "Federal Income Tax Considerations Requirements for Qualification: Distribution Requirements." Debt incurred by the Company may be collateralized by some or all of the Company's assets. The Company anticipates that, in normal operations, it will not exceed a debt to equity ratio of 0.5:1. For purposes of calculating this ratio, the Company's indebtedness will include all indebtedness of the Company, whether or not with recourse to the Company, and equity will be equal to the value of the Company's portfolio based upon the most recent appraised value of the properties underlying the portfolio. The Company is not limited as to the amount of debt that it may incur, and may have a debt to equity ratio that may from time to time vary substantially from 0.5 to 1, if appropriate investment opportunities are presented. See "Risk Factors - Other Investment Activity Considerations; Use of Leverage." The Company currently has no arrangements for loans or lines of credit. Portfolio Turnover The Company will not purchase investments with the intention of engaging in short-term trading. The Company may, however, sell any particular investment and reinvest proceeds (subject to distribution requirements and limitations on asset sales imposed on a REIT by the Code; see "Federal Income Tax Considerations") when it is deemed prudent by the Company's management, regardless of the length of the holding period. Other Policies The Company will not invest in the securities of other issuers for the purpose of exercising control, except to the extent set forth in "Investment Objectives and Policies Acquisition of Real Property Interests," nor will it underwrite securities of other issuers. The Company will not repurchase or otherwise reacquire its Common Shares or other securities, except to the extent set forth in "Description of Shares of Beneficial Interest - Restrictions on Ownership and Transfer" with respect to certain transfers in violation of the Ownership Limitation. These policies may be changed by majority vote of the Board of Trustees, including a majority of the Independent Trustees. The Company, however, does not currently anticipate any such changes. Initial Investments The Company has contracted to purchase 11 loans at an aggregate cost of approximately $40.0 million (the "Initial Purchased Loans") and has identified one loan for direct origination with a funding requirement of $1.3 million (the "Initial Direct Loan"). All of the Initial Purchased Loans will be purchased from RAI. Assuming the Company acquired the Initial Purchased Loans as of June 30, 1997, RAI would realize a book gain of -36- approximately $7.6 million as a result of the Company's purchase of the Initial Purchased Loans. See Note 7 to the below table and "The Company - Certain Relationships; Conflicts of Interest." The Initial Purchased Loans consist of (i) 9 loans purchased at discounts of between 12.9% and 55.9% from the outstanding loan receivable balances, and at ratios of between 69% to 97% of investment cost to appraised values of the underlying properties (the "Discounted Loans") and (ii) two loans purchased at par or at a slight (5% or less) discount to the outstanding loan receivable balance (the "Non-Discounted Loans"). The Discounted Loans are subject to an aggregate of approximately $8.5 million of senior financing ($5.2 million of senior loan participation interests that the Company intends to purchase and $3.3 million of senior financing with respect to the underlying properties that the Company does not intend to purchase and to which the Company's loans are subordinate), as set forth in the table below. Each of the Discounted Loans is in default with respect to its terms as originally underwritten, but is subject to a forbearance agreement pursuant to which the holder of the loan (the Company, upon acquisition) has agreed not to foreclose provided that the borrower pays (subject to a stated minimum) all revenues from the underlying property (after operating expenses) to the Company. Accordingly, the Company will receive all the increase, if any, in the revenues from the underlying properties, after payment of operating expenses, to a maximum aggregate amount equal to the then outstanding balance of the loan as originally underwritten and accrued interest. In addition, these loans permit the Company to capture (upon a sale or refinancing of the property) any increase in the value of the underlying property to a maximum amount equal to the then outstanding balance of the loan as originally underwritten and accrued interest. Since debt service on these loans is in excess of payments currently being made, the Company anticipates that the outstanding balances will increase. The Non-Discounted Loans consist of two subordinated loans, one with a current return of 18% and the other with a current return of 17.7% (based upon the Company's cash investment). The Non-Discounted Loans are wraparound loans and are subordinate to an aggregate of approximately $4.1 million of senior debt held by third parties that is secured by the underlying properties, as set forth in the table below. There are no senior loan participation interests in either Non-Discounted Loan. The aggregate outstanding loan receivable balance of the Initial Purchased Loans, as of June 30, 1997 was $82.9 million. The appraised value of the properties underlying the Initial Purchased Loans is $58.4 million and their estimated replacement cost (as set forth in such appraisals) is $________ million. The Initial Direct Loan is a wraparound, participating loan which provides for the Company to receive current annual interest payments of 11% on the funds advanced by the Company, plus all amortization of the senior debt, and a participation in the appreciation of the property in excess of the current appraised value. The Initial Direct Loan is subordinate to an aggregate of approximately $6.3 million of senior debt held by third parties that is secured by the underlying property, as set forth in the table below. -37- The following table sets forth certain information regarding each of the Initial Investments as of June 30, 1997:
Maturity of Cost of Investment Loan/Expiration to Company of Forbearance Type of Outstanding Including Amount of Loan Number(1) Agreement(2) Property Location Loan Receivable(3) Senior Debt(4) Senior Debt(5) - ----------- ---------------- -------- -------- ------------------ ------------------ -------------- Initial Purchased Loans: Discounted Loans 101 10/31/98 Multifamily Philadelphia, PA $ 1,530,948 $ 782,416 $ 600,000 102 10/31/98 Multifamily Philadelphia, PA 1,472,814 1,153,639 896,000 103 10/31/98 Office Arlington, VA 5,704,180 2,517,502 882,162 104 07/31/98 Multifamily Philadelphia, PA 5,351,234 3,094,354 1,105,318 105 09/02/99 Multifamily Philadelphia, PA 1,558,489 707,089 600,000 106 12/02/99 Multifamily Philadelphia, PA 3,025,791 2,007,804 1,261,016 107 10/31/98 Multifamily Philadelphia, PA 4,601,055 3,093,204 2,675,000 108 03/28/01 Multifamily Philadelphia, PA 715,581 623,601 450,000 109 01/01/02 Office Philadelphia, PA 52,348,480 27,000,000 - ----------- ----------- ------------ Total Discounted Loans 76,308,572 40,979,609 8,469,496 ----------- ----------- ------------ Non-Discounted Loans 110 10/31/97 Multifamily Philadelphia, PA 1,623,560 1,589,246 889,246 111 12/29/00 Multifamily Philadelphia, PA 4,953,111 4,752,865 3,190,865 ----------- ----------- ------------ Total Non-Discounted Loans 6,576,671 6,342,111 4,080,111 ----------- ----------- ------------ Total Initial Purchased Loans 82,885,243 47,321,720 12,549,607 ----------- ----------- ------------ Initial Direct Loans: 112 08/31/02 Retail/Office Philadelphia, PA 7,630,000 7,580,000 6,280,000 ----------- ----------- ------------ Total Initial Direct Loans 7,630,000 7,580,000 6,280,000 ----------- ----------- ------------ Total Initial Investments $90,515,243 $54,901,720 $18,829,607 =========== =========== ============
Ratio of Senior Debt to Appraised Monthly Ratio of Cost of Value After Revenues from Ratio of Appraised Value the Company's Certain Senior Operations Cash Flow to of Underlying Investment to Debt Acquisitions Company's Net or Monthly Senior Debt Loan Number(1) Property(6) Appraised Value(7) by the Company(8) Investment(9) Debt Service(10) Service(11) - ----------- ------------------ ------------------ ----------------- ----------------- ---------------- ------------- Initial Purchased Loans: Discounted Loans 101 $ 900,000 87% 0% $ 782,416 $ 6,400 n/a 102 1,300,000 89% 0% 1,153,639 8,900 n/a 103 2,800,000 90% 32% 1,635,340 16,100 2.90 104 3,200,000 97% 38% 1,989,036 14,578 2.27 105 855,000 83% 0% 707,089 6,185 n/a 106 2,320,000 87% 54% 746,788 7,211 1.63 107 3,600,000 86% 0% 3,093,204 24,800 n/a 108 900,000 69% 0% 623,601 5,700 n/a 109 34,000,000 79% 0% 27,000,000 238,084 n/a ----------- ---- ---- ----------- -------- Total Discounted Loans 49,875,000 82% 7% 37,731,113 327,958 ----------- ---- ---- ----------- -------- Non-Discounted Loans 110 2,210,000 72% 40% 700,000 10,500 2.98 111 6,300,000 75% 51% 1,562,000 23,077 1.83 ----------- ---- ---- ----------- -------- Total Non-Discounted Loans 8,510,000 75% 48% 2,262,000 33,577 ----------- ---- ---- ----------- -------- Total Initial Purchased Loans 58,385,000 81% 13% 39,993,113 361,535 6.85 ----------- ---- ---- ----------- -------- ---- Initial Direct Loans: 112 8,400,000 90% 75% 1,300,000 17,952 1.23 ----------- ---- ---- ----------- -------- Total Initial Direct Loans 8,400,000 90% 75% 1,300,000 17,952 ----------- ---- ---- ----------- -------- Total Initial Investments $66,785,000 82% 20% $41,293,113 $379,487 4.32 ============ ==== ==== =========== ======== ====
-38- (1) Loan 112 has not yet been funded. Information set forth herein with respect to such loans is based upon the Company's loan commitment and information supplied by the borrower. (2) Loans 101, 102 and 105 through 109 are subject to forbearance agreements which expire on the specified dates. Pursuant to these forbearance agreements, (i) the lender (the Company once it has acquired the loans) has agreed, subject to receiving specified minimum monthly payments, to defer exercise of existing rights to proceed on the loan (which is in default relative to its initial underwriting), including the right of foreclosure, (ii) the Company directly receives rents from the underlying property and (iii) the borrower has agreed to retain a property management company acceptable to the Company. Brandywine currently acts as the property manager for each such property. Loans 103, 104 and 110 through 112 are not subject to forbearance agreements; the dates specified are the maturity dates of the loans (or, with respect to Loan 112, the maturity date set forth in the loan commitment). (3) Consists of the outstanding principal balance of the obligations plus (i) accrued interest and penalties, and (ii) the outstanding balance of senior indebtedness relating to the underlying property, each as of June 30, 1997. (4) Consists of the purchase price to be paid by the Company plus the outstanding balance, as of June 30, 1997, of senior indebtedness relating to the underlying property. Does not include costs and expenses relating to the acquisition or origination of the loan, and related professional fees, estimated at $_________________ for such loans in the aggregate. (5) Outstanding balance of all senior indebtedness relating to the underlying property as of June 30, 1997. (6) The Company retained independent appraisal firms (Joseph Dennis Pasquarella & Co. with respect to loans 101, 102, 104, 107, 108, 110 and 111, Johnson, McClellan, Sullins & Page with respect to loan 103, M. Richard Cohen with respect to loans 106 and 109, and Louis A. Iatrola Realty Appraisal Group, Ltd. with respect to loan 112) to appraise the properties underlying the Initial Investments. The appraisals were conducted in July, August and September 1997. The appraised values generally were developed based on consideration of the cost, market and income valuation approaches. The cost approach considers the land value of the properties and depreciated replacement cost of the improvements. The market approach analyzes sales of other going-concern properties in comparison to the subject properties. The income approach develops a going-concern value of the subject properties by capitalizing the projected operating income. Operating data, financial data and legal descriptions of the properties provided to the appraisers by the Company or the prior or current owners thereof were assumed by the appraisers to be accurate and correct, and no audit verification thereof was undertaken by the appraisers. Further, the appraisers did not assume responsibility for matters of title. Caution should be exercised in evaluating appraisal results. An appraisal is only an estimate of value and should not be relied upon as a precise measure of realizable value. The appraisals assume that the properties would be sold on an -39- orderly basis under stable market conditions. See "Risk Factors - Real Property Considerations" and "Experts." (7) The purchase price paid by RAI for each loan acquired from RAI, and RAI's cost basis (as of June 30, 1997) in each loan, is as follows: Loan No. RAI's Cost Basis RAI's Purchase Price -------- ---------------- -------------------- 101 $ 783,024 $ 569,513 102 1,135,478 859,547 103 2,505,572 2,325,558 104 2,028,992 1,614,174 105 727,734 456,356 106 1,985,619 1,299,780 107 3,512,705 2,427,221 108 573,255 474,064 109 20,949,927 19,201,778 110 1,445,016 1,362,884 111 4,116,293 3,757,701 ----------- ----------- Total $39,763,615 $34,348,576 =========== =========== For purposes of this table, (i) "RAI's Cost Basis" consists of the cost of the investment as carried on the books and records of RAI (after allocation of gains from the sale of a participation in the loan, or borrower refinancing of the underlying property), including (a) all acquisition costs and expenses, (b) subsequent advances, if any, made by RAI in connection with its acquisition of the loan, and (c) amounts representing accretion of discount by RAI; and (ii) "RAI's Purchase Price" consists of the original cost of the investment to RAI, plus the amounts referred to in clauses (i) (a) and (b), above, plus the amount, as of the date of RAI's acquisition of the loan, of any senior indebtedness to which the underlying property was subject. Accretion of discount by RAI subsequent to June 30, 1997 will increase RAI's cost basis in, and thus decrease RAI's book profit from the sale of, the loans to the Company. For July 1997 and August 1997, RAI's accretion of discount resulted in increases of approximately $283,000 and $ , respectively, in RAI's aggregate cost basis in the loans. RAI's gain from the sale of the loans to the Company would also be reduced to the extent of any gain realized upon a sale of a participation in a loan prior to sale to the Company. (8) The Company will acquire senior loan participation interests previously sold by RAI in connection with loans 101, 102, 105, 107 and 108. See "Use of Proceeds." In connection with the sale of these senior loan participation interests, RAI had subordinated its interests in the loans to the interests of the participant. After acquisition of the senior loan participation interests, the Company will hold the entire lender's interest in each such loan. (9) The Company's net investment is calculated as the difference between the amount set forth in the column "Cost of Investment to Company Including Senior Debt," less the amount set forth in the column "Amount of Senior Debt," except for loans 101, 102, 105, 107 and 108 where, because the Company anticipates acquiring the senior indebtedness -40- (see note (8), above), the amount is that set forth in the column "Cost of Investment to Company Including Senior Debt" only. (10) Amounts set forth with respect to loans 101 through 109 represent the monthly revenues from operations for the underlying properties. Amounts set forth for loans 110 through 112 represent the monthly debt service required to be paid on the loans. With respect to loans 110 through 112, the monthly revenues from operations with respect to the underlying properties are $24,500, $21,900 and $46,350, respectively. For purposes of this table, (i) "monthly revenues from operations" consist of the monthly rent roll as of June 30, 1997 with respect to the underlying property less operating expenses, including real estate and other taxes pertaining to the underlying property and its operation and less interest on senior debt (to the extent not being acquired by the Company), but before depreciation, amortization and capital expenditures; and (ii) "monthly debt service" is the stated amount of interest and principal payable monthly under the terms of the loan. Monthly revenues from operations are set forth where, pursuant to forbearance agreements or the terms of the loan documents, the holder of the loan has the right to receive all net cash flow from the underlying properties as payment of debt service on the loans while monthly debt service is set forth where the stated monthly debt service under the terms of the loan is less than monthly revenues from operations. (11) Consists of monthly revenues from operations before interest on the senior indebtedness divided by the monthly payment of principal and interest required under the senior indebtedness. The following is a description of certain of the material terms of the loans included in the Initial Investments, and assumes the acquisition by the Company of all senior loan participation interests as set forth in Note 8 to the above table: Loan 101. Loan evidenced by a note in the original principal amount of $1,080,000, secured by a first mortgage on multi-family residential property located in Philadelphia, Pennsylvania, bearing interest at 12% per year until October 31, 1998 when all principal, accrued interest and other amounts become due and payable. The loan documents provide that the holder of the loan (i) holds a deed-in-lieu of foreclosure, which may be recorded upon default by the borrower, and (ii) may replace the manager of the property. Tenants at the property currently pay rents directly to the holder of this loan. Loan 102. Loan evidenced by a note in the original principal amount of $1,312,000, secured by a first mortgage on multi-family residential property located in Philadelphia, Pennsylvania, bearing interest at an annual rate of 2.5% over the monthly national median annualized cost of funds for SAIF-insured institutions as announced by the Federal Deposit Insurance Corporation with a minimum rate of 8.5% (which, as of June 30, 1997, resulted in an interest rate of 8.5%) until October 31, 1998 when all principal, accrued interest and other amounts become due and payable. The loan documents provide that the holder of the loan (i) holds a deed-in-lieu of foreclosure, which may be recorded upon default by the borrower, and -41- (ii) may replace the manager of the property. Tenants at the property currently pay rents directly to the holder of this loan. Loan 103. Loan evidenced by a note in the original principal amount of $4,165,000, bearing interest at an annual rate of 0.5% over the Maryland National Bank prime rate (which, as of June 30, 1997, resulted in an interest rate of 9.0%) until October 31, 1998 when all principal, accrued interest and other amounts become due and payable. The loan is subject to senior indebtedness held by an unaffiliated third party in the form of a first mortgage loan on an office property located in Arlington, Virginia, in the amount of $882,162. The loan documents provide that the holder of the loan (i) holds a deed-in-lieu of foreclosure with respect to the property, which may be recorded upon default by the borrower, and (ii) may replace the manager of the property. Moreover, the terms of the senior indebtedness restrict the borrower from incurring any other indebtedness (except trade indebtedness) or encumbrances upon the Property without the consent of the senior lender. Tenants of the property currently pay rents directly to the holder of this loan. Loan 104. Loan evidenced by a note in the original principal amount of $3,559,000, bearing interest at annual rate of 2% over the yield of one-year United States Treasury Securities (which, as of June 30, 1997, resulted in an interest rate of 7.5%) until July 31, 1998 when all principal, accrued interest and other amounts become due and payable. The loan is subject to senior indebtedness held by an unaffiliated third party in the form of a first mortgage loan on a multi-family residential property located in Philadelphia, Pennsylvania, in the amount of $1,105,318. The loan documents provide that the holder of the loan (i) holds a deed-in-lieu of foreclosure with respect to the property, which may be recorded upon default by the borrower, and (ii) may replace the manager of the property. Moreover, the terms of the senior indebtedness restrict the borrower from incurring any other indebtedness (except trade indebtedness) or encumbrances upon the Property without the consent of the senior lender. Tenants of the property currently pay rents directly to the holder of this loan. Loan 105. Loan evidenced by a note in the original principal amount of $1,211,000, secured by a first mortgage on a multi-family residential property located in Philadelphia, Pennsylvania, bearing interest at 12.2% until September 2, 1999 when all principal, accrued interest and other amounts become due and payable. In addition, the loan documents provide that the holder of the loan (i) holds a deed-in-lieu of foreclosure with respect to the underlying property, which may be recorded upon default by the borrower, and (ii) may replace the manager of the property. Tenants at the property currently pay rents directly to the holder of this loan. Loan 106. Loan evidenced by notes in the original aggregate principal amount of $1,695,000, bearing interest at varying annual rates from 12% to 14% per year until December 2, 1999 when all principal, accrued interest and other amounts become due and payable. The loan is subject to senior indebtedness held by an unaffiliated third party in the form of a first mortgage loan on a multi-family residential property located in Philadelphia, Pennsylvania, in the amount of $1,261,016. The loan documents provide that the holder of the loan (i) holds a deed-in-lieu -42- of foreclosure with respect to the property, which may be recorded upon default by the borrower, and (ii) may replace the manager of the property. Moreover, the terms of the senior indebtedness restrict the borrower from incurring any other indebtedness (except trade indebtedness) or encumbrances upon the Property without the consent of the Senior Lender. Tenants of the property currently pay rents directly to the holder of this loan. Loan 107. Loan evidenced by a note in the original principal amount of $3,250,000, secured by a first mortgage on a multi-family residential property located in Philadelphia, Pennsylvania, bearing interest at an annual rate equal to 85% of the sum of the rate of interest paid by major money market banks on new issues of negotiable certificates of deposit usually on principal amounts of $1 million or more, with a minimum unit of $100,000, for a term to maturity of one month, plus 2.75% (which, as of June 30, 1997, resulted in an interest rate of 6.779%), until October 31, 1998 when all principal, accrued interest and other amounts become due and payable. In addition, the loan documents provide that the holder of the loan (i) holds a deed-in-lieu of foreclosure, which may be recorded upon default by the borrower, and (ii) may replace the manager of the property. Tenants at the property currently pay rents directly to the holder of this loan. Loan 108. Loan evidenced by a note in the original principal amount of $600,000, secured by a first mortgage on a multi-family residential property located in Philadelphia, Pennsylvania, bearing interest at an annual rate of 12% until March 28, 2001 when all principal, accrued interest and other amounts become due and payable. The loan documents provide that the holder of the loan (i) holds a deed-in-lieu of foreclosure, which may be recorded upon default by the borrower, and (ii) may replace the manager of the property. Tenants at the property currently pay rents directly to the holder of this loan. Loan 109. Loan evidenced by notes in the original aggregate principal amount of $40,906,000, secured by a first mortgage on an office property located in Philadelphia, Pennsylvania, bearing interest at an annual rate of 8% until January 1, 2002 (or January 1, 2009 if the borrower exercises an option to extend) when all principal, accrued interest and other amounts become due and payable. The loan documents provide that (i) the holder of the loan may record a deed to the property, which is held in escrow, on the occurrence of certain defaults, (ii) the holder of the loan may assume operating control of the property under certain conditions and (iii) certain principals of the borrower may be subject to limited personal recourse under certain circumstances. Loan 110. Loan evidenced by a note in the original principal amount of $765,000, bearing interest at an annual rate of 18% until October 31, 1997 when all principal, accrued interest and other amounts become due and payable. The loan is subject to senior indebtedness held by an unaffiliated third party in the form of a first mortgage loan on a multi-family residential property located in Philadelphia, Pennsylvania, in the amount of $889,000. The loan documents provide that the holder of the loan (i) holds a deed-in-lieu of foreclosure with respect to the property, which may be recorded upon default by the borrower, and (ii) may replace the manager of the property. Moreover, the terms of the senior indebtedness restrict the borrower -43- from incurring any other indebtedness (except trade indebtedness) or encumbrances upon the property without the consent of the senior lender. Tenants of the property currently pay rents directly to the holder of this loan. Loan 111. Loan evidenced by a note in the original principal amount of $4,627,000, bearing interest at annual rate of 7.75% until December 29, 2000 when all principal, accrued interest and other amounts become due and payable. The loan is subject to senior indebtedness held by an unaffiliated third party in the form of a first mortgage loan on a multi-family residential property located in Philadelphia, Pennsylvania in the amount of $3,192,000. The loan documents provide that the holder of the loan (i) holds a deed-in-lieu of foreclosure with respect to the property, which may be recorded upon default by the borrower, and (ii) may replace the manager of the property. Moreover, the terms of the senior indebtedness restrict the borrower from incurring any other indebtedness (except trade indebtedness) or encumbrances upon the property without consent of the senior lender. Tenants of the property currently pay rents directly to the holder of this loan. Loan 112. Loan to be evidenced by a wraparound note in the original principal amount of $7,580,000, secured by a second mortgage on a retail/office property located in Philadelphia, Pennsylvania. The loan will be subordinated to senior indebtedness held by an unaffiliated third party in the form of a first mortgage on the property in the amount of $6,280,000, bearing interest at 8.55%, due August 3, 2002 when the holder of this loan will have an option to purchase the property (which such option will be recorded and title insured) by assuming the senior debt. The loan bears a stated annual rate of interest of 11% on the funds advanced by the Company, plus amortization of the senior debt, resulting in an annual return on the Company's net investment of 16.7% in the first year growing to 19% in the fifth year. The borrower must make a payment of $50,000 at the time the loan is repaid as additional interest. In addition, the loan will provide for the holder to receive a participation in the increase in value of the property over the current appraised value equal to 25% of the first $600,000 of such appreciation and 15% of any additional appreciation, payable on the sale or refinancing of the underlying property or at maturity of the loan. Moreover, the terms of the senior indebtedness restrict the borrower from incurring any other indebtedness (except trade indebtedness) or encumbrances upon the property. All tenants of the property will pay rents directly to the holder of this loan. -44- THE COMPANY RAIT was formed as a real estate investment trust in the State of Maryland in August, 1997 and will elect to be taxed as a REIT under the Code. The principal executive offices of the Company are located at 1521 Locust Street, 6th Floor, Philadelphia, Pennsylvania 19102. The Company's telephone number is (215) 546-5119. Management The Company will be self-administered and self-managed with respect to its investments in Financings and Property Interests. While the Company will supervise the management of the properties underlying its Financings and Property Interests, the leasing, operational and tenant improvement services will be provided by third-party managers, including Brandywine, an affiliate of RAI. The Company will internally service its Financing, although it has the right to retain third-party servicers, including affiliates. The Company may also utilize property due diligence investigation services provided by RAI. See "The Company - Certain Relationships; Conflicts of Interest." Trustees and Executive Officers The following sets forth certain information regarding the trustees and executive officers of the Company: Name Age Position with the Company - ---- --- ------------------------- Betsy Z. Cohen 55 Chairman, Chief Executive Officer and Trustee Jay J. Eisner 40 President, Chief Operating Officer and Secretary Ellen J. DiStefano 32 Chief Financial Officer Jonathan Z. Cohen 27 Trustee* Jerome S. Goodman 62 Trustee** Joel R. Mesznik 51 Trustee** Daniel Promislo 64 Trustee** Jack L. Wolgin 80 Trustee** * Trustee nominated by RAI ** Independent Trustee -45- Betsy Z. Cohen was elected on ______________, 1997 to serve as Chairman, Chief Executive Officer and trustee of the Company. Mrs. Cohen has served as Chairman, Chief Executive Officer and a director of JeffBanks, a bank holding company with $1.2 billion in total assets as of June 30, 1997, since its founding in 1981, and of its subsidiaries Jefferson Bank (since its founding in 1974) and Jefferson Bank of New Jersey (since its founding in 1988). Mrs. Cohen is also a director of Aetna USHealthcare and Life Technologies, Inc. Mrs. Cohen is married to Edward E. Cohen, Chairman, Chief Executive Officer and President of RAI. Jonathan Z. Cohen, a trustee of the Company, is Mrs. Cohen's son. Jay J. Eisner, a certified public accountant, was elected on _____________, 1997 to serve as President, Chief Operating Officer and Secretary of the Company. From December 1994 to March 1997, Mr. Eisner was Chief Financial Officer of Washington Capital Corporation, Philadelphia, Pennsylvania (a private investment firm providing non-conforming mortgage loan financing to real estate developers and others) and, from 1987 to December 1994, was Chief Financial Officer of Asbell & Associates, L.P., Philadelphia, Pennsylvania, (a private real estate development, investment and financing firm). From 1983 through 1987, Mr. Eisner was Vice President and Controller of Ascott Investment Corporation, a national real estate syndication and investment company and from 1979 through November 1983 was a Supervisor with Touche Ross & Company, certified public accountants. Ellen J. DiStefano, a certified public accountant, was elected on _______________, 1997 to serve as Chief Financial Officer of the Company. From 1992 to August 1997, Ms. DiStefano was Chief Financial Officer of Brandywine, a Philadelphia, Pennsylvania based national manager and developer of commercial, multifamily, office and hotel properties, and an affiliate of RAI. From 1987 to 1992, Ms. DiStefano was a Senior Associate at Coopers & Lybrand, certified public accountants. Jonathan Z. Cohen was elected on ____________, 1997 to serve as a trustee of the Company, and is the nominee of RAI. From 1994 to present, Mr. Cohen has been a founder and the Chief Executive Officer of Blue Guitar Films, Inc., a New York based feature film production company. Mr. Cohen received his J.D. from the American University with honors in May 1995 and his B.A. from the University of Pennsylvania. From 1989 to 1991, Mr. Cohen was President and founder of a group of neighborhood advertising supplements/magazines called "In Walking Distance." Mr. Cohen is the son of Betsy Z. Cohen. Jerome S. Goodman was elected on _________________, 1997 to serve as a trustee of the Company. Mr. Goodman has been Chairman of Travel One (a commercial travel management company) since 1971, and was the sole stockholder of Travel One from 1971 to 1994. Mr. Goodman was a member of the New Jersey Sports Exposition Authority from 1991 to 1994, and its Chairman from 1992 to 1994. He has also served as Chairman, President and Chief Executive Officer of First Peoples Financial Corporation (a bank holding company) from 1987 to 1992 and President and Chief Executive Officer of First Peoples Bank of NJ from 1983 to 1987. He was a member of the Board of Directors of GBC Technologies, Inc. from 1992 to -46- 1995. Mr. Goodman has been a director of Aetna US Healthcare (and its predecessor, US Healthcare) since 1988. Joel R. Mesznik was elected on ___________, 1997 to serve as a trustee of the Company. From 1990 to date, Mr. Mesznik has been President of Mesco Ltd., New York, New York (a corporate financial advisory firm). From 1976 to 1990, Mr. Mesznik was affiliated with Drexel Burnham Lambert, Inc. including, from 1976 to 1987, service as head of its Public Finance Department. Mr. Mesznik is the general partner of several private limited partnerships which have acquired real estate assets from the Resolution Trust Corporation, the Federal Deposit Insurance Corporation and institutional lenders. Daniel Promislo was elected on ______________, 1997 to serve as a trustee of the Company. Mr. Promislo has been Of Counsel (from 1994 to date) and a partner (from 1977 to 1994) of Wolf, Block, Schorr and Solis-Cohen, a Philadelphia, Pennsylvania law firm, principally involved in corporate and real estate finance matters. He currently is also President and a director of Historic Documents Co. and Historical Souvenir Co. (of which he is also a founder), which manufacture souvenirs of American history, and a director of U.S. Physicians, Inc., a physicians' practice management company. From 1994 to date he has been a director, and from 1996 to date, Chairman of the Board of Directors, of WHYY, Inc., the principal public television station in the Philadelphia metropolitan area. Jack L. Wolgin was elected on ________________, 1997 to serve as a trustee of the Company. For over 50 years, Mr. Wolgin has been extensively involved in the development and financing of real estate, as a founder and director of Industrial Valley Bank (where he was a member of the Executive, Audit and Real Estate Loan Committees), founder, Chairman, President and Chief Executive Officer of Atlas Credit Corporation (a Philadelphia home improvement lender) and Colonial Mortgage Company (a mortgage origination and servicing company), a founder of the Pennsylvania Real Estate Investment Trust, a past director and member of the Executive Committee of the board of directors of Brooks Harvey Realty Investors (a REIT sponsored by Morgan Stanley & Co.) and as a developer, for his own account, of in excess of $340 million of commercial, multifamily residential, office and other properties. All trustees (except trustees appointed to fill vacancies) will be elected at each annual meeting of shareholders for a term of one year, and will hold office until their successors are elected and qualified. All officers serve at the discretion of the Board of Trustees. The Company will pay an annual trustee's fee to each Independent Trustee equal to $3,000 plus $1,000 for each meeting of the Board of Trustees, and $500 for each meeting of a committee thereof, attended in person. Chairmen of committees will receive an additional $500 for each meeting of a committee attended in person. All trustees will be reimbursed for their costs and expenses in attending all meetings of the Board of Trustees and any committee thereof. Affiliated trustees will not be separately compensated by the Company. The following table sets forth certain information concerning the compensation that will be paid to the Company's Chief Executive Officer and each of the Company's other most highly compensated executive officers whose aggregate compensation will exceed $100,000 in the Company's first full fiscal year: Summary Compensation Table
Annual Compensation Long-Term Compensation - ------------------------------------------------------------------------------------------------------------------ Restricted Securities Stock Underlying LTIP All Name and Principal Position Salary Bonus Other Award Options Payouts Other - ------------------------------------------------------------------------------------------------------------------- Betsy Z. Cohen, Chairman and Chief Executive Officer(1) Jay J. Eisner, President, Chief Operating Officer and Secretary (1) Ellen J. DiStefano Chief Financial Officer
- --------------- (1) The Company anticipates that it will enter into employment agreements with Mrs. Cohen and Mr. Eisner upon completion of the Offering. No such agreements have been negotiated as of the date hereof, and there can be no assurance as to the final terms of any such agreements. -47- Except for Mrs. Cohen, all executive officers of the Company are required to devote substantially all of their business time to the Company's operations. Mrs. Cohen is required to devote only so much of her time as may be required for the effective discharge of her duties. Mrs. Cohen currently has substantial business interests apart from the Company which the Company anticipates will require a material amount of her time. The trustees and officers (subject to the requirement that the officers, with the exception of Mrs. Cohen, devote substantially all of their business time to the Company's operations) generally are not limited or restricted from engaging in any business or rendering services of any kind to any other person, including the acquisition or origination of real properties or loans that meet the Company's investment objectives and policies. Except as set forth in "The Company - Certain Relationships; Conflicts of Interest," the trustees and officers of the Company and their affiliates may not be participants in the Company's investments. The Company's Declaration of Trust provides that, except in the case of a vacancy, a majority of the members of the Board of Trustees, and of any committee of the Board of Trustees, will at all times be Independent Trustees. Vacancies occurring on the Board of Trustees among the Independent Trustees will be filled by the vote of a majority of the trustees, including a majority of the Independent Trustees. Option Plan The Company intends to adopt a qualified share option plan (the "Option Plan"), which provides for options to purchase Common Shares (or, at the election of the Company, units in the Operating Partnership that may be redeemed for cash, or, at the election of the General Partner, Common Shares on a one-for-one basis). See "Operating Partnership Agreement - Redemption Rights." The maximum aggregate number of Common Shares that may be issued pursuant to options granted under the Option Plan is ___________________. The purpose of the Option Plan is to provide a means of performance-based compensation in order to provide incentive for the Company's key employees. The following table sets forth the options the Company currently anticipates granting under the Option Plan: Option/SAR Grants
Number of Percent of Total Potential Realizable Securities Options/SARs Value at Assumed Underlying Granted to Exercise Rates of Stock Price Name and Options/SARs Employees in Price Expiration Appreciation for Principal Position Granted(1) Fiscal Year ($/Sh) Date Option Term - ---------------------------------------------------------------------------------------------------------------------------- @5% @10% ---------------------- Betsy Z. Cohen, Chairman and Chief Executive Officer Jay J. Eisner, President, Chief Operating Officer and Secretary Ellen J. DiStefano Chief Financial Officer
- --------------- (1) Options expire ten years from the date of issuance and will be granted at an exercise price equal to the initial offering price of the Common Shares. Options vest at a rate of 25% of the option shares on each anniversary of the date of grant, beginning with the first anniversary. -48- Indemnification of Trustees and Executive Officers The Company's Declaration of Trust provides for the indemnification of the trustees and officers of the Company to the full extent permitted by Maryland law. See "Description of Shares of Beneficial Interest - Indemnification." The Declaration of Trust also provides that the personal liability of any trustee or officer of the Company to the Company or its shareholders for money damages is limited to the fullest extent allowed by Maryland law. See "Description of Shares of Beneficial Interest - Limitation of Liability." Certain Relationships; Conflicts of Interest The Company, on the one hand, and RAI, JeffBanks and their affiliates, on the other, will enter into several relationships which may give rise to conflicts of interest. RAI, which is the sponsor of the Company, will own 9.8% of the Company's Common Shares at the completion of the Offering (assuming the Underwriters do not exercise their overallotment option), acquired at the public offering price net of underwriting discounts and commissions. RAI may acquire Common Shares after the Offering to a maximum of 15% of the Common Shares outstanding. RAI will have the right to nominate one person for election to the Company's Board of Trustees until such time as its ownership of outstanding Common Shares is less than 5% Currently, Jonathan Z. Cohen is serving as RAI's nominee. Mr. Cohen is the son of Betsy Z. Cohen, the Chairman and Chief Executive Officer of the Company, and her spouse, Edward E. Cohen. Edward E. Cohen is the Chairman, Chief Executive Officer, President, a director and a principal shareholder of RAI. RAI has advanced $_________ to the Company for pre-Offering organization expenses. These advances are without interest and will be repaid from the proceeds of this Offering. See "Use of Proceeds." Of the Initial Investments, 97%, by cost, will be purchased by the Company from RAI. See "Investment Objectives and Policies - Initial Investments." The Company anticipates that, subject to the limitations referred to below in this section, it will purchase additional investments from RAI. The Company may from time to time (but is not obligated to) retain RAI to perform due diligence investigations on properties underlying Financing (excluding Financing being acquired from RAI) or on Property Interests that the Company is considering for acquisition. It is also anticipated that Brandywine, which is an affiliate of RAI, may provide real estate management and or management supervisory services to a material number of properties for which the Company has provided Financing or which are included in the Company's Property Interests. Brandywine currently manages, or supervises the management of 11 of the properties underlying the Initial Investments. -49- The Company anticipates that it will have customary banking relationships with the bank affiliates of JeffBanks, although it is not currently anticipated that the Company will establish a borrowing relationship. JeffBanks may, as needed and requested by the Company, provide loan administration services to the Company. JeffBanks may also refer to the Company for its consideration financing proposals which are not within JeffBanks' normal underwriting criteria. The Company anticipates that it may, in the future, sublease office space from JeffBanks. Mr. and Mrs. Cohen are principal stockholders of JeffBanks, Mrs. Cohen is the Chairman and Chief Executive Officer of JeffBanks and Mr. Cohen is Chairman of its Executive Committee. The Company has instituted certain procedures to mitigate the effects of any such conflicts, including (i) requiring that a majority of its trustees be Independent Trustees, (ii) requiring that the acquisition price of any investments acquired from RAI (or in which an officer or trustee of the Company, including Mrs. Cohen, has an interest) be determined based upon independent appraisal of the underlying property, (iii) limiting the investments which may be acquired from RAI to a maximum of 30% of the Company's investments (excluding the Initial Investments), based upon the Company's investment cost (the amount of the investment plus legal, filing and other related fees and expenses), (iv) requiring that any fees for services performed by RAI, Brandywine, JeffBanks or their affiliates be no greater than prevailing fees in the area for similar services provided by unrelated third parties, (v) requiring that any service arrangements with an affiliated entity provide that services will be rendered only as and to the extent requested by the Company from time to time and that, in any event, the arrangements be cancelable by the Company, without penalty, on no more than 30 days' notice, (vi) requiring that any investment acquisition or services arrangement, and every transaction with RAI, Brandywine, JeffBanks and their affiliates, or relating to any property in which any such persons has an interest, receive the prior approval of a majority of the Independent Trustees (who, in giving such approval, may rely upon information supplied by RAI, Brandywine, JeffBanks or their affiliates), and (vii) with respect to real estate management or management supervisory services performed by Brandywine, requiring that the aggregate of the fee received by Brandywine and the manager being supervised may not exceed the normal and customary fee for similar property management services with respect to similar properties in the same area. The Company will not, however, be required to obtain the approval of the Independent Trustees to retain RAI to perform a due diligence investigation of a property where the amount of the fee for such services will not exceed the lesser of 1% of the property's appraised value or $10,000. Since each of the Company, RAI and JeffBanks seeks to originate or, in the case of the Company and RAI, acquire mortgage loans, there may be conflicts of interest among the Company, RAI and JeffBanks regarding the allocation of loan opportunities. The Company believes, however, that these conflicts are substantially mitigated since there are significant differences between the investment objectives of the Company, RAI and JeffBanks. RAI has advised the Company that it seeks to acquire loans which are either in default, or at risk of imminent default, requiring active intervention by RAI in the workout process. The Company, however, seeks to acquire loans where the workout process has already been initiated and there is no need for its active intervention. JeffBanks has advised the Company that it seeks to provide customary commercial lending services emphasizing (with respect to real estate loans) first lien -50- financing that is subject to specified underwriting standards. The Company seeks to provide Financing that does not conform to JeffBanks' underwriting standards. The Company believes that conflicts are further mitigated because the anticipated sources of the Company's loan referrals (apart from loans acquired from RAI) are different from those of RAI and JeffBanks. See "Investment Objectives and Policies - Certain Relationships; Conflicts of Interest." To further limit conflicts between the Company and RAI, the Company and RAI have agreed that, for two years following the completion of the Offering, (i) RAI will not sponsor another REIT with investment objectives and policies which are the same as, or substantially similar to, those of the Company; (ii) if RAI originates a proposal to provide wraparound or other junior lien or subordinated Financing with respect to multifamily, office or other commercial properties to a borrower (other than to a borrower with an existing loan from RAI), RAI must first offer the opportunity to the Company; and (iii) if RAI desires to sell any loan it has acquired that conforms to the Company's investment objectives and policies with respect to acquired loans, it must first offer to sell it to the Company. Subject only to the limitations referred to above, to the extent that an investment opportunity is presented to one entity which may be deemed appropriate for either entity, the entity to which the opportunity is presented may invest without offering the other entity the right to participate. However, each entity reserves the right, in its sole discretion, to refer to the other appropriate investment opportunities, or to offer a participation to the other entity in investments that may be deemed appropriate for both. Ledgewood Law Firm, P.C., which has acted as counsel to the Company in connection with its organization and the Offering, also has in the past acted as counsel to RAI, Brandywine, JeffBanks and their affiliates (including Messrs. Jonathan Z. and Edward E. Cohen and Mrs. Cohen) and anticipates that it will continue to do so in the future. Until April 1996, Edward E. Cohen was Of Counsel to such firm, of which he was previously a member, and receives certain debt service payments from such firm in connection with his withdrawal from such firm as a member and its redemption of his interest. There is a possibility that, in the future, the interests of the Company, RAI, Brandywine, JeffBanks or their affiliates may become adverse. In the event that a dispute were to arise between the Company and any of such entities, either the Company or such entity (or both), as appropriate, will retain separate counsel for such matters. DISTRIBUTION POLICY In order to avoid corporate income taxation on the earnings that it distributes, the Company must distribute to its shareholders an amount at least equal to (i) 95% of its REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gain) plus (ii) 95% of the excess of its net income from foreclosure property over the tax imposed on such income by the Code less (iii) any excess non-cash income (as determined under the Code). See "Federal Income Tax Considerations." The actual amount and timing of distributions, however, will be at the discretion of the Board of Trustees and will depend upon the financial condition of the Company in addition to the requirements of the Code. It is -51- anticipated that the first distribution will be made after the first full fiscal quarter following the completion of this Offering. Subject to the distribution requirements referred to in the immediately preceding paragraph, the Company intends, to the extent practicable, to invest substantially all of the principal from repayments, sales and refinancings of the Company's assets in Financings and Property Interests. The Company may, however, under certain circumstances, make a distribution of principal. Such distributions, if any, will be made at the discretion of the Board of Trustees. It is anticipated that distributions generally will be taxable as ordinary income, although a portion of such distributions may be designated by the Company as long-term capital gain or may constitute a return of capital. The Company will furnish annually to each of its shareholders a statement setting forth distributions paid during the preceding year and their federal income tax status. For a discussion of the federal income tax treatment of distributions by the Company, see "Federal Income Tax Considerations - Taxation of the Company" and "- Taxation of Taxable U.S. Shareholders." CAPITALIZATION The capitalization of the Company, as of ____________, 1997, and as adjusted to reflect the sale of the Common Shares offered hereby, is as follows: Actual As Adjusted(1) ------ -------------- Preferred Shares, par value $.01; 25,000,000 shares authorized; no shares outstanding; no shares outstanding, as adjusted.................................. $ -0- $ -0- Common Shares, par value $.01; 200,000,000 shares authorized; ___________ shares outstanding; ___________ shares outstanding, as adjusted(2).................. --------- ------ Additional paid-in capital................... --------- ------ Total................................... $ $ ========= ====== - ---------- (1) Includes ________ Common Shares to be purchased by RAI at the initial public offering price, less underwriting discounts and commissions, and is stated after deducting Offering and organizational expenses, estimated to be $________________, payable by the Company. -52- (2) Assumes no exercise of the Underwriters' over-allotment option to purchase up to an additional _______________ Common Shares, and excludes ______ shares issuable pursuant to warrants granted to the Representative and ____________ shares issuable to executive officers of the Company pursuant to employee options. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION The Company has not yet commenced operations and will be dependent upon the proceeds of the Offering of the Common Shares to carry on its proposed activities. See "Use of Proceeds." The Company intends to use the net proceeds of the Offering, together with the proceeds of borrowed funds, if any, obtained by the Company, to provide Financings and acquire Property Interests, including the Initial Investments. See "Investment Objectives and Policies." After commencement of operations, the Company's principal sources of funds will be interest paid on Financings, rents received from Property Interests (or, where the Company owns an equity interest in a property, distributions in respect of rents), the proceeds of any sales of loans or properties, proceeds from any participations and borrowings (if any; see "Investment Objectives and Policies - Leverage"). Since the Company will elect to qualify as a REIT under the Code, it will be required to distribute annually at least 95% of its taxable income, subject to certain adjustments, and, accordingly, the Company anticipates that substantially all of its operating cash flow will be utilized to make distributions to shareholders. Cash received from sales of assets will be reinvested in further Financings or Property Interests. The Company intends to establish working capital reserves, to a maximum of 3% of the Offering proceeds, which, together with funds derived from operations representing a return of principal, is anticipated to be sufficient to satisfy liquidity requirements. Liquidity may be adversely affected by costs of operating the Company and administering its portfolio investments. To the extent that working capital reserves and cash from operations are insufficient to satisfy the Company's cash requirements, the Company will be required to obtain financing from third parties or raise additional capital. There can be no assurance that any such financing or capital will be available when needed. DESCRIPTION OF SHARES OF BENEFICIAL INTEREST General The Declaration of Trust provides that the Company may issue up to 200,000,000 Common Shares, $.01 par value per share, and 25,000,000 preferred shares ("Preferred Shares"), $.01 par value per share of beneficial interest. Upon completion of this Offering, ______ Common Shares will be issued and outstanding and no Preferred Shares will be issued and outstanding. -53- Common Shares Each outstanding Common Share will entitle the holder to one vote on all matters presented to shareholders for a vote, including the election of trustees, and, except as otherwise required by law or as provided in any resolution adopted by the Board of Trustees with respect to any other class or series of shares establishing the designation, powers, preferences and relative, participating, optional or other special rights and powers of such series, the holders of such shares will possess the exclusive voting power, subject to the provisions of the Company's Declaration of Trust regarding the ownership of Common Shares in excess of the Ownership Limitation or as otherwise may be permitted by the Board of Trustees, as described below. Holders of Common Shares will have no conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any securities of the Company or cumulative voting rights in the election of trustees. All Common Shares to be issued and outstanding following the completion of the Offering will be duly authorized, fully paid and non-assessable. Subject to the preferential rights of any other shares or series of shares and to the provisions of the Declaration of Trust regarding ownership of Common Shares in excess of the Ownership Limitation or as otherwise may be permitted by the Board of Trustees, as described below, distributions may be paid to the holders of Common Shares if and when authorized and declared by the Board of Trustees out of funds legally available therefor. The Company intends to make quarterly distributions, beginning with distributions for the first full quarter following the consummation of the Offering. See "Distribution Policy." Under Maryland law, shareholders of a business trust are generally not liable for the Company's debts or obligations. If the Company is liquidated, subject to the right of any holders of Preferred Shares to receive preferential distributions, each outstanding Common Share will be entitled to participate pro rata in the assets remaining after payment of, or adequate provision for, all known debts and liabilities of the Company. Subject to the provisions of the Declaration of Trust regarding the ownership of Common Shares in excess of the Ownership Limitation or as otherwise permitted by the Board of Trustees, as described below, all Common Shares will have equal distribution, liquidation and voting rights, and will have no preference or exchange rights. Under the Declaration of Trust, the Company cannot dissolve, amend its trust agreement (except as described in this paragraph), merge, consolidate or sell, lease, exchange or otherwise transfer all or substantially all of its assets, unless approved by the affirmative vote of shareholders holding at least two-thirds of the shares entitled to vote on the matter. As permitted under Maryland law, the Company's Declaration of Trust permits the Board of Trustees, without any action by the shareholders of the Company, to (i) amend the Declaration of Trust by a two-thirds vote to allow the Company to qualify, or continue its qualification, as a REIT under the Code or Maryland law and (ii) amend the Declaration of Trust by a majority vote to increase or decrease the aggregate number of shares of beneficial interest or the number of shares of any class of shares of beneficial interest that the Company has the authority to issue. -54- The Declaration of Trust authorizes the Board of Trustees to reclassify any unissued Common Shares into other classes or series of classes of shares and to establish the number of shares in each class or series and to set the preferences, conversion and other rights, voting powers, restrictions, limitations and restrictions on ownership, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such class or series. Preferred Shares Preferred Shares may be issued from time to time, in one or more series, as authorized by the Board of Trustees. No Preferred Shares are currently issued or outstanding. Prior to the issuance of shares of each series, the Board of Trustees is required to fix for each series the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption, as permitted by Maryland law. Because the Board of Trustees has the power to establish the preferences, powers and rights of each series of Preferred Shares, it may afford the holders of any series of Preferred Shares preferences, powers and rights, voting or otherwise, senior to the rights of holders of Common Shares. Apart from the effect of the Ownership Limitation (see "Description of Shares of Beneficial Interest - Restrictions on Ownership and Transfer"), the issuance of Preferred Shares could have the effect of delaying or preventing a change of control of the Company that might involve a premium price for holders of Common Shares or that they otherwise may deem to be desirable. The Board of Trustees has no present plans to issue any Preferred Shares. Restrictions on Ownership and Transfer For the Company to qualify as a REIT under the Code, no more than 50% in value of its outstanding shares of beneficial interest may be owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of a taxable year (other than the first year for which an election to be treated as a REIT has been made). In addition, if the Company, or an owner of 10% or more of the Company's shares, actually or constructively owns 10% or more of a tenant of the Company (or a tenant of any partnership in which the Company is a partner), the rent received by the Company (either directly or through any such partnership) from such tenant will not be qualifying income for purposes of the REIT gross income tests of the Code. The Company's shares must also be beneficially owned by 100 or more persons during at least 335 days of a taxable year of twelve months or during a proportionate part of a shorter taxable year (other than the first year for which an election to be treated as a REIT has been made). Because the Company believes it to be essential to qualify as a REIT, the Declaration of Trust, subject to certain exceptions described below, contains restrictions on the ownership and transfer of Common and Preferred Shares which are intended to assist the Company in complying with these requirements. The Ownership Limitation set forth in the Company's Declaration of Trust provides that, subject to certain specified exceptions, no person or entity may own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Code, (i) more than 8.5% of the number of outstanding Common Shares, except for RAI which may own -55- up to 15% of the number of outstanding Common Shares (and which will own 9.8% of the outstanding Common Shares at the conclusion of the Offering, assuming the Underwriters do not exercise their over-allotment option), or (ii) more than 9.8% of the number of outstanding Preferred Shares of any class or series (the "Ownership Limitation"). The constructive ownership rules are complex, and may cause shares owned actually or constructively by a group of related individuals and/or entities to be owned constructively by one individual or entity. As a result, the acquisition or ownership of less than 8.5% of the Common Shares or 9.8% of the Preferred Shares (or the acquisition of an interest in an entity that owns, actually or constructively, Common or Preferred Shares) by an individual or entity, could nevertheless cause that individual or entity, or another individual or entity, to own constructively in excess of 8.5% of the outstanding Common Shares or 9.8% of the Preferred Shares, and thus violate the Ownership Limitation, or such other limit as provided in the Company's Declaration of Trust or as otherwise established by the Board of Trustees. The Board of Trustees may, but in no event will be required to, waive the Ownership Limitation with respect to a particular shareholder if it determines that such ownership will not jeopardize the Company's status as a REIT and the Board of Trustees otherwise decides such action would be in the best interest of the Company. As a condition of such waiver, the Board of Trustees may require an opinion of counsel satisfactory to it or undertakings or representations from the applicant with respect to preserving the REIT status of the Company. The Company's Declaration of Trust further prohibits (i) any person from actually or constructively owning Common or Preferred Shares that would cause in the Company to be "closely held" under Section 856(h) of the Code, to own constructively 10% or more of the ownership interests in a tenant of the Company's real property (within the meaning of Code section 856(d)(2)(B)), or otherwise cause the Company to fail to qualify as a REIT, and (ii) any person from transferring Common or Preferred Shares if the transfer would cause the Company's shares to be owned by fewer than 100 persons. Any person who acquires or attempts or intends to acquire actual or constructive ownership of the Company's shares that will or may violate any of the foregoing restrictions on transferability and ownership is required to give notice immediately to the Company and provide the Company with such other information as the Company may request in order to determine the effect of the transfer on the Company's status as a REIT. The foregoing restrictions on transferability and ownership will not apply if the Board of Trustees determines that it is no longer in the best interest of the Company to attempt to qualify, or to continue to qualify, as a REIT. Except as otherwise described above, the Ownership Limitation can only be changed by an amendment to the Declaration of Trust requiring the affirmative vote of two-thirds of the outstanding shares. Pursuant to the Declaration of Trust, if any purported transfer of Common or Preferred Shares or any other event would otherwise result in any person violating the Ownership Limitation or such other limit as provided in the Declaration of Trust, or as otherwise permitted by the Board of Trustees, the transfer will be void and of no force or effect with respect to the purported transferee (the "Prohibited Transferee") as to that number of shares in excess of the Ownership Limitation or such other limit, and the Prohibited Transferee will acquire no right or interest (or, in the case of any event other than a purported transfer, the person or entity holding -56- record title to any such excess shares (the "Prohibited Owner") shall cease to own any right or interest) in the excess shares. Excess shares will be transferred automatically, by operation of law, to a trust, the beneficiary of which will be a qualified charitable organization selected by the Company (the "Beneficiary"). The automatic transfer will be deemed to be effective as of the close of business on the business day prior to the date of the violative transfer. The trustee of the trust (who shall be designated by the Company and be unaffiliated with the Company and any Prohibited Transferee or Prohibited Owner) will be required to sell the excess shares to a person who could own the shares without violating the Ownership Limitation, or such other limit as provided in the Company's Declaration of Trust or as otherwise permitted by the Board of Trustees, and distribute to the Prohibited Owner the sales proceeds received by the trust for such excess shares. Where excess shares result from an event other than a transfer, or from a transfer for no consideration (such as a gift), the trustee will be required to sell the excess shares to a qualified person and distribute to the Prohibited Owner an amount equal to the lesser of the Market Price (as defined in the Company's Declaration of Trust) of the excess shares as of the date of such event or the sales proceeds received by the trust for the excess shares. In either case, any proceeds in excess of the amount distributable to the Prohibited Transferee or Prohibited Owner, as applicable, will be distributed to the Beneficiary. Prior to sale, the trustee will be entitled to receive, in trust for the Beneficiary, all dividends and other distributions paid by the Company with respect to the excess shares, and also will be entitled to exercise all voting rights with respect to the excess shares. Subject to Maryland law, effective as of the date that the shares have been transferred to the trust, the trustee has the right (i) to rescind any vote cast by a Prohibited Transferee or Prohibited Owner prior to the discovery by the Company that such shares have been transferred to the trust and (ii) thereafter to vote the shares at its discretion. However, if the Company has already taken irreversible corporate action, then the trustee shall not have the authority to rescind and revote such vote. Any dividend or other distribution paid to the Prohibited Transferee or Prohibited Owner (prior to the discovery by the Company that such shares had been automatically transferred to a trust as described above) will be required to be repaid to the trustee, upon demand, for distribution to the Beneficiary. In the event that transfer to the trust as described above is not automatically effective (for any reason) to prevent violation of the Ownership Limitation or such other limit as provided in the Company's Declaration of Trust or as otherwise permitted by the Board of Trustees, then the Declaration of Trust provides that the transfer of the excess shares will be void. In addition, Common Shares held in the trust shall be deemed to have been offered for sale to the Company, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the trust (or, in the case of a gift, the Market Price at the time of gift) and (ii) the Market Price on the date the Company, or its designee, accepts such offer. The Company may accept the offer until the trustee has sold the shares. Upon that sale, the interest of the Beneficiary in the shares terminates and the trustee must distribute the net sale proceeds to the Prohibited Transferee or Prohibited Owner. If any purported transfer of Common Shares would cause the Company to be beneficially owned by fewer than 100 persons, the transfer will be null and void in its entirety and the intended transferee will acquire no rights to the Common Shares. -57- All certificates evidencing Common Shares will bear a legend referring to the restrictions described above. The foregoing ownership limitations could delay, defer or prevent a transaction or a change in control of the Company that might involve a premium price for the Common Shares or otherwise be desired by shareholders. Under the Declaration of Trust, every owner of a specified percentage (or more) of the outstanding Common Shares must file a completed questionnaire with the Company containing information regarding his ownership of such shares, as set forth in the Treasury Regulations. Under current Treasury Regulations, the percentage will be set between 0.5% and 5.0%, depending upon the number of record holders of the Common Shares. In addition, each shareholder shall, upon demand, be required to disclose to the Company in writing such information as the Company may request in order to determine the effect, if any, of such shareholder's actual and constructive ownership of Common Shares on the Company's status as a REIT and to ensure compliance with the Ownership Limitation, or such other limit as provided in the Company's Declaration of Trust or as otherwise permitted by the Board of Trustees. Dividend Reinvestment Plan The Company intends to implement a dividend reinvestment plan whereby shareholders may automatically reinvest their dividends in the Common Shares. Details about any such plan will be sent to the Company's shareholders following adoption thereof by the Board of Trustees. Reports to Shareholders The Company will furnish its shareholders with annual reports containing audited financial statements certified by independent public accountants and distribute quarterly reports containing unaudited financial information for each of the three remaining quarters of the year. Transfer Agent and Registrar The transfer agent and registrar for the Common Shares will be ____________________. CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S DECLARATION OF TRUST AND BYLAWS The following paragraphs summarize certain provisions of Maryland law relating to REITs and of the Company's Declaration of Trust and Bylaws. The summary does not purport to be complete and is subject to and qualified in its entirety by reference to Maryland law and to the Declaration of Trust and Bylaws of the Company. -58- Board of Trustees The Declaration of Trust provides that the number of trustees of the Company may be established by the Board of Trustees but may not be fewer than three nor more than nine. There are currently six trustees. The trustees may increase or decrease the number of trustees by a majority vote of the Board of Trustees, provided that (i) the number of trustees may be increased above nine or decreased below three only by a vote of at least 75% of the trustees then in office, (ii) the number of trustees shall never be less than the number required by Maryland law and (iii) the tenure of office of a trustee shall not be affected by any decrease in the number of trustees. Any vacancy will be filled, including any vacancy created by an increase in the number of trustees, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining trustees, provided that Independent Trustees shall nominate replacements for vacancies in Independent Trustee positions. The Company's Declaration of Trust provides that a trustee may be removed with or without cause by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of trustees. This provision, when coupled with the provision in the Bylaws authorizing the Board of Trustees to fill vacant trusteeships, precludes the Company's shareholders, as a practical matter, from removing incumbent trustees and filling the vacancies created by such removal with their own nominees. Business Combinations Under the Maryland General Corporation Law ("MGCL"), as applicable to REITs, certain "business combinations" (including a merger, consolidation, share exchange, or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between the Company and any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the Company's shares, or an affiliate of the Company who, at any time within the previous two years was the beneficial owner of 10% or more of the voting power of the Company's then outstanding shares (an "Interested Shareholder") or an affiliate of an Interested Shareholder are prohibited for five years after the most recent date on which the Interested Shareholder became an Interested Shareholder. Thereafter, a proposed business combination must be recommended by the Board of Trustees and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by holders of outstanding voting shares and (ii) two-thirds of the votes entitled to be cast by holders of outstanding voting shares excluding shares held by the Interested Shareholder unless, among other conditions, the Company's shareholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Shareholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by the Board of Trustees prior to the time that the Interested Shareholder becomes an Interested Shareholder. It is anticipated that the Company's Board of Trustees will resolve to "opt out" of the business combination provisions of the MGCL. -59- Control Share Acquisitions The MGCL, as applicable to REITs, provides that control shares (as defined below) of the Company acquired in a control share acquisition (as defined below) have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquiror or by officers or trustees who are employees of the Company. "Control Shares" are voting shares which, if aggregated with all other such shares previously acquired by the acquiror, or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by revocable proxy), would entitle the acquiror to exercise voting power in electing trustees within one of the following ranges of voting power: (i) one-fifth or more but less than one-third; (ii) one-third or more but less than a majority; or (iii) a majority of all voting power. Control Shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained shareholder approval. A "Control Share Acquisition" means the acquisition of Control Shares, subject to certain exceptions. A person who has made or proposes to make a Control Share Acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the Board of Trustees to call a special meeting of shareholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the Company may itself present the question at any shareholders' meeting. If voting rights are not approved at the shareholders' meeting or if the acquiring person does not deliver an acquiring person statement as required by the MGCL, then, subject to certain conditions and limitations, the Company may redeem any or all of the Control Shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the Control Shares, as of the date of the last Control Share Acquisition by the acquiror or of any meeting of shareholders at which the voting rights of such shares are considered and not approved. If voting rights for Control Shares are approved at a shareholders' meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other shareholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquiror in the Control Share Acquisition. The Control Share Acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the Company is a party to the transaction or to acquisitions approved or exempted by the Declaration of Trust or Bylaws. Under the MGCL the Company may "opt out" of the control share provisions. The Bylaws of the Company contain a provision exempting from the Control Share Acquisition statute any and all acquisitions by any person of the Company's Common or Preferred Shares. There can be no assurance that such provision will not be amended or eliminated at any time in the future. -60- Amendment of the Declaration of Trust and Bylaws The Company's Declaration of Trust may not be amended without the affirmative vote of at least a majority of the shares entitled to vote on the matter except that the sections of the Declaration of Trust relating to the trustees, the Ownership Limitation, amendments to the Declaration of Trust and the duration and termination of the Company may not be amended without the affirmative vote of two-thirds of the shares entitled to vote on the matter. In addition, the Declaration of Trust may be amended by a two-thirds vote of the Board of Trustees, without any action by the shareholders of the Company, to allow the Company to qualify, or continue its qualification, as a REIT under the Code or Maryland law and, by a majority vote of the Board of Trustees, to increase or decrease the aggregate number of shares of beneficial interest or the number of shares of any class of shares of beneficial interest that the Company has the authority to issue. See "Description of Shares of Beneficial Interest - Common Shares." The Company's Bylaws may be amended or altered only by the Board of Trustees. Meetings of Shareholders The Company's Declaration of Trust provides for annual meetings of shareholders, commencing in 1998, to elect the Board of Trustees and transact such other business as may properly be brought before the meeting. Special meetings of shareholders may be called by the Chairman, the Chief Executive Officer, the President or the Board of Trustees and shall be called at the request in writing of the holders of 50% or more of the outstanding shares entitled to vote. Advance Notice of Trustee's Nominations and New Business The Company's Declaration of Trust provides that (i) with respect to any meeting of shareholders, the nomination of persons for election to the Board of Trustees and the proposal of business to be considered by shareholders may be made only (a) by the Board of Trustees or (b) by a shareholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the Bylaws, and (ii) with respect to a special meeting of shareholders, only the business specified in the Company's notice of meeting may be brought before the meeting. Dissolution of the Company Pursuant to the Company's Declaration of Trust, and subject to any restrictions imposed by the terms of any class or series of shares of beneficial interest of the Company then outstanding, the shareholders of the Company may dissolve the Company by the affirmative vote of the holders of two-thirds of all of the votes entitled to be cast on the matter. -61- Indemnification; Limitation of Trustees' and Officers' Liability Maryland law permits a Maryland REIT to include in its declaration of trust, and the Company's Declaration of Trust includes, a provision limiting the liability of its trustees and officers to the trust and its shareholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) a final judgment based upon a finding of active and deliberate dishonesty by the Trustee that was material to the cause of action adjudicated. The Declaration of Trust authorizes the Company, to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former shareholder, trustee or officer or (b) any individual who, while a trustee of the Company and at the request of the Company, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a trustee, director, officer, partner or otherwise, from and against any claim or liability to which such person may become subject or which such person may incur by reason thereof. The Bylaws require the Company to indemnify each trustee or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in the foregoing capacities. Maryland law permits a Maryland REIT to indemnify and advance expenses to its trustees officers, employees and agents to the same extent as permitted by the MGCL for directors and officers of Maryland corporations. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation. In accordance with the MGCL, the Bylaws of the Company require it, as a condition to advancing expenses, to obtain (i) a written affirmation by the trustee or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by the Company as authorized by the Bylaws and (ii) a written statement by or on his behalf to repay the amount paid or reimbursed by the Company if it shall ultimately be determined that the standard of conduct was not met. Indemnification Agreements The Company will enter into indemnification agreements with each of its officers and trustees. The indemnification agreements will require, among other matters, that the Company indemnify its officers and trustees to the fullest extent permitted by law and advance to the -62- officers and trustees all related expenses, subject to reimbursement if it is subsequently determined that indemnification is not permitted. Under the agreements, the Company must also indemnify and advance all expenses incurred by officers and trustees seeking to enforce their rights under the indemnification agreements and may cover officers and trustees under any trustees' and officers' liability insurance. Although the form of indemnification agreement offers substantially the same scope of coverage afforded by the Declaration of Trust, Bylaws and applicable Maryland law, it provides greater assurance to trustees and officers that indemnification will be available, because, as a contract, it cannot be modified unilaterally in the future by the Board of Trustees or the shareholders to eliminate the rights it provides. Possible Anti-takeover Effect of Certain Provisions of Maryland Law and of the Declaration of Trust and Bylaws The provisions of the Declaration of Trust regarding the removal of Trustees and the restrictions on the transfer of shares, and the advance notice provisions of the Bylaws, could have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium price for holders of Common Shares or that they otherwise may believe to be desirable. Also, if the resolution of the Board of Trustees opting out of the business combination statute or the provisions of the Bylaws electing not to be governed by the control share acquisition statute are rescinded, such statutes could have a similar effect. Maryland Asset Requirements To maintain its qualification as a Maryland real estate investment trust, Maryland law requires at least 75% of the value of the Company's assets to be held, directly or through other entities, in real estate assets, mortgages or mortgage related securities, government securities, cash and cash equivalent items, including high-grade short term securities and receivables. Maryland law also prohibits the Company from using or applying land for farming, agricultural, horticultural or similar purposes. COMMON SHARES AVAILABLE FOR FUTURE SALE Upon the completion of the Offering, the Company will have outstanding (or reserved for issuance upon exercise of options) _____________ Common Shares. The Common Shares issued in the Offering will be freely tradeable by persons other than "affiliates" of the Company without restriction under the Securities Act of 1933, as amended (the "Securities Act"), subject to the Ownership Limitation. See "Description of Shares of Beneficial Interest - Restrictions on Transfer." Common Shares issued to holders of units of limited partnership interest in the Operating Partnership ("Units") upon exercise of the Redemption Rights (see "Operating Partnership Agreement - Redemption Rights") will be "restricted" securities under the meaning of Rule 144 promulgated under the Securities Act ("Rule 144") and may not be sold in the absence of -63- registration under the Securities Act unless an exemption from registration is available, including exemptions contained in Rule 144. See "Operating Partnership - Redemption Rights." In general, under Rule 144 as currently in effect, if one year has elapsed since the later of the date of acquisition of restricted shares from the Company or any "affiliate" of the Company, as that term is defined under the Securities Act, the acquiror or subsequent holder thereof is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding Common Shares or the average weekly trading volume of the Common Shares during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 also are subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If two years have elapsed since the date of acquisition of restricted shares from the Company or from any affiliate of the Company, and the acquiror or subsequent holder thereof is deemed not to have been an affiliate of the Company at any time during the three months preceding a sale, such person would be entitled to sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. No prediction can be made as to the effect, if any, that future sales of Common Shares, or the availability of Common Shares for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of Common Shares, or the perception that such sales could occur, may affect adversely prevailing market prices of the Common Shares. OPERATING PARTNERSHIP AGREEMENT The Operating Partnership has been organized as a Delaware limited partnership, the general partner of which is RAIT General, Inc., and the initial limited partner of which is RAIT Limited, Inc., each of which is a wholly-owned subsidiary of RAIT. Because RAIT indirectly owns 100% of the partnership interests in the Operating Partnership, the Operating Partnership will be disregarded as a separate entity from RAIT for federal income tax purposes until a third party is admitted as a partner of the Operating Partnership. The Company organized the Operating Partnership in order to provide future sellers of assets with the opportunity to transfer those assets to the Company in a tax-deferred exchange. The Operating Partnership Agreement currently does not contain many of the provisions described below. Instead, the following summary of the Operating Partnership Agreement, and the descriptions of certain provisions thereof set forth elsewhere in this Prospectus, describe certain provisions that likely will appear in the Operating Partnership Agreement when third-party sellers of assets who wish to achieve tax deferral are admitted as partners of the Operating Partnership. The provisions described in this summary, however, may not appear in the Operating Partnership Agreement that ultimately is executed. -64- General Pursuant to the Operating Partnership Agreement, the General Partner, as the sole general partner of the Operating Partnership, will have full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership. The limited partners of the operating partnership (the "Limited Partners") will have no authority in their capacity as Limited Partners to transact business for, or participate in the management activities or decisions of, the Operating Partnership except as required by applicable law. Consequently, RAIT, as a result of its ownership of the General Partner, will control the assets and business of the Operating Partnership. However, it is anticipated that any amendment to the Operating Partnership Agreement that would (i) convert a Limited Partner's interest in the Operating Partnership into a General Partner interest; (ii) increase the liability of a Limited Partner under the Operating Partnership Agreement; (iii) alter a Partner's rights to distributions; (iv) alter or modify any aspect of a Partners' rights with respect to redemption of his interest; or (v) cause the early termination of the Operating Partnership (other than as set forth in the Operating Partnership Agreement) will require the consent of the Limited Partners affected thereby. General Partner Not to Withdraw It is anticipated that the General Partner will not be able to withdraw voluntarily from the Operating Partnership or transfer or assign its interest in the Operating Partnership unless (i) the transaction in which such withdrawal or transfer occurs results in the liquidation of the Operating Partnership or (ii) the Limited Partners, by majority vote, elect to continue the Operating Partnership and to appoint a successor General Partner. Capital Contribution RAIT will contribute, through the General Partner and the Initial Limited Partner, all of the net proceeds of the Offering to the Operating Partnership. The General Partner will hold a 1% general partnership interest in the Operating Partnership, and the Initial Limited Partner will hold a 99% limited partnership interest in the Operating Partnership. After the completion of the Offering, RAIT will have issued a total of _______________ Common Shares and will own, through the General Partner and the Initial Limited Partner, 100% of the Units in the Operating Partnership. Although the Operating Partnership will receive the net proceeds of the Offering, the Initial Limited Partner and the General Partner will be deemed to have made a capital contribution to the Operating Partnership in the aggregate amount of the gross proceeds of the Offering and the Operating Partnership will be deemed simultaneously to have paid the underwriter's discount and other expenses paid or incurred in connection with the Offering. It is anticipated that the Operating Partnership Agreement will provide that if the Operating Partnership requires additional funds at any time or from time to time in excess of funds available to the Operating Partnership from borrowing or capital contributions, the General -65- Partner may borrow such funds from a financial institution or other lender and lend such funds to the Operating Partnership on the same terms and conditions as are applicable to the General Partner's borrowing of such funds. Moreover, it is anticipated that the General Partner will be authorized to cause the Operating Partnership to issue Units for less than fair market value if the Company has concluded in good faith that such issuance is in the best interest of the Company and the Operating Partnership. Under the Operating Partnership Agreement, each of the General Partner and the Initial Limited Partner is obligated to contribute the net proceeds of any future share offering by RAIT as additional capital to the Operating Partnership in exchange for additional Units. Upon such contribution, the General Partner's and the Initial Limited Partner's percentage interests in the Operating Partnership would be increased on a proportionate basis based upon the amount of such additional capital contributions. The percentage interest of the Limited Partners (other than the Initial Limited Partner) would be decreased on a proportionate basis in the event of additional capital contributions by the General Partner and the Initial Limited Partner. In addition, if the General Partner and the Initial Limited Partner were to contribute additional capital to the Operating Partnership, the General Partner would revalue the property of the Operating Partnership to its fair market value (as determined by the General Partner) and the capital accounts of the partners would be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property (that has not been reflected in the capital accounts previously) would be allocated among the partners under the terms of the Operating Partnership Agreement as if there were a taxable disposition of such property for such fair market value on the date of the revaluation. Redemption Rights It is anticipated that pursuant to the Operating Partnership Agreement, the Limited Partners (other than the Initial Limited Partner) will have the right (the "Redemption Rights") to cause the Operating Partnership to redeem their Units for cash or, at the election of the General Partner, Common Shares on a one-for-one basis. The redemption price will be paid in cash in the discretion of the Company or in the event that the issuance of Common Shares to the redeeming Limited Partner would (i) result in any person owning, directly or indirectly, Common Shares in excess of the Ownership Limitation, (ii) result in capital shares of the Company being owned by fewer than 100 persons (determined without reference to any rules of attribution), (iii) result in the Company being "closely held" within the meaning of section 856(h) of the Code, (iv) cause the Company to own, actually or constructively, 10% or more of the ownership interests in a tenant of the Company's or the Operating Partnership's real property, within the meaning of section 856(d)(2)(B) of the Code, or (v) cause the acquisition of Common Shares by such redeeming Limited Partner to be "integrated" with any other distribution of Common Shares for purposes of complying with the Securities Act. Operations The Operating Partnership Agreement requires that the Operating Partnership be operated in a manner that will enable RAIT to satisfy the requirements for being classified as a REIT for federal tax purposes, to avoid any federal income or excise tax liability imposed by the Code, and -66- to ensure that the Operating Partnership will be not classified as a "publicly traded partnership" for purposes of section 7704 of the Code. In addition to the administrative and operating costs and expenses incurred by the Operating Partnership, it is anticipated that the Operating Partnership will pay all general, operating and administrative expenses of the Company, the General Partner and the Initial Limited Partner (collectively, the "Company Expenses") and the Company Expenses will be treated as expenses of the Operating Partnership. The Company Expenses generally will include (i) all expenses relating to the organization and continuation of the Company, the General Partner and the Initial Limited Partner, (ii) all expenses relating to the public offering and registration of securities by the Company, (iii) all expenses associated with the preparation and filing of any periodic reports by the Company under federal, state or local laws or regulations, (iv) all expenses associated with compliance by the Company, the General Partner and the Initial Limited Partner with laws, rules and regulations promulgated by any regulatory body and (v) all other general, operating and administrative costs of the Company, the General Partner and the Initial Limited Partner incurred in the ordinary course of their business on behalf of the Operating Partnership. Distributions It is anticipated that the Operating Partnership Agreement will provide that the Operating Partnership will distribute cash from operations (including net sale or refinancing proceeds, but excluding net proceeds from the sale of the Operating Partnership's property in connection with the liquidation of the Operating Partnership) on a quarterly (or, at the election of the General Partner, more frequent) basis, in amounts determined by the General Partner in its sole discretion, to the partners in accordance with their respective percentage interests in the Operating Partnership. Upon liquidation of the Operating Partnership, after payment of, or adequate provision for, debts and obligations of the Operating Partnership, including partner loans, it is anticipated that any remaining assets of the Operating Partnership will be distributed to all partners with positive capital accounts in accordance with their respective positive capital account balances. If the General Partner has a negative balance in its capital account following a liquidation of the Operating Partnership, it will be obligated to contribute cash to the Operating Partnership equal to the negative balance in its capital account. Allocations It is anticipated that income, gain and loss of the Operating Partnership for each fiscal year generally will be allocated among the partners in accordance with their respective interests in the Operating Partnership, subject to compliance with the provisions of Code sections 702 and 704 and Treasury regulations ("Treasury Regulations") promulgated thereunder. Term The Operating Partnership shall continue until December 31, 2050, or until sooner terminated as provided in the Operating Partnership Agreement or by operation of law. -67- Tax Matters Pursuant to the Operating Partnership Agreement, the General Partner is the tax matters partner of the Operating Partnership and, as such, has authority to handle tax audits and to make tax elections under the Code on behalf of the Operating Partnership. FEDERAL INCOME TAX CONSIDERATIONS The following is a summary of material federal income tax considerations that may be relevant to a prospective holder of Common Shares. Ledgewood Law Firm, P.C. ("Counsel") has acted as counsel to the Company, has reviewed this summary and has rendered an opinion that the descriptions of the law and the legal conclusions contained herein are correct in all material respects, and that the discussions hereunder fairly summarize the federal income tax considerations that are likely to be material to the Company and a holder of the Common Shares. This discussion does not purport to address all aspects of taxation that may be relevant to particular shareholders (including insurance companies, tax-exempt organizations, financial institutions or broker-dealers and, except to the extent discussed below, foreign corporations and persons who are not citizens or residents of the United States) subject to special treatment under the federal income tax laws. The statements in this discussion and the opinion of Counsel are based on current provisions of the Code, existing, temporary and currently proposed Treasury Regulations promulgated under the Code, the legislative history of the Code, existing administrative rulings and practices of the Services, and judicial decisions. No assurance can be given that future legislative, judicial or administrative actions or decisions, which may be retroactive in effect, will not affect the accuracy of any statements in this Prospectus with respect to the transactions entered into or contemplated prior to the effective date of such changes. EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF THE COMMON SHARES AND OF RAIT'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. Taxation of RAIT RAIT plans to make an election to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with its taxable year ending December 31, 1997. RAIT will be organized and has represented that it will operate in such a manner as to qualify for taxation as a REIT under the Code, but no assurance can be given that RAIT actually will operate in a manner so as to qualify or remain qualified as a REIT. -68- The sections of the Code and the corresponding Treasury Regulations relating to qualification and operation as a REIT are highly technical and complex. The following discussion sets forth the material aspects of the Code sections that govern the federal income tax treatment of a REIT and its shareholders. The discussion is qualified in its entirety by the applicable Code provisions, Treasury Regulations promulgated thereunder, and administrative and judicial interpretations thereof, all of which are subject to change prospectively or retroactively. Counsel has acted as counsel to RAIT in connection with the Offering and RAIT's election to be taxed as a REIT. In the opinion of Counsel, assuming that the elections and other procedural steps described in this discussion are completed by RAIT in a timely fashion, RAIT will qualify to be taxed as a REIT under the Code, and RAIT's organization and proposed method of operation will enable it to continue to meet the requirements for qualification and taxation as a REIT under the Code. Investors should be aware, however, that opinions of counsel are not binding upon the Service or any court. It must be emphasized that Counsel's opinion is based on various assumptions and is conditioned upon certain representations made by the Company as to factual matters, including representations regarding its business, assets and future operations, as set forth below in this discussion. Moreover, such qualification and taxation as a REIT depends upon RAIT's ability to meet on a continuing basis, through actual annual operating results, distribution levels, and diversity of share ownership, the various qualification tests imposed under the Code discussed below, the results of which will not be reviewed by Counsel. Accordingly, no assurance can be given that the actual results of RAIT's operations for any particular taxable year will satisfy such requirements. For a discussion of the tax consequences of failure to qualify as a REIT, see "Federal Income Tax Considerations - Failure to Qualify." If RAIT qualifies for taxation as a REIT, it generally will not be subject to federal corporate income tax on its net income that is distributed currently to its shareholders. That treatment substantially eliminates the "double taxation" (i.e., taxation at both the corporate and shareholder levels) that generally results from an investment in a regular corporation. However, RAIT will be subject to federal income tax in the following circumstances. First, RAIT will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains. Second, under certain circumstances, RAIT may be subject to the "alternative minimum tax" on its undistributed items of tax preference, if any. Third, if RAIT has (i) net income from the sale or other disposition of "foreclosure property" (defined generally as property acquired by RAIT through foreclosure or otherwise after a default on a loan secured by the property or a lease of the property; see "Federal Income Tax Considerations - Requirements for Qualification: Income Tests") that is held primarily for sale to customers in the ordinary course of business or (ii) other nonqualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. Fourth, if RAIT has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property (other than foreclosure property or property that has been involuntarily converted) held primarily for sale to customers in the ordinary course of business), such income will be subject to a 100% tax. Fifth, if RAIT should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), and nonetheless has maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on an amount equal to (i) the gross -69- income attributable to the greater of the amount by which RAIT fails the 75% or 95% gross income test, multiplied by (ii) a fraction intended to reflect RAIT's profitability. Sixth, if RAIT should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, RAIT would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Seventh, if RAIT acquires any asset from a C corporation (i.e., a corporation generally subject to full corporate-level tax) in a merger or other transaction in which the basis of the asset in RAIT's hands is determined by reference to the basis of the asset (or any other asset) in the hands of the C corporation and RAIT recognizes gain on the disposition of such asset during the 10-year period beginning on the date on which it acquired such asset, then to the extent of such asset's "built-in-gain" (i.e., the excess of the fair market value of such asset at the time of acquisition by RAIT over the adjusted basis in such asset at such time), RAIT will be subject to tax at the highest regular corporate rate applicable (as provided in Treasury Regulations that have not yet been promulgated). The results described above with respect to the tax on "built-in-gain" assume that RAIT will elect pursuant to IRS Notice 88-19 to be subject to the rules described in the preceding sentence if it were to make any such acquisition. Requirements for Qualification The Code defines a REIT as a corporation, trust or association (i) that is managed by one or more trustees or directors, (ii) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (iii) that would be taxable as a domestic corporation but for Sections 856 through 860 of the Code; (iv) that is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons; (vi) not more than 50% in value of the outstanding shares of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of each taxable year other than its first taxable year (the "5/50 Rule"); (vii) that makes an election to be a REIT (or has made such election for a previous taxable year) and satisfies all relevant filing and other administrative requirements established by the Service that must be met in order to elect and maintain REIT status; (viii) that uses a calendar year for federal income tax purposes and complies with the recordkeeping requirements of the Code and Treasury Regulations promulgated thereunder; and (ix) that meets certain other tests, described below, regarding the nature of its income and assets. The Code provides that conditions (i) to (iv), inclusive, must be met during the entire taxable year and that condition (v) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Conditions (v) and (vi) will not apply until after the first taxable year for which an election is made by RAIT to be taxed as a REIT. For purposes of determining share ownership under the 5/50 Rule, a supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes generally is considered an individual. A trust that is a qualified trust under Code section 401(a), however, generally is not considered an individual and beneficiaries of such trust are treated as holding shares of a REIT in proportion to their actuarial interests in such trust for purposes of the 5/50 Rule. In addition, -70- a REIT that (i) complies with certain Treasury regulations discussed in "Federal Income Tax Considerations - Requirements for Qualification - Recordkeeping Requirements" and (ii) does not know, or have reason to know, that it is closely held so as to violate the 5/50 Rule, is treated as having satisfied the 5/50 Rule. Prior to the consummation of the Offering, RAIT will not satisfy conditions (v) and (vi) in the preceding paragraph. RAIT anticipates issuing sufficient Common Shares with sufficient diversity of ownership pursuant to the Offering to allow it to satisfy the share ownership requirements described in clauses (v) and (vi) above. In addition, RAIT's Declaration of Trust provides for restrictions regarding the transfer of the Common Shares that are intended to assist RAIT in continuing to satisfy the share ownership requirements described in clauses (v) and (vi) above. See "Description of Shares of Beneficial Interest - Restrictions on Transfer." These restrictions, however, may not ensure that RAIT will, in all cases, be able to satisfy the share ownership requirements described above. Failure to do so will result in termination of RAIT's status as a REIT. See "Federal Income Tax Considerations - Failure to Qualify." RAIT currently has two corporate subsidiaries, the General Partner and the Initial Limited Partner, and may have additional corporate subsidiaries in the future. Code section 856(i) provides that a corporation that is a "qualified REIT subsidiary" shall not be treated as a separate corporation, and all assets, liabilities and items of income, deduction and credit of a "qualified REIT subsidiary" shall be treated as assets, liabilities and items of income, deduction and credit of the REIT. A "qualified REIT subsidiary" is a corporation, all of the capital stock of which is owned by the REIT. Thus, in applying the requirements described herein, any "qualified REIT subsidiaries" of RAIT will be ignored, and all assets, liabilities and items of income, deduction and credit of such "qualified REIT subsidiaries" will be treated as assets, liabilities and items of income, deduction and credit of RAIT. The General Partner and the Initial Limited Partner are "qualified REIT subsidiaries." Accordingly, the General Partner and the Initial Limited Partner will not be subject to federal income taxation, although they may be subject to state and local taxation. Pursuant to Treasury Regulations relating to entity classification (the "Check-the-Box Regulations"), an unincorporated entity that has a single owner is disregarded as an entity separate from its owner for federal income tax purposes. Because RAIT will be deemed to own 100% of the partnership interests in the Operating Partnership for federal income tax purposes, the Operating Partnership will be disregarded as an entity separate from RAIT under the Check-the- Box Regulations during the period when its only partners are the General Partner and the Initial Limited Partner. In the case of a REIT that is a partner in a partnership, Treasury Regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership and will be deemed to be entitled to the gross income of the partnership attributable to such share. In addition, the assets and gross income of the partnership will retain the same character in the hands of the REIT for purposes of section 856 of the Code, including satisfying the gross income and asset tests described below. When the Operating Partnership admits a partner other than -71- RAIT or a qualified REIT subsidiary of RAIT, a proportionate share of the assets and gross income of the Operating Partnership will be treated as assets and gross income of RAIT for purposes of applying the requirements described herein. Income Tests In order for RAIT to qualify and to maintain its qualification as a REIT, two requirements relating to RAIT's gross income must be satisfied annually. First, at least 75% of RAIT's gross income (excluding gross income from prohibited transactions) for each taxable year must consist of defined types of income derived directly or indirectly from investments relating to real property or mortgages on real property (including "rents from real property" and interest on obligations secured by mortgages on real property or on interests in real property) or temporary investment income. Second, at least 95% of RAIT's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property, mortgages on real property, or temporary investments, and from dividends, other types of interest, hedges that reduce the interest rate risk of RAIT's liabilities, and gain from the sale or disposition of stock or securities, or from any combination of the foregoing. The specific application of these tests to the Company is discussed below. There may be circumstances in which the principal amount of mortgages on a property exceed its fair market value. In such a situation, the Service may contend that the lender is actually the owner of the property for tax purposes. Since RAIT may acquire loans the face amount of which exceeds the fair market value of the underlying property, such recharacterization may occur although the existence of a forbearance or other workout arrangement would make it less likely. If RAIT is found to be the owner of real property rather than a mortgagee, its income would consist of the rent from the property rather than interest on the debt. RAIT would generally be entitled to deductions for operating expenses of the property as well as for depreciation. Consequently, as long as the rent qualifies as "rents from real property," it is unlikely that such recharacterization would adversely affect RAIT's qualification under the asset tests, income tests or distribution requirements, except as discussed below. The term "interest," as defined for purposes of the 75% and 95% gross income tests, generally does not include any amount received or accrued (directly or indirectly) if the determination of such amount depends in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being based on a fixed percentage or percentages of receipts or sales. In addition, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being based on the income or profits of a debtor if the debtor derives substantially all of its gross income from the related property through the leasing of substantially all of its interests in the property, to the extent the amounts received by the debtor would be characterized as rents from real property if received by a REIT. Furthermore, to the extent that interest from a loan that is based on the cash proceeds from the sale of the property securing the loan constitutes a "shared appreciation provision" (as defined in the Code), income attributable to such participation feature will be treated as gain from the sale of the secured property, which -72- generally is qualifying income for purposes of the 75% and 95% gross income tests. In addition, if RAIT receives interest income with respect to a mortgage loan that is secured by both real property and other property and the highest principal amount of the loan outstanding during the taxable year exceeds the fair market value of the real property on the date RAIT purchased the mortgage loan, the interest income will be apportioned between the real property and the other property, which apportionment may cause RAIT to recognize income that is not qualifying income for purposes of the 75% gross income test. Counsel is of the opinion that the interest, OID and market discount income that RAIT derives from its investments in loans generally will be qualifying interest income for purposes of both the 75% and 95% gross income tests. In some cases, however, the amount of a loan may exceed the value of the real property securing the loan, which will result in a portion of the income from the loan being classified as qualifying income for purposes of the 95% gross income test, but not for purposes of the 75% gross income test. It is also possible that, in some instances, the interest income from a loan may be based in part on the borrower's profits or net income, which generally will disqualify the income from the loan for purposes of both the 75% and 95% gross income tests. In addition, it is contemplated that RAIT may purchase and originate loans that are only indirectly secured by real estate. In situations where a senior loan prevents a junior lender from recording a mortgage against the property, a junior note held by RAIT may be collateralized by an unrecorded mortgage, a deed-in-lieu of foreclosure, a pledge of equity interests of the borrower, a purchase option or some other arrangements that RAIT believes will enable it to obtain an interest in the underlying property upon default. It is possible that the Service would conclude that interest on such a note does not constitute interest "secured by mortgages on real property or on interests in real property," so that such interest would not qualify for purposes of the 75% gross income test. RAIT will take steps to ensure that it will always have sufficient qualifying income to meet the 75% and 95% gross income tests. In the case of wraparound loans, there is authority for the position that only the interest attributable to money advanced by the wraparound lender is income to a REIT making such a loan. That is, instead of including the estimated amount of interest received on the wraparound loan as income, with a deduction for interest paid to the underlying lenders, gross income would only include the amount of interest on the money loaned by the wraparound lender; the amounts paid to the underlying lenders would be treated as having been paid directly by the borrower. RAIT may originate or acquire mortgage loans that have shared appreciation provisions. RAIT may be required to recognize income from a shared appreciation provision over the term of the related loan using the constant yield method pursuant to certain Treasury Regulations. This method generally will result in RAIT recognizing at least some taxable income in advance of the cash flow. RAIT may receive income not described above that is not qualifying income for purposes of the 75% and 95% gross income tests. For example, certain fees for services which may be rendered by RAIT will not be qualifying income for purposes of the gross income tests. It is not anticipated that RAIT will receive a significant amount of such fees. RAIT will monitor the -73- amount of nonqualifying income produced by its assets and has represented that it will manage its portfolio in order to comply at all times with the gross income tests. The rent received by RAIT from the tenants of its real properties will qualify as "rents from real property" in satisfying the gross income tests for a REIT described above only if several conditions are met. First, the amount of rent must not be based, in whole or in part, on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales. Second, the Code provides that rents received from a tenant will not qualify as "rents from real property" in satisfying the gross income tests if RAIT, or a direct or indirect owner of 10% or more of RAIT, owns 10% or more of such tenant, taking into account both direct and constructive ownership (under constructive ownership rules found in Section 856(d)(5) of the Code, as modified by the 1997 tax law) (a "Related Party Tenant"). Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as "rents from real property." Finally, for rents received to qualify as "rents from real property," RAIT generally must not operate or manage the real property or furnish or render services to the tenants of such real property other than through an "independent contractor" who is adequately compensated and from whom RAIT derives no revenue. The "independent contractor" requirement, however, does not apply to the extent the services provided by RAIT are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant." Moreover, RAIT may render a de minimis amount (no more than 1% of the gross income from a property) of otherwise impermissible services to tenants or in connection with the management of such property, while still treating amounts received with respect to such property (other than amounts attributable to such services) as rent. For these purposes, the services may not be valued at less than 150% of RAIT's direct costs for the services. RAIT has represented that it will not charge rent for any portion of any Property Interest that is based, in whole or in part, on the income or profits of any person (except by reason of being based on a fixed percentage or percentages of receipts of sales, as described above) to the extent that the receipt of such rent would jeopardize RAIT's status as a REIT. In addition, RAIT has represented that, to the extent that it receives rent from a Related Party Tenant, such rent will not cause RAIT to fail to satisfy either the 75% or 95% gross income test. RAIT also has represented that it will not allow the rent attributable to personal property leased in connection with any lease of real property to exceed 15% of the total rent received under the lease, if the receipt of such rent would cause RAIT to fail to satisfy either the 75% or 95% gross income test. Finally, RAIT has represented that it will not operate or manage its Property Interests or furnish or render noncustomary services to the tenants of its Property Interests other than through an "independent contractor," to the extent that such operation or the provision of such services would jeopardize RAIT's status as a REIT. REITs generally are subject to tax at the maximum corporate rate on any income from foreclosure property (other than income that would be qualifying income for purposes of the 75% -74- gross income test), less expenses directly connected with the production of such income. "Foreclosure property" is defined as any real property (including interests in real property) and any personal property incident to such real property (i) that is acquired by a REIT as the result of such REIT having bid in such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of such property or on an indebtedness owed to the REIT that such property secured, (ii) for which the related loan was acquired by the REIT at a time when default was not imminent or anticipated, and (iii) for which the REIT makes a proper election to treat the property as foreclosure property. A property generally may be treated as foreclosure property until the last day of the third full taxable year following the election, although the IRS may grant one extension of the period for treating the property as foreclosure property if RAIT establishes that an extension is necessary for the orderly liquidation of RAIT's interest in the property. Such extension may not extend the treatment as foreclosure property beyond six years from the date the property is acquired by RAIT. RAIT does not anticipate that it will receive any income from foreclosure property that is not qualifying income for purposes of the 75% gross income test, but, if RAIT does receive any such income, RAIT will make an election to treat the related property as foreclosure property. If property is not eligible for treatment as foreclosure property ("Ineligible Property") because the related loan was acquired by the REIT at a time when default was imminent or anticipated, income received with respect to such Ineligible Property may not be qualifying income for purposes of the 75% or 95% gross income test. RAIT anticipates that any income it receives with respect to Ineligible Property will be qualifying income for purposes of the 75% and 95% gross income tests. The net income from a prohibited transaction is subject to a 100% tax. The term "prohibited transaction" generally includes a sale or other disposition of property (other than foreclosure property) that is held primarily for sale to customers in the ordinary course of a trade or business. The Company believes that no asset owned by RAIT will be held for sale to customers and that a sale of any such asset will not be in the ordinary course of RAIT's business. Whether an asset is held "primarily for sale to customers in the ordinary course of a trade or business" depends, however, on the facts and circumstances in effect from time to time, including those related to a particular asset. Nevertheless, RAIT will attempt to comply with the terms of safe-harbor provisions in the Code prescribing when asset sales will not be characterized as prohibited transactions. Complete assurance cannot be given, however, that RAIT can comply with the safe-harbor provisions of the Code or avoid owning property that may be characterized as property held "primarily for sale to customers in the ordinary course of a trade or business." If RAIT fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it nevertheless may qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. Those relief provisions generally will be available if RAIT's failure to meet such tests is due to reasonable cause and not due to willful neglect, RAIT attaches a schedule of the sources of its income to its federal income tax return, and any incorrect information on the schedule was not due to fraud with intent to evade tax. It is not possible, -75- however, to state whether in all circumstances RAIT would be entitled to the benefit of those relief provisions. As discussed above in "Federal Income Tax Considerations - Taxation of RAIT," even if those relief provisions apply, a 100% tax would be imposed on an amount equal to (i) the gross income attributable to the greater of the amount by which RAIT fails the 75% or 95% gross income test, multiplied by (ii) a fraction intended to reflect RAIT's profitability. Asset Tests At the close of each quarter of each taxable year, RAIT must satisfy two tests relating to the nature of its assets. First, at least 75% of the value of RAIT's total assets must be represented by cash or cash items (including certain receivables), government securities, "real estate assets," or, in cases where RAIT raises new capital through offerings of shares or long-term (at least five-year) debt, temporary investments in stock or debt instruments during the one-year period following RAIT's receipt of such capital. The term "real estate assets" includes interests in real property, interests in mortgages on real property to the extent the principal balance of a mortgage does not exceed the fair market value of the associated real property, and shares of other REITs. For purposes of the 75% asset test, the term "interest in real property" includes an interest in mortgage loans or land and improvements thereon, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures), a leasehold of real property, and an option to acquire real property (or a leasehold of real property). To the extent that the fair market value of the real property securing a mortgage loan equals or exceeds the outstanding principal balance of the loan, the loan will qualify as a real estate asset. However, if the outstanding principal balance of a mortgage loan exceeds the fair market value of the real property securing the loan, such loan may not be a qualifying real estate asset to the extent that the loan amount exceeds the value of the associated real property, although the matter is not free from doubt. An "interest" in real property also generally includes an interest in mortgage loans secured by controlling equity interests in entities treated as partnerships for federal income tax purposes that own real property, to the extent that the principal balance of the mortgage does not exceed the fair market value of the real property that is allocable to the equity interest. Second, of the investments not included in the 75% asset class, the value of any one issuer's securities owned by RAIT may not exceed 5% of the value of RAIT's total assets, and RAIT may not own more than 10% of any one issuer's outstanding voting securities (except for its interests in the General and Initial Limited Partners, the Operating Partnership, and any other qualified REIT subsidiary). RAIT expects that any loans, real properties and temporary investments that it acquires generally will be qualifying assets for purposes of the 75% asset test, except to the extent that the principal balance of any loan exceeds the value of the associated real property, or to the extent the asset is a loan that is not deemed to be an interest in real property. In the case of wraparound loans, it is uncertain whether the entire wraparound mortgage amount or only the amount of RAIT's investment that is in excess of the principal amount of the underlying loans will be considered an asset of RAIT. RAIT will monitor the status of the assets that it acquires for purposes of the various asset tests and has represented that it will manage its portfolio in order to comply at all times with such tests. If RAIT should fail to satisfy the asset tests at the -76- end of a calendar quarter, such a failure would not cause it to lose its REIT status if (i) it satisfied the asset tests at the close of the preceding calendar quarter and (ii) the discrepancy between the value of RAIT's assets and the asset test requirements arose from changes in the market values of its assets and was not wholly or partly caused by the acquisition of one or more non-qualifying assets. If the condition described in clause (ii) of the preceding sentence were not satisfied, RAIT still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose. RAIT intends to maintain accurate records of the value of its assets to ensure compliance with the assets tests and to take such other actions within 30 days after the close of any quarter as may be required to cure any noncompliance. Distribution Requirements In order to qualify as a REIT, RAIT is required to distribute with respect to each taxable year dividends (other than capital gain dividends) to its shareholders in an aggregate amount at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed without regard to the dividends paid deduction and its net capital gain) and (B) 95% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of noncash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before RAIT timely files its federal income tax return for such year and if paid on or before the first regular dividend payment date after such declaration. To the extent that RAIT does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax thereon at regular ordinary and capital gains corporate tax rates (see "- Taxation of Taxable U.S. Shareholders Generally" for a discussion of an election RAIT may make with respect to deemed distributions of long-term capital gain). Furthermore, if RAIT should fail to distribute during each calendar year (or, in the case of a distribution with declaration and record dates falling in the last three months of the calendar year, by the end of the January immediately following such year) at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, RAIT would be subject to a 4% nondeductible excise tax on the excess of such required distribution over the amounts actually distributed. If RAIT makes the election to retain and pay income tax on its net long-term capital gains (see "Federal Income Tax Considerations - Taxation of Taxable U.S. Shareholders Generally") such amounts are treated as distributed for purposes of the 4% excise tax. RAIT intends to make timely distributions sufficient to satisfy the annual distribution requirements. It is possible that, from time to time, RAIT may experience timing differences between (i) the actual receipt of income and actual payment of deductible expenses and (ii) the inclusion of that income and deduction of such expenses in arriving at its REIT taxable income. For example, RAIT will recognize taxable income in excess of its cash receipts when OID accrues with respect to its loans. OID generally will be accrued using a constant yield methodology that takes into account projected prepayments but that does not allow credit losses to be reflected until they are actually incurred. Thus, pursuant to certain Treasury Regulations, RAIT may be required -77- to recognize the amount of any payment projected to be made pursuant to a participation provision in a loan over the term of the loan using the constant yield method. In addition, RAIT may recognize as income taxable market discount income upon the receipt of proceeds from the disposition of, or principal payments on, loans that are "market discount bonds" (i.e., obligations with a stated redemption price at maturity that is greater than RAIT's tax basis in such obligations), although such proceeds often will be used to make non-deductible principal payments on related borrowings. RAIT may also recognize income in excess of cash receipts if it makes wraparound loans where the payments of nondeductible principal it must make on the underlying loans exceed the amount of nontaxable principal it is receiving from the borrower. There is authority, however, for the position that only the interest on the amount advanced by the wraparound lender is included in the income of a REIT making such a loan; this would reduce or limit the possibility of mismatching. It also is possible that, from time to time, RAIT may recognize net capital gain attributable to the sale of depreciated property that exceeds its cash receipts from the sale. RAIT also may recognize taxable income without receiving a corresponding cash distribution if it forecloses on or makes a "significant modification" (as defined in Regulations Section 1.1001-3(e)) to a loan, to the extent that the fair market value of the underlying property or the principal amount of the modified loan, as applicable, exceeds RAIT's basis in the original loan. Finally, capital losses recognized by RAIT may not be deducted from its REIT taxable income. Therefore, RAIT may have less cash than is necessary to meet its annual 95% distribution requirement or to avoid corporate income tax or the excise tax imposed on certain undistributed income. In such a situation, RAIT may find it necessary to arrange for short-term (or possibly long-term) borrowings or to raise funds through the issuance of Preferred Shares or additional Common Shares. Under certain circumstances, RAIT may be able to rectify a failure to meet the distribution requirements for a year by paying "deficiency dividends" to its shareholders in a later year, which may be included in RAIT's deduction for dividends paid for the earlier year. Although RAIT may be able to avoid being taxed on amounts distributed as deficiency dividends, it will be required to pay to the Service interest based upon the amount of any deduction taken for deficiency dividends. Recordkeeping Requirements Pursuant to applicable Treasury Regulations, RAIT must maintain certain records and request on an annual basis certain information from its shareholders designed to disclose the actual ownership of its outstanding shares. Failure to request such information from shareholders in a taxable year could subject RAIT to a penalty of $25,000 ($50,000 for intentional violations). Failure to Qualify If RAIT fails to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, RAIT will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to RAIT's shareholders in any year in which RAIT fails to qualify will not be deductible by RAIT nor will -78- they be required to be made. In such event, to the extent of RAIT's current and accumulated earnings and profits, all distributions to shareholders will be taxable as ordinary income and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, RAIT also will be disqualified from taxation as a REIT for the four taxable years following the year during which RAIT ceased to qualify as a REIT. It is not possible to state whether in all circumstances RAIT would be entitled to such statutory relief. Taxation of Taxable U.S. Shareholders Generally As long as RAIT qualifies as a REIT, distributions made to RAIT's taxable U.S. shareholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by such U.S. shareholders as ordinary income and will not be eligible for the dividends received deduction generally available to corporations. As used herein, the term "U.S. shareholder" means a holder of Common Shares that for United States federal income tax purposes is (i) a citizen or resident of the United States, (ii) a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) an estate whose income from sources without the United States is includible in gross income for United States federal income tax purposes regardless of its connection with the conduct of a trade or business within the United States, or (iv) any trust with respect to which (A) a United States court is able to exercise primary supervision over the administration of such trust and (B) one or more United States fiduciaries have the authority to control all substantial decisions of the trust. Distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed RAIT's actual net capital gain for the taxable year) without regard to the period for which the shareholder has held his Common Shares. However, corporate shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. RAIT may elect to retain and pay income tax on net long-term capital gains it receives during the taxable year. If RAIT makes this election, (i) its shareholders would include in their income as long-term capital gains their proportionate share of the undistributed long-term capital gains as designated by RAIT, (ii) each shareholder would be deemed to have paid the shareholder's share of the tax, which would be credited or refunded to the shareholder, and (iii) the basis of each shareholder's shares would be increased by the amount of the undistributed long-term capital gains (less the amount of capital gains tax paid by RAIT) included in the shareholder's long-term capital gains. Distributions in excess of current and accumulated earnings and profits will not be taxable to a shareholder to the extent that they do not exceed the adjusted basis of the shareholder's Common Shares, but rather will reduce the adjusted basis of such shares. To the extent that these distributions exceed the adjusted basis of a shareholder's Common Shares, such distributions will be included in income as long-term capital gain (or short-term capital gain if the Common Shares had been held for one year or less), assuming the Common Shares are a capital asset in the hands of the shareholder. In addition, any distribution declared by RAIT in October, November, or December of any year and payable to a shareholder of record on a specified date in any such month shall be treated as both paid by RAIT and received by the shareholder on December 31 of such year, provided that the distribution is actually paid by RAIT during January of the following calendar year. -79- Shareholders may not include in their individual income tax returns any net operating losses or capital losses of RAIT. Instead, any such losses are carried over by RAIT for potential offset against its future income (subject to certain limitations). Taxable distributions from RAIT and gain from the disposition of the Common Shares will not be treated as passive activity income and, therefore, shareholders generally will not be able to apply any "passive activity losses" (such as losses from certain types of limited partnerships in which a shareholder is a limited partner) against such income. In addition, taxable distributions from RAIT generally will be treated as investment income for purposes of the investment interest limitations. Capital gains from the disposition of Common Shares (or distributions treated as such), however, will be treated as investment income only if the shareholder so elects, in which case such capital gains will be taxed at ordinary income rates. RAIT will notify shareholders after the close of RAIT's taxable year as to the portions of the distributions attributable to that year that constitute ordinary income or capital gain dividends. RAIT's investments may cause it under certain circumstances to recognize taxable income in excess of its economic income ("phantom income") and to experience an offsetting excess of economic income over its taxable income in later years. As a result, shareholders may from time to time be required to pay federal income tax on distributions that economically represent a return of capital, rather than a dividend. Such distributions would be offset in later years by distributions representing economic income that would be treated as returns of capital for federal income tax purposes. Accordingly, if RAIT receives phantom income, its shareholders may be required to pay federal income tax with respect to such income on an accelerated basis, i.e., before such income is realized by the shareholders in an economic sense. Taking into account the time value of money, such an acceleration of federal income tax liabilities would cause shareholders to receive an after-tax rate of return on an investment in RAIT that would be less than the after-tax rate of return on an investment with an identical before-tax rate of return that did not generate phantom income. For example, if an investor subject to an effective income tax rate of 30% purchased a bond (other than a tax-exempt bond) with an annual interest rate of 10% for its face value, his before-tax return on his investment would be 10%, and his after-tax return would be 7%. However, if the same investor purchased shares of RAIT at a time when the before-tax rate of return was 10%, his after-tax rate of return on his shares might be somewhat less than 7% as a result of RAIT's phantom income. In general, as the ratio of RAIT's phantom income to its total income increases, the after-tax rate of return received by a taxable shareholder of RAIT will decrease. RAIT will consider the potential effects of phantom income on its taxable shareholders in managing its investments. Taxation of Shareholders on the Disposition of the Common Shares In general, any gain or loss realized upon a taxable disposition of the Common Shares by a shareholder who is not a dealer in securities will be treated as long-term capital gain or loss if the Common Shares have been held for more than 12 months (subject to a reduction in tax rate if the Common Shares have been held for more than 18 months; see "Federal Income Tax Considerations - Capital Gains and Losses") and otherwise as short-term capital gain or loss. However, any loss upon a sale or exchange of Common Shares by a shareholder who has held -80- such shares for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss to the extent of distributions from RAIT required to be treated by such shareholder as long-term capital gain. All or a portion of any loss realized upon a taxable disposition of the Common Shares may be disallowed if other Common Shares are purchased within 30 days before or after the disposition. Capital Gains and Losses A capital asset generally must be held for more than one year in order for gain or loss derived from its sale or exchange to be treated as long-term capital gain or loss. The highest marginal individual income tax rate is 39.6%. The maximum tax rate on long-term capital gains applicable to individuals is 28% for assets held for more than one year but not more than 18 months, and 20% for assets held more than 18 months. Thus, the tax rate differential between capital gain and ordinary income for individuals may be significant. In addition, the characterization of income as capital gain or ordinary income may affect the deductibility of capital losses. Capital losses not offset by capital gains may be deducted against an individual's ordinary income only up to a maximum annual amount of $3,000. Unused capital losses may be carried forward indefinitely by individuals. All net capital gain of a corporate taxpayer is subject to tax at ordinary corporate rates. A corporate taxpayer can deduct capital losses only to the extent of capital gains, with unused losses being carried back three years and forward five years. Information Reporting Requirements and Backup Withholding RAIT will report to its U.S. shareholders and to the Service the amount of distributions paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a shareholder may be subject to backup withholding at the rate of 31% with respect to distributions paid unless such holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup withholding rules. A shareholder who does not provide RAIT with his correct taxpayer identification number also may be subject to penalties imposed by the Service. Any amount paid as backup withholding will be creditable against the shareholder's income tax liability. In addition, RAIT may be required to withhold a portion of capital gain distributions to any shareholders who fail to certify their nonforeign status to RAIT. The Treasury Department issued proposed regulations in April 1996 regarding the backup withholding rules as applied to Non-U.S. Shareholders. The proposed regulations would alter the current system of backup withholding compliance and are proposed to be effective for distributions made after December 31, 1997. See "-Taxation of Non-U.S. Shareholders." -81- Taxation of Tax-Exempt Shareholders Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts ("Exempt Organizations"), generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income ("UBTI"). While many investments in real estate generate UBTI, in a published ruling the Service stated that dividend distributions from a REIT to an exempt employee pension trust do not constitute UBTI, provided that the shares of the REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on that ruling, amounts distributed by RAIT to Exempt Organizations generally should not constitute UBTI. However, if an Exempt Organization finances its acquisition of the Common Shares with debt, a portion of its income from RAIT will constitute UBTI pursuant to the "debt-financed property" rules. Furthermore, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans that are exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of Code section 501(c) are subject to different UBTI rules, which generally will require them to characterize distributions from RAIT as UBTI. In addition, in certain circumstances, a pension trust that owns more than 10% of RAIT's shares is required to treat a percentage of the dividends from RAIT as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross income derived by RAIT from an unrelated trade or business (determined as if RAIT were a pension trust) divided by the gross income of RAIT for the year in which the dividends are paid. The UBTI rule applies to a pension trust holding more than 10% of RAIT's shares only if (i) the UBTI Percentage is at least 5%, (ii) RAIT qualifies as a REIT by reason of the modification of the 5/50 Rule that allows the beneficiaries of the pension trust to be treated as holding shares of RAIT in proportion to their actuarial interests in the pension trust, and (iii) RAIT is a "pension-held REIT" (that is, either (A) one pension trust owns more than 25% of the value of RAIT's shares or (B) a group of pension trusts individually holding more than 10% of the value of RAIT's shares collectively owns more than 50% of the value of RAIT's shares). Because the Ownership Limitation prohibits any shareholder from owning (i) more than 8.5% of the number of outstanding Common Shares (other than RAI, which may own no more than 15% of the number of outstanding Common Shares and will, at the conclusion of the Offering, own 9.8% of the outstanding Common Shares, assuming the Underwriters do not exercise their over-allotment option) or (ii) more than 9.8% of the number of outstanding Preferred Shares of any series, RAIT should not be a pension-held REIT and, accordingly, no pension trust should be required to treat a percentage of the dividends from RAIT as UBTI. Taxation of Non-U.S. Shareholders The rules governing United States federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships, and other foreign shareholders (collectively, "Non-U.S. Shareholders") are complex. The following discussion provides only a summary of such rules. PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME -82- TAX LAWS WITH REGARD TO AN INVESTMENT IN THE COMMON SHARES, INCLUDING ANY REPORTING REQUIREMENTS. Distributions to Non-U.S. Shareholders that are not attributable to gain from sales or exchanges by RAIT of United States real property interests and are not designated by RAIT as capital gains dividends will be treated as dividends of ordinary income to the extent that they are made out of current or accumulated earnings and profits of RAIT. Such distributions ordinarily will be subject to a withholding tax equal to 30% of the gross amount of the distribution unless an applicable tax treaty reduces or eliminates that tax. However, if income from the investment in the Common Shares is treated as effectively connected with the Non-U.S. Shareholder's conduct of a United States trade or business, the Non-U.S. Shareholder generally will be subject to federal income tax at graduated rates, in the same manner as U.S. Shareholders are taxed with respect to such distributions (and also may be subject to the 30% branch profits tax in the case of a Non-U.S. Shareholder that is a non-U.S. corporation). RAIT expects to withhold United States income tax at the rate of 30% on the gross amount of any such distributions made to a Non-U.S. Shareholder unless (i) a lower treaty rate applies and any required form evidencing eligibility for that reduced rate is filed with RAIT or (ii) the Non-U.S. Shareholder files an IRS Form 4224 with RAIT claiming that the distribution is effectively connected income. The Treasury Department issued proposed regulations in April 1996 that would modify the manner in which RAIT complies with the withholding requirements. Distributions in excess of current and accumulated earnings and profits of RAIT will not be taxable to a shareholder to the extent that such distributions do not exceed the adjusted basis of the shareholder's Common Shares, but rather will reduce the adjusted basis of such shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a Non-U.S. Shareholder's Common Shares, such distributions will give rise to tax liability if the Non-U.S. Shareholder would otherwise be subject to tax on any gain from the sale or disposition of his Common Shares as described above. Because it generally cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current and accumulated earnings and profits, the entire amount of any distribution normally will be subject to withholding at the same rate as a dividend. However, amounts so withheld are refundable to the extent it is determined subsequently that such distribution was, in fact, in excess of current and accumulated earnings and profits of RAIT. In August 1996, the U.S. Congress passed the Small Business Job Protection Act of 1996, which requires RAIT to withhold 10% of any distribution in excess of RAIT's current and accumulated earnings and profits. Consequently, although RAIT intends to withhold at a rate of 30% on the entire amount of any distribution, to the extent that RAIT does not do so, any portion of a distribution not subject to withholding at a rate of 30% will be subject to withholding at a rate of 10%. For any year in which RAIT qualifies as a REIT, distributions that are attributable to gain from sales or exchanges by RAIT of United States real property interests will be taxed to a Non- U.S. Shareholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of United States real property interests are taxed to a Non-U.S. Shareholder as if such gain were effectively -83- connected with a United States business. Non-U.S. Shareholders thus would be taxed at the normal capital gain rates applicable to U.S. Shareholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Distributions subject to FIRPTA also may be subject to the 30% branch profits tax in the hands of a non-U.S. corporate shareholder not entitled to treaty relief or exemption. RAIT is required to withhold 35% of any distribution that is designated by RAIT as a capital gains dividend. The amount withheld is creditable against the Non-U.S. Shareholder's FIRPTA tax liability. Gain recognized by a Non-U.S. Shareholder upon a sale of his Common Shares generally will not be taxed under FIRPTA if RAIT is a "domestically controlled REIT," defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the shares was held directly or indirectly by Non-U.S. persons. However, because the Common Shares will be publicly traded, no assurance can be given that RAIT will be a "domestically controlled REIT." In addition, a Non-U.S. Shareholder that owns, actually or constructively, not more than 5% of RAIT's shares throughout a specified "look-back" period will not recognize gain on the sale of his shares taxable under FIRPTA, if the shares are traded on an established securities market. Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S. Shareholder if (i) investment in the Common Shares is effectively connected with the Non-U.S. Shareholder's U.S. trade or business, in which case the Non-U.S. Shareholder will be subject to the same treatment as United States shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and certain other conditions apply, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains. If the gain on the sale of the Common Shares were to be subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment as U.S. Shareholders with respect to such gain (subject to applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals, and the possible application of the 30% branch profits tax in the case of non-U.S. corporations). State and Local Taxes RAIT, the General Partner, the Initial Limited Partner, the Operating Partnership and RAIT's shareholders may be subject to state and local tax in various states and localities, including those states and localities in which they transact business, own property, or reside. The state and local tax treatment of RAIT and its shareholders in such jurisdictions may differ from the federal income tax treatment described above. Consequently, prospective shareholders should consult their own tax advisors regarding the effect of state and local tax laws upon an investment in the Common Shares. Sale of RAIT's Property Any gain realized by RAIT on the sale of any property held as inventory or other property held primarily for sale to customers in the ordinary course of its trade or business will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. Such prohibited -84- transaction income also may have an adverse effect upon RAIT's ability to satisfy the income tests for REIT status. See "Federal Income Tax Considerations--Requirements for Qualification: Income Tests" above. RAIT, however, does not presently intend to acquire or hold a material amount of property that represents inventory or other property held primarily for sale to customers in the ordinary course of its trade or business. BENEFIT PLAN CONSIDERATIONS The following summary of material considerations arising under the Employee Retirement Income Security Act of 1974, as amended, and the prohibited transaction provisions of section 4975 of the Code, does not purport to deal with all aspects of ERISA or section 4975 of the Code that may be relevant to particular shareholders (including plans subject to Title I of ERISA, other retirement plans and individual retirement accounts ("IRAs") subject to the prohibited transaction provisions of section 4975 of the Code, and governmental plans or church plans that are exempt from ERISA and section 4975 of the Code but that may be subject to state law requirements) in light of their particular circumstances. The discussion is based on current provisions of ERISA and the Code, existing and currently proposed regulations under ERISA and the Code, the legislative history of ERISA and the Code, existing administrative rulings of the Department of Labor ("DOL") and reported judicial decisions. No assurance can be given that legislative, judicial or administrative changes will not affect the accuracy of any statements herein with respect to transactions entered into or contemplated prior to the effective date of such changes. A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON SHARES ON BEHALF OF A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED RETIREMENT PLAN, OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF THE COMMON SHARES BY SUCH PLAN OR IRA. Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs Each fiduciary of a pension, profit-sharing or other employee benefit plan (a "Plan") subject to Title I of ERISA should consider carefully whether an investment in the Common Shares is consistent with such fiduciary's responsibilities under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of ERISA require a Plan's investment to be (i) prudent and in the best interests of the Plan, its participants and its beneficiaries, (ii) diversified in order to minimize the risk of large losses, unless it is clearly prudent not to do so, and (iii) authorized under the terms of the Plan's governing documents (provided the documents are consistent with ERISA). In determining whether an investment in the Common Shares is prudent for purposes of ERISA, the appropriate fiduciary of a Plan should consider all of the facts and circumstances, including whether the investment is reasonably designed, as a part of the Plan's portfolio for -85- which the fiduciary has investment responsibility, to meet the objectives of the Plan, taking into consideration the risk of loss and opportunity for gain (or other return) from the investment, the diversification of portfolio investments and the cash flow requirements of the Plan. A fiduciary of an IRA or of an employee benefit plan that is not subject to Title I of ERISA because it is a governmental or church plan or because it does not cover common law employees (a "Non-ERISA Plan") should consider that such an IRA or Non-ERISA Plan may only make investments that are authorized by the appropriate governing documents and under applicable law. Fiduciaries of Plans and persons making investment decisions for an IRA or other Non- ERISA Plan also should consider the application of the prohibited transaction provisions of ERISA and the Code in making their investment decision. A "disqualified person" (within the meaning of section 4975 of the Code) with respect to a Plan, or an IRA subject to Code section 4975, is subject to (i) an initial 15% excise tax on the amount involved in any prohibited transaction involving the assets of the Plan or IRA and (ii) an excise tax equal to 100% of the amount involved if any prohibited transaction is not corrected. In general, if the disqualified person who engages in the transaction is the individual on behalf of whom an IRA is established (or his beneficiary), the IRA will lose its tax-exempt status and its assets will be deemed to have been distributed to such individual in a taxable distribution (and no excise tax will be imposed) on account of the prohibited transaction. In addition, a fiduciary who permits a Plan to engage in a transaction that the fiduciary knows or should know is a prohibited transaction may, among other things, be liable to the Plan for any loss the Plan incurs as a result of the transaction or for any profits earned by the fiduciary in the transaction. Status of the Company under ERISA's Plan Asset Rules Regulations of the DOL defining "plan assets" (the "Plan Asset Regulations") generally provide that when a Plan, Non-ERISA Plan or IRA subject to section 406 of ERISA or section 4975 of the Code acquires a security that is an equity interest in an entity and the security is neither a "publicly-offered security" nor a security issued by an investment company registered under the Investment Company Act, the Plan's or Non-ERISA Plan's or IRA's assets include both the equity interest and an undivided interest in each of the underlying assets of the issuer of such equity interest, unless one or more exceptions specified in the Plan Asset Regulations are satisfied. The Plan Asset Regulations define a publicly-offered security as a security that is "widely-held," "freely-transferable," and either part of a class of securities registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an effective registration statement under the Securities Act (provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred). The Common Shares are being sold in an offering registered under the Securities Act and will be registered under the Exchange Act within the required 120 day period. -86- The Plan Asset Regulations provide that a security is "widely held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A security will not fail to be widely held because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. The Company anticipates that upon completion of this Offering, the Common Shares will be "widely held." The Plan Asset Regulations provide that whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. The Plan Asset Regulations further provide that where a security is part of an offering in which the minimum investment is $10,000 or less (as is the case with this offering), certain restrictions ordinarily will not, alone or in combination, affect a finding that such securities are freely transferable. The restrictions on transfer enumerated in the Plan Asset Regulations as ordinarily not affecting that finding include: (i) any restriction on or prohibition against any transfer or assignment that would result in the termination or reclassification of an entity for federal or state tax purposes, or that otherwise would violate any federal or state law or court order, (ii) any requirement that advance notice of a transfer or assignment be given to the issuer, (iii) any administrative procedure that establishes an effective date, or an event (such as completion of an offering), prior to which a transfer or assignment will not be effective, and (iv) any limitation or restriction on transfer or assignment that is not imposed by the issuer or a person acting on behalf of the issuer. The Company believes that the restrictions imposed under the Declaration of Trust on the transfer of the Company's Common Shares will not result in the failure of the Common Shares to be "freely transferable." The Company also is not aware of any other facts or circumstances limiting the transferability of the Common Shares that are not identified in the Plan Asset Regulations as factors that ordinarily do not adversely affect a finding that securities are freely transferable. However, no complete assurances can be given that the DOL or the Treasury Department would not reach a contrary conclusion. Assuming that the Common Shares will be "widely held" and that no other facts and circumstances other than those referred to in the preceding paragraph exist that restrict transferability of the Common Shares, the Common Shares should be publicly offered securities and the assets of the Company should not be deemed to be "plan assets" of any Plan, IRA or Non-ERISA Plan that invests in the Common Shares. However, no assurances can be given that the Company's assets will not be deemed to be plan assets. If the assets of the Company were to be deemed to be "plan assets" under ERISA, (i) the prudence standards and other provisions of Part 4 of Title I of ERISA would be applicable to any transactions involving the Company's assets, (ii) persons who exercise any authority over the Company's assets, or who provide investment advice to the Company, would (for purposes of the fiduciary responsibility provisions of ERISA) be fiduciaries of each Plan that acquires Common Shares, (iii) a fiduciary exercising his investment discretion over the assets of a Plan to cause it to acquire or hold the Common Shares could be held liable under Part 4 of Title I of ERISA for transactions entered into by the Company that do not conform to ERISA standards of prudence and fiduciary responsibility, and (iv) certain transactions that the Company might enter into in -87- the ordinary course of its business and operations might constitute "prohibited transactions" under ERISA and the Code. CERTAIN LEGAL ASPECTS OF REAL PROPERTY LOANS AND INVESTMENTS The Company intends primarily to originate or acquire Financings (including wraparound and other forms of junior lien or subordinated financing) and, to a lesser extent, Property Interests. There are a number of legal considerations involved in the origination and acquisition of Financings and Property Interests or the foreclosure and sale of defaulted Financing. The following discussion provides general summaries of certain legal aspects of real estate loans and real property. Because such legal aspects are governed by applicable state law (which laws vary from state to state), the summaries do not purport to be complete, to reflect the laws of any particular state, or to encompass the laws of all states. Accordingly, the summaries are qualified in their entirety by reference to the applicable laws of the states where the property is located. General Each Financing will be evidenced by a note or bond and typically will be collateralized by an instrument granting a security interest in real property, which may be a mortgage, deed of trust, deed to secure debt or similar instrument, depending upon the prevailing practice and law in the state in which the underlying property is located. Mortgages, deeds of trust, deeds to secure debt and similar instruments are herein collectively referred to as "mortgages." A mortgage creates a lien upon, or grants a title interest in, the real property covered thereby, and represents the security for the repayment of the indebtedness customarily evidenced by a promissory note. The priority of the lien created or interest granted will depend on the terms of the mortgage and, in some cases, on the terms of separate subordination agreements or intercreditor agreement with others that hold interests in the real property, the knowledge of the parties to the mortgage and, generally, the order of recordation of the mortgage in the appropriate public recording office. However, the lien of a recorded mortgage will generally be subordinate to later-arising liens for real estate taxes and assessments and other charges imposed under governmental police powers. With respect to Financing acquired by the Company, the Company may not record its mortgage until a default occurs (as a result of provisions in the instruments held by senior lienors or otherwise), at which time there may be intervening or prior liens, or injunctions or stays delaying or precluding such recordation or the exercise of any rights under such mortgages. See "- Foreclosure and Bankruptcy Laws," below. Types of Mortgage Instruments There are two parties to a mortgage: a mortgagor (the borrower and usually the owner of the subject property) and a mortgagee (the lender). In contrast, a deed of trust is a three-party instrument, among a trustor (the equivalent of a borrower), a trustee to whom the real property is conveyed, and a beneficiary (the lender) for whose benefit the conveyance is made. Under a deed of trust, the trustor grants the property, irrevocably until the debt is paid, in trust and -88- generally with a power of sale, to the trustee to secure repayment of the indebtedness evidenced by the related note. A deed to secure debt typically has two parties. The grantor (the borrower) conveys title to the real property to the grantee (the lender), generally with a power of sale, until such time as the debt is repaid. The mortgagee's authority under a mortgage, the trustee's authority under a deed of trust and the grantee's authority under a deed to secure debt are governed by the express provisions of the related instrument, the law of the state in which the real property is located, certain federal laws and, in some deed of trust transactions, the directions of the beneficiary. Leases and Rents Mortgages that encumber income-producing property often contain an assignment of rents and leases, pursuant to which the borrower assigns to the lender the borrower's right, title and interest as landlord under each lease and the income derived therefrom, while (unless rents are to be paid directly to the lender) retaining a revocable license to collect the rents so long as there is no default. If the borrower defaults, the license terminates and the lender is entitled to collect the rents. Local law may require that the lender take possession of the property and/or obtain a court-appointed receiver before becoming entitled to collect the rents. The potential payments from a property may be less than the periodic payments due under the mortgage. For example, the net income that would otherwise be generated from the property may be less than that amount that would be needed to service the debt if the leases on the property are at below-market rents, the market rents have fallen since the original financing, vacancies have increased, or as a result of excessive or increased maintenance, repair or other obligations to which a lender succeeds as landlord. Condemnation and Insurance The form of the mortgage or deed of trust used by many lenders confers on the mortgagee or beneficiary the right both to receive all proceeds collected under any hazard insurance policy and all awards made in connection with any condemnation proceedings, and to apply such proceeds and awards to any indebtedness secured by the mortgage or deed of trust, in such order as the mortgagee or beneficiary may determine. Thus, in the event improvements on the property are damaged or destroyed by fire or other casualty, or in the event the property is taken by condemnation, the mortgagee or beneficiary under the senior mortgage or deed of trust will have the prior right to collect any insurance proceeds payable under a hazard insurance policy and any award of damages in connection with the condemnation and to apply the same to the indebtedness secured by the senior mortgage or deed of trust. Proceeds in excess of the amount of senior mortgage indebtedness will, in most cases, be applied to the indebtedness of a junior mortgage or trust deed to the extent the junior mortgage or deed of trust so provides (subject, however, to any inter-creditor agreements). The laws of certain states may limit the ability of mortgagees or beneficiaries to apply the proceeds of hazard insurance and partial condemnation awards to the secured indebtedness. In such states, the mortgagor or trustor must be allowed to use the proceeds of hazard insurance to repair the damage unless the security of the mortgage or -89- beneficiary has been impaired. Similarly, in certain states, the mortgagee or beneficiary is entitled to the award for a partial condemnation of the real property security only to the extent that its security is impaired. Foreclosure General. Foreclosure is a legal procedure that allows the lender to recover its mortgage debt by enforcing its rights and available legal remedies under the mortgage. If the borrower defaults in payment or performance of its obligations under the note or mortgage, the lender has the right to institute foreclosure proceedings to sell the real property at public auction to satisfy the indebtedness. Foreclosure procedures vary from state to state. Two primary methods of foreclosing a mortgage are judicial foreclosure, involving court proceedings, and non-judicial foreclosure pursuant to a power of sale granted in the mortgage instrument. Other foreclosure procedures are available in some states, such as strict foreclosure, but they are either infrequently used or available only in limited circumstances. Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a court having jurisdiction over the mortgaged property. Generally, the action is initiated by the service of legal pleadings upon the property owner and all parties having a subordinate interest of record in the real property and all parties in possession of the property, under leases or otherwise, whose interests are subordinate to the mortgage. A foreclosure action may be subject to most of the delays and expenses of other lawsuits if defenses are available and are raised or counterclaims are interposed. When the lender's right to foreclose is contested, the legal proceedings can be time-consuming. Upon successful completion of a judicial foreclosure proceeding, the court generally issues a judgment of foreclosure and appoints a referee or other officer to conduct a public sale of the mortgaged property, the proceeds of which are used to satisfy the judgment. Such sales are made in accordance with procedures that vary from state to state. Non-Judicial Foreclosure/Power of Sale. Foreclosure of a deed of trust is generally accomplished by a non-judicial trustee's sale pursuant to a power of sale typically granted in the deed of trust. A power of sale may also be contained in any other type of mortgage instrument if applicable law so permits. A power of sale under a deed of trust allows a non-judicial public sale to be conducted generally following a request from the beneficiary/lender to the trustee to sell the property upon default by the borrower and after notice of sale is given in accordance with the terms of the mortgage and applicable state law. The borrower or junior lienholder may then have the right, during a reinstatement period required in some states, to cure the default by paying the entire actual amount in arrears (without regard to the acceleration of the indebtedness), plus the lender' expenses incurred in enforcing the obligation. In other states, the borrower or the junior lienholder is not provided a period to reinstate the loan, but has only the right to pay off the entire debt to prevent the foreclosure sale. Generally, state law governs the procedure for public sale, the parties entitled to notice, the method of giving notice and the applicable time -90- periods. An action to halt a non-judicial foreclosure might be brought if valid defenses to such foreclosure exist. Equitable Limitations on Enforceability of Certain Provisions. United States courts have often imposed general equitable principles to limit the remedies available to lenders in foreclosure actions. These principles are generally designed to relieve borrowers from the effects of mortgage defaults perceived as harsh or unfair. Relying on such principles, a court may alter the specific terms of a loan to the extent it considers necessary to prevent or remedy an injustice, undue oppression or overreaching, or may require the lender to undertake affirmative actions to determine the cause of the borrower's default and the likelihood that the borrower will be able to reinstate the loan. In some cases, courts have substituted their judgment for the lenders' and have required that lenders reinstate loans or recast payment schedules in order to accommodate borrowers who are suffering from a temporary financial disability. In other cases, courts have limited the right of the lender to foreclosure in the case of a non-monetary default, such as a failure to adequately maintain the mortgaged property or an impermissible further encumbrance of the mortgaged property. However, there can be no assurance that these principles will be applied. Post-Sale Redemption. In a majority of states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors are given a statutory period in which to redeem the property. In some states, statutory redemption may occur only upon payment of the foreclosure sale price. In other states, redemption may be permitted if the former borrower pays only a portion of the sums due. In some states, the borrower retains possession of the property during the statutory redemption period. The effect of a statutory right of redemption is to diminish the ability of the lender to sell the foreclosed property because the exercise of a right of redemption would defeat the title of any purchaser through a foreclosure. Consequently, the practical effect of the redemption right is to force the lender to maintain the property and pay the expenses of ownership until the redemption period has expired. In some states, a post-sale statutory right of redemption may exist following a judicial foreclosure, but not following a trustee's sale under a deed of trust. Anti-Deficiency Legislation. Many loans acquired by the Company are likely to be nonrecourse loans, as to which recourse in the case of default will be limited to the property and such other assets, if any, that were pledged to secure the mortgage loan. However, even if a mortgage loan by its terms provides for recourse to the borrower's other assets, a lender's ability to realize upon those assets may be limited by state law. For example, in some states a lender cannot obtain a deficiency judgment against the borrower. In certain other states, the lender has the option of bringing a personal action against the borrower. In certain other states, the lender has the option of bringing a personal action against the borrowing on the debt without first exhausting such security; however, in some of those states, the lender, following judgment on such personal action, may be deemed to have elected a remedy and thus may be precluded from foreclosing upon the security. Consequently, lenders in those states where such an election of remedy provision exists may choose to proceed first against the security. Finally, other statutory provisions, designed to protect borrowers from exposure to large deficiency judgments that might -91- result from bidding at below-market values at the foreclosure sale, limit any deficiency judgment to the excess of the outstanding debt over the fair market value of the property at the time of the sale. Bankruptcy Laws Operation of the Bankruptcy Code and related state laws may interfere with or affect the ability of a lender to realize upon collateral or to enforce a deficiency judgment. For example, under the Bankruptcy Code, virtually all actions (including foreclosure actions and deficiency judgment proceedings) to collect a debt are automatically stayed upon the filing of the bankruptcy petition and, often, no interest or principal payments are made during the course of the bankruptcy case. The delay and the consequences thereof caused by such automatic stay can be significant. Also, under the Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a junior lienor may stay the senior lender from taking action to foreclose out such junior lien. Under the Bankruptcy Code, provided certain substantive and procedural safeguards protective of the lender are met, the amount and terms of a mortgage loan secured by a lien on property of the debtor may be modified under certain circumstances. For example, the outstanding amount of the loan may be reduced to the then-current value of the property (with a corresponding partial reduction of the amount of lender's security interest) pursuant to a confirmed plan or lien avoidance proceeding, thus leaving the lender a general unsecured creditor for the difference between such value and the outstanding balance of the loan. Under certain circumstances, a plan can be confirmed which provides for little or no payment for the unsecured claim for deficiency. Other modifications may include a reduction in the amount of each scheduled payment, by means of a reduction in the rate of interest or alteration of the repayment schedule (with or without affecting the unpaid principal balance of the loan), and by an extension (or shortening) of the term to maturity. Federal bankruptcy law may also have the effect of interfering with or affecting the ability of the secured lender to enforce the borrower's assignment of rents and leases related to the mortgaged property. Under section 362 of the Bankruptcy Code, the lender will be stayed from enforcing the assignment, and the legal proceedings necessary to resolve the issue could be time-consuming, with resulting delays in the lender's receipt of the rents. In addition, the Bankruptcy Code has been amended to provide that a lender's perfected pre-petition security interest in leases, rents and hotel revenues continues in the post-petition leases, rents and hotel revenues, unless a bankruptcy court orders to the contrary "based on the equities of the case." In a bankruptcy or similar proceeding, action may be taken seeking the recovery as a preferential transfer of any payments made by the mortgagor under the related mortgage loan to the owner of such mortgage loan. Payments on long-term debt may be protected from recovery as preferences to the extent the lender is oversecured or if they are payments in the ordinary course of business made on debts incurred in the ordinary course of business. Whether any particular payment would be protected depends upon the facts specific to a particular transaction. -92- A trustee in bankruptcy, in some cases, may be entitled to collect its costs and expenses in preserving or selling the mortgaged property ahead of payment to the lender. In certain circumstances, a debtor in bankruptcy may also have the power to grant liens senior to the lien of a mortgage, and analogous state statutes and general principles of equity may also provide a mortgagor with means to halt a foreclosure proceeding or sale and to force a restructuring of a mortgage loan on terms a lender would not otherwise accept. Moreover, the laws of certain states also give priority to certain tax liens over the lien of a mortgage or deed of trust. Under the Bankruptcy Code, in unusual circumstances, if the court finds that actions of the mortgagee have been harmful to the unsecured creditors and are in bad faith or highly unreasonable, the lien of the related mortgage may be subordinated to the claims of unsecured creditors. The Company's acquisition of Property Interests may be affected by many of the considerations applicable to mortgage loan lending. For example, the Company's ability to derive income from real property will generally be dependent on its receipt of rent payments under leases of the related property. The ability to collect rents may be impaired by the commencement of a bankruptcy proceeding relating to a lessee under such lease. Under the Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against the commencement or continuation of any state court proceeding for past due rent, for accelerated rent, for damages or for a summary eviction order with respect to a default under the lease that occurred prior to the filing of the lessee's petition. In addition, the Bankruptcy Code generally provides that a trustee or debtor-in-possession may, subject to approval of the court, (i) assume the lease and retain it or assign it to a third party or (ii) reject the lease. If the lease is assumed, the trustee or debtor-in-possession (or assignee, if applicable) must cure any default under the lease, compensate the lessor for its losses and provide the lessor with "adequate assurance" of future performance. Such remedies may be insufficient, and any assurances provided to the lessor may, in fact, be inadequate. If the lease is rejected, the lessor will be treated as an unsecured creditor with respect to its claim for damages for termination of the lease. The Bankruptcy Code also limits a lessor's damages for lease rejection to the rent reserved by the lease (without regard to acceleration) for the greater of one year, or 15%, not to exceed three years, of the remaining term of the lease. Efforts to eject a debtor/lessee are usually costly and time-consuming. Default Interest and Limitations on Prepayments Notes and mortgages may contain provisions that obligate the borrower to pay a late charge or additional interest if payments are not timely made, and in some circumstances, may prohibit prepayments for a specified period or condition prepayments upon the borrower's payment of prepayment fees or yield maintenance penalties. In certain states, there are or may be specific limitations upon the late charges that a lender may collect from a borrower for delinquent payments. Certain states also limit the amounts that a lender may collect from a borrower as an additional charge if the loan is prepaid. In addition, the enforceability of provisions that provide for prepayment fees or penalties upon an involuntary prepayment is unclear under the laws of many states. -93- Forfeitures in Drug and RICO Proceedings Federal law provides that property owned by persons convicted of drug-related crimes or of criminal violations of the Racketeer Influenced and Corrupt Organizations ("RICO") statute can be seized by the government if the property was used in, or purchased with the proceeds of, such crimes. Under procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime Control Act"), the government may seize the property even before conviction. The government must publish notice of the forfeiture proceeding and may give notice to all parties "known to have an alleged interest in the property," including the holders of mortgage loans. A lender may avoid forfeiture of its interest in the property if it establishes that: (i) its mortgage was executed and recorded before commission of the crime upon which the forfeiture is based, or (ii) the lender was, at the time of execution of the mortgage, "reasonably without cause to believe" that the property was used in, or purchased with the proceeds of, illegal drug or RICO activities. Environmental Risks General. The Company may risk environmental liabilities when it takes a security interest in real property, as well as when it acquires any real property. Of particular concern are properties that are or have been used for industrial, manufacturing, military or disposal activity. Such environmental risks include the risk of the diminution of the value of a contaminated property or, as discussed below, liability for the costs of compliance with environmental regulatory requirements or the costs of any remedial actions. These compliance or remediation costs could exceed the value of the property or the amount of the lender's loan. In certain circumstances, a lender could determine to abandon a contaminated mortgaged property as collateral for its loan rather than foreclose and risk liability for compliance or remediation costs. CERCLA. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on present and past "owners" and "operators" of contaminated real property for the costs of site assessment and remediation. A secured lender may be liable as an "owner" or "operator" of a contaminated mortgaged property if agents or employees of the lender have become sufficiently involved in the management of such mortgaged property or the operations of the borrower. Such liability may exist even if the lender did not cause or contribute to the contamination, and whether the lender has actually taken possession of a mortgaged property through foreclosure, deed in lieu of foreclosure or otherwise. The magnitude of the CERCLA liability at any given contaminated site is a function of the actions required to address adequately the risks to human health and the environment posed by the particular conditions at the site. As a result, such liability is not constrained by the value of the property or the amount of the original or unamortized principal balance of any loans secured by the property. Moreover, under certain circumstances, liability under CERCLA may be joint and several; any liable party may be obligated to pay the entire remediation cost regardless of its relative contribution to the contamination. -94- The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996 (the "1996 Lender Liability Act") provides a safe harbor for a secured lender from CERCLA liability even though the lender forecloses and sells the real estate securing the loan, provided the secured lender sells "at the earliest practicable, commercially reasonable time, at commercially reasonable terms, taking into account market conditions and legal and regulatory requirements." Although the 1996 Lender Liability Act appears to provide significant protection to secured lenders, it has not yet been construed by the courts and there are circumstances in which actions taken could expose a secured lender to CERCLA liability. Further, the transferee from the secured lender is not entitled to the protections enjoyed by a secured lender. Accordingly, the marketability of any contaminated real property cannot be assured. Certain Other Federal and State Laws. Many states have environmental clean-up statutes similar to CERCLA, and not all those statutes provide for a secured creditor exemption. In addition, underground storage tanks ("USTs") commonly are found at a wide variety of commercial and industrial properties. Federal and state laws impose liability on the owners and operators for any remediation that may be required as a result of releases from USTs. These laws also impose certain compliance obligations on the UST owners and operators, such as regular monitoring for leaks and upgrading of older USTs. The Company may become a UST owner or operator and subject to compliance obligations and potential remediation liabilities, either as a result of becoming involved in the management of a site at which a UST is located or, more commonly, by taking title to such a property. Federal and state laws also obligate property owners and operators to maintain and, under some circumstances, to remove asbestos-containing building materials and lead-based paint. As a result, the presence of these materials can increase the cost of operating a property and thus diminish its value. In a few states, transfers of some types of properties are conditioned upon remediation of contamination prior to transfer. In these cases, a lender that becomes the owner of a property through foreclosure, deed in lieu of foreclosure or otherwise, may be required to remedy the contamination before selling or otherwise transferring the property. Beyond statute-based environmental liability, there exist common law causes of action (for example, actions based on nuisance or on toxic tort resulting in death, personal injury or damage to property) related to hazardous environmental conditions on a property. Superlien Laws. Under many states' laws, contamination of a property may give rise to a lien on the property for remediation costs. In several states, such a lien has priority over all existing liens, including those of existing mortgages. In these states, the lien of a mortgage may lose its priority to such a "superlien." Additional Considerations. The cost of remediating environmental contamination at a property can be substantial. To reduce the likelihood of exposure to such losses, the Company will neither acquire title to a property, whether directly or through foreclosure, nor take over its operation unless, based on an environmental site assessment prepared by a qualified environmental consultant, the Company has determined that the acquisition is appropriate. The Company intends to consider all of its options, including the organization of a special purpose -95- subsidiary, if it determines it appropriate to acquire any environmentally contaminated real property. Environmental Site Assessments. Environmental site assessments can be a valuable tool in anticipating, managing and minimizing risks from environmental conditions. They are commonly performed in many commercial real estate transactions. The Company will require that a recent "Phase I" environmental site assessment report be obtained or available for properties underlying any Financing or Property Interest. The purpose of Phase I environmental assessments is to identify potential environmental contamination that is made apparent from historical reviews of the properties, reviews of certain public records, preliminary investigations of the sites and surrounding properties, and screening for the presence of hazardous substances, toxic substances and underground storage tanks. Environmental site assessments vary considerably in their content and quality. Even when adhering to good professional practices, environmental consultants sometimes do not detect significant environmental problems. Accordingly, these reports may not reveal all environmental liabilities or there may be material environmental liabilities of which the Company is unaware. Nevertheless, in assessing and addressing environmental risks in connection with commercial real estate (including multifamily properties) it is generally helpful to conduct an environmental site assessment of a property because it enables anticipation of environmental problems and, if agreements are structured appropriately, can allow a party to decline to go forward with a transaction. Depending on what the Phase I assessment discloses, a Phase II environmental site assessment may be performed. Where a property has been the subject of a recent Phase I assessment report which is addressed to the borrower, owner or another person, the Company may accept such assessment report in lieu of requiring that another assessment be performed. The Company will normally require that the assessment report be updated and addressed to the Company. The Company may waive either requirement if management believes, based upon its review of the assessment report and the property, that environmental risk is minimal. Applicability of Usury Laws Title V of the Depository Institutions Deregulation and Monetary Control Act of 1980 ("Title V") provides that state usury limitations shall not apply to certain types of residential (including multifamily) first mortgage loans originated by certain lenders after March 31, 1980. Title V authorized any state to reimpose interest rate limits by adopting, before April 1, 1983, a law or constitutional provision that expressly rejects application of the federal law. In addition, even where Title V is not so rejected, any state is authorized by the law to adopt a provision limiting discount points or other charges on mortgage loans covered by Title V. Certain states have taken action to reimpose interest rate limits and/or to limit discount points or other charges. Americans With Disabilities Act Under Title III of the ADA, in order to protect individuals with disabilities, public accommodations (such as hotels, restaurants, shopping centers, hospitals, schools and social -96- service center establishments) must remove architectural and communication barriers to disabled individuals that are structural in nature from existing places of public accommodation to the extent "readily achievable." In addition, under the ADA, alterations to a place of public accommodation or a commercial facility are to be made so that, to the maximum extent feasible, such altered portions are readily accessible to and usable by disabled individuals. The "readily achievable" standard takes into account, among other factors, the financial resources of the affected site, owners, landlord, or other applicable person. In addition to imposing a possible financial burden on the borrower in its capacity as owner or landlord, the ADA may also impose such requirements on a foreclosing lender who succeeds to the interest of the borrower, owner or landlord. Furthermore, since the "readily achievable" standard may vary depending on the financial condition of the owner or landlord, a foreclosing lender who is financially more capable than the borrower of complying with the requirements of the ADA may be subject to more stringent requirements that those to which the borrower is subject. UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement, the Company has agreed to sell to each of the Underwriters named below and each of the Underwriters, for whom Friedman, Billings, Ramsey & Co., Inc. is acting as Representative, has severally agreed to purchase, the number of Common Shares offered hereby set forth below opposite its name. Underwriter Number of Shares ----------- ---------------- Friedman, Billings & Ramsey & Co., Inc.......... _______________................................. Total...................................... =============== Under the terms and conditions of the Underwriting Agreement, the Underwriters are committed to purchase all the Common Shares offered hereby if any are purchased. The Underwriters propose initially to offer the Common Shares directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such offering price less a concession not to exceed $_______ per Common Share. The Underwriters may allow and such dealers may reallow a concession not to exceed $______ per Common Share to certain other dealers. After the Common Shares are released for sale to the public, the offering price and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option exercisable during a 30-day period after the date hereof to purchase, at the initial offering price less underwriting discounts and commissions, up to an additional ________ Common Shares for the sole purpose of covering over-allotments, if any. To the extent that the Underwriters exercise such option, each Underwriter will be committed, subject to certain conditions, to purchase that number of additional Common Shares which is proportionate to such Underwriter's initial commitment. -97- The Company has agreed to reimburse the Underwriters for up to $100,000 of their out-of-pocket expenses, including fees and expenses of counsel to the Underwriters. The Company has further agreed to grant to the Representative, for nominal consideration, warrants to purchase ____________ Common Shares at the initial public offering price. The warrants will be exercisable for a period of five years commencing with the completion of the Offering. The Common Shares underlying the warrants have been included in the registration statement of which this Prospectus is a part. The Company has granted to the Representative preferential rights for two years from the completion of the Offering to act as the exclusive underwriter for, or advisor to, the Company in specified transactions or offerings. The Company has also agreed that, in the event the Representative's engagement as lead Underwriter for the Offering is terminated prior to completion of the Offering, and the Company subsequently effects a public or private sale of equity, debt or capital markets securities, the Company will pay the Representative a fee of 3.5% of the gross proceeds received by the Company from such sale. The Underwriters and dealers may engage in passive market making transactions in the Common Shares in accordance with Rule 103 of Regulation M promulgated by the Commission. In general, a passive market maker may not bid for or purchase Common Shares at a price that exceeds the highest independent bid. In addition, the net daily purchases made by any passive market maker generally may not exceed 30% of its average daily trading volume in the Common Shares during a specified two-month prior period, or 200 shares, whichever is greater. A passive market maker must identify passive market making bids as such on the Nasdaq electronic inter-dealer reporting system. Passive market making may stabilize or maintain the market price of the Common Shares above independent market levels. Underwriters and dealers are not required to engage in passive market making and may end passive market making activities at any time. In connection with this Offering, certain Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Shares. Specifically, the Underwriters may overallot this Offering, creating a syndicate short position. In addition, the Underwriters may bid for and purchase Common Shares in the open market to cover syndicate short positions or to stabilize the price of the Common Shares. Finally, the underwriting syndicate may reclaim selling concessions from syndicate members if the syndicate repurchases previously distributed Common Shares in syndicate covering transactions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Shares above independent market levels. The Underwriters are not required to engage in these activities and may end any of these activities at any time. The Company has agreed to indemnify the several Underwriters against certain civil liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. Prior to this Offering, there has been no public market for the Common Shares. The initial public offering price has been determined by negotiation between the Company and the -98- representative of the Underwriters. Among the factors considered in making such determination were the history of, and the prospects for, the industry in which the Company will compete, an assessment of the Initial Investments and the Company's prospects for future earnings, the general conditions of the economy and the securities markets and the prices of offerings by similar issuers. There can, however, be no assurance that the price at which the Common Shares will sell in the public market after this Offering will not be lower than the price at which they are sold by the Underwriters. The Company has been advised by the Representative that it and certain of the other Underwriters intend to make a market in the Common Shares. However, the Underwriters are not obligated to do so and such market making may be interrupted or discontinued at any time without notice at the sole discretion of each of the Underwriters. Application has been made by the Company to list the Common Shares in the Nasdaq Stock Market, but one of the requirements for listing and continued listing is the presence of two market makers for the Common Shares. The presence of a second market maker cannot be assured. Accordingly, no assurance can be given as to the development or liquidity of any market for the Common Shares. The Representative has informed the Company that the Underwriters do not intend to confirm sales of the Common Shares offered hereby to any accounts over which they exercise discretionary authority. Entities associated with the Representative are the beneficial owners of shares of RAI's common stock, representing % of all common shares issued and outstanding. Entities affiliated with the Representative are the beneficial owners of $ in principal amount of RAI's 12% Senior Notes, representing % of the outstanding number of such notes. The Representative currently makes a market in the securities of RAI. LEGAL MATTERS Certain legal matters will be passed upon for the Company by Ledgewood Law Firm, P.C., Philadelphia, Pennsylvania and for the Underwriters by Hunton & Williams, Richmond, Virginia. Certain matters regarding formation of the Company and Maryland law will be passed upon for the Company by Arnold & Porter, Washington, D.C. For certain relationships between Ledgewood Law Firm, P.C. and the Company, see "The Company - Certain Relationships; Conflicts of Interest." EXPERTS The financial statement of the Company as of August 25, 1997 included in this Prospectus or in the Registration Statement of which this Prospectus forms a part, have been audited by Grant Thornton LLP, independent certified public accountants, whose report thereon appears herein and elsewhere in this Registration Statement. Such financial statement is included in reliance upon the report of Grant Thornton LLP, given upon the authority of such firm as experts in accounting and auditing. The appraised values of properties underlying the Initial Investments have been included herein in reliance upon the reports of Johnson, McClellan, Sullins & Page, Joseph Dennis Pasquarella & Co., M. Richard Cohen and Louis A. Iatrola Realty Appraisal Group, Ltd. as experts in appraising real properties. -99- ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement (of which this Prospectus forms a part) on Form S-11 under the Securities Act with respect to the Common Shares. This Prospectus contains summaries of the material terms of the documents referred to herein and therein, but does not contain all of the information set forth in the Registration Statement pursuant to the rules and regulations of the Commission. For further information, reference is made to such Registration Statement and the exhibits thereto. Such Registration Statement and exhibits filed by the Company can be inspected without charge and copied at prescribed rates at the public reference facilities maintained by the Commission at the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as follows: Chicago Regional Office, Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511; and New York Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048. In addition, copies of such documents may be obtained at the Commission's Internet address at http://www.sec.gov. Statements contained in this Prospectus as to the contents of any contract or other document that is filed as an exhibit to the Registration Statement are not necessarily complete, and each such statement is qualified in its entirety by reference to the full text of such contract or document. The Company will be required to file reports and other information with the Commission pursuant to the Securities Exchange Act of 1934. In addition to applicable legal requirements, if any, holders of Common Shares will receive annual reports containing audited financial statements with a report thereon by the Company's independent certified public accountants, and quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. -100- GLOSSARY As used in this Prospectus, the capitalized and other terms listed below have the meanings indicated. "ADA" shall mean the Americans with Disabilities Act of 1990, as amended. "Bankruptcy Code" shall mean Title 11 of the United States Code, as amended. "Beneficiary" shall mean a charitable organization selected by the Company to which shares in excess of the Ownership Limitation may be donated under the circumstances set forth in "Description of Shares of Beneficial Interest - Restrictions on Ownership and Transfer." "Board of Trustees" shall means the Board of Trustees of RAIT. "Brandywine" shall mean Brandywine Construction & Management, Inc. "Bylaws" shall mean the Bylaws of RAIT. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Commission" shall mean the Securities and Exchange Commission. "Common Shares" shall mean the common shares of beneficial interest, par value $0.01 per share, of RAIT. "Company" shall mean Resource Asset Investment Trust, a Maryland real estate investment trust, together with its subsidiaries, unless the context indicates otherwise. "Company Expenses" shall mean all administrative costs and expenses of the Company and the General Partner. "Control Share Acquisitions" shall mean transactions causing the voting strength of any person acquiring beneficial ownership of shares to meet or exceed certain threshold percentages (20%, 33 1/3% or 50%) of the total votes entitled to be cast for the election of trustees. "Counsel" shall mean Ledgewood Law Firm, P.C., counsel to the Company. "Declaration of Trust" shall mean the Declaration of Trust of RAIT. "DOL" shall mean the Department of Labor. -101- "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exempt Organizations" shall mean tax-exempt entities, including, but not limited to, charitable organizations, qualified employee pension and profit sharing trusts and individual retirement accounts. "Financing" shall mean any one or more of the mortgage or other debt obligations the Company will originate or acquire for its investment portfolio. "5/50 Rule" shall mean the requirement under the Code that not more than 50% in value of the outstanding shares of a REIT be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of each taxable year after the REIT's first taxable year. "FIRPTA" shall mean the Foreign Investment in Real Property Tax Act of 1980. "General Partner" shall mean RAIT General, Inc., as the sole general partner of the Operating Partnership. "Independent Trustee" shall mean a trustee who, within the last two years, has not (i) been an Affiliate of RAI, JeffBanks, Brandywine or their Affiliates, (ii) been an officer of the Company, or (iii) had any material business or professional relationship with the Company, RAI, Brandywine, JeffBanks or their affiliates. "Initial Investments" shall mean the Financings acquired or originated by the Company as set forth in "Investments Objectives and Policies - Initial Investments." "Initial Limited Partner" shall mean RAIT Limited, Inc., as limited partner of the Operating Partnership. "Interested Shareholder" shall mean any holder of more than 10% of any class of outstanding voting shares of the Company. "Investment Company Act" shall mean the Investment Company Act of 1940. "IRA" shall mean an individual retirement account. "JeffBanks" shall mean JeffBanks, Inc. "Limited Partners" shall mean the Initial Limited Partner and any additional persons admitted as limited partners of the Operating Partnership. -102- "MGCL" shall mean the Maryland General Corporation Law. "1996 Lender Liability Act" shall mean the Asset Conversion, Lender Liability and Deposit Insurance Act of 1996. "Non-ERISA Plan" shall mean a plan that does not cover common law employees. "Non-U.S. Shareholder" shall mean alien individuals, foreign corporations, foreign partnerships and other foreign shareholders that are not resident in the United States. "Offering" shall mean the offering of Common Shares made pursuant to this Prospectus. "Offering Price" shall mean the offering price of $_____ per Common Share offered pursuant to this Prospectus. "OID" shall mean original issue discount. "Operating Partnership" shall mean RAIT Partnership, L.P. "Operating Partnership Agreement" shall mean the agreement of limited partnership of the Operating Partnership, as amended from time to time. "Option Plan" shall mean the qualified share option plan that the Company intends to adopt to provide options to officers and trustees of the Company. "Ownership Limitation" shall mean the restriction on ownership (or deemed ownership by virtue of the attribution provisions of the Code) of (a) more than 8.5% of the outstanding Common Shares by any shareholder other than RAI, (b) more than 15% of the outstanding Common Shares by RAI, or (c) more than 9.8% of the outstanding Preferred Shares of any series by any shareholder. "Plan" shall mean a pension, profit-sharing or other employee benefit plan. "Plan Asset Regulations" shall mean DOL regulations that define "plan assets." "Preferred Shares" shall mean the preferred shares of beneficial interest, par value $0.01 per share, of the Company. "Prohibited Transferee" shall mean a person to whom a transfer of Common Shares has been made which is in excess of the Ownership Limitation. "Property Interest" shall mean any direct or indirect interest in a property acquired by the Company, including an interest in a partnership, joint venture or limited liability company owning real property as all or substantially all of its assets. -103- "Qualified Interests" shall mean mortgages and other liens on and interests in real estate, within the meaning of the Investment Company Act. "RAI" shall mean Resource America, Inc., the sponsor of the Company. "RAIT" shall mean Resource Asset Investment Trust. "Redemption Rights" shall mean the rights that it is anticipated the Limited Partners (other than the Initial Limited Partner) will have pursuant to the Operating Partnership Agreement to redeem all or a portion of their interests in the Operating Partnership for cash or, at the option of the General Partner, Common Shares on a one-for-one basis. "REIT" shall mean a real estate investment trust, as defined in section 856 of the Code. "Representative" shall mean Friedman, Billings, Ramsey & Co., Inc., as representative of the Underwriters. "RICO" shall mean the Racketeer Influenced and Corrupt Organizations Act. "Rule 144" shall mean the rule promulgated under the Securities Act that permits holders of restricted securities as well as affiliates of an issuer of securities, pursuant to certain conditions and subject to certain restrictions, to sell their securities publicly without registration under the Securities Act. "Securities Act" shall mean the Securities Act of 1933, as amended. "Service" shall mean the Internal Revenue Service. "Title V" shall mean Title V of the Depository Institutions Deregulation and Monetary Control Act of 1980. "Treasury Regulations" shall mean the income tax regulations promulgated under the Code. "Trustee" shall mean a trustee of RAIT. "UBTI" shall mean unrelated business taxable income. "UBTI Percentage" shall mean the gross income derived by the Company in any year from an unrelated trade or business divided by the gross income of the Company for that year. "Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc. and each of the underwriters for whom Friedman, Billings, Ramsey & Co., Inc. is acting as representative. -104- "Underwriting Agreement" shall mean the agreement pursuant to which the Underwriters will underwrite the Common Stock. "Units shall mean units of limited partnership interest in the Operating Partnership. "UST" shall mean an underground storage tank. -105- BALANCE SHEET AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS RESOURCE ASSET INVESTMENT TRUST August 25, 1997 F-1 Report of Independent Certified Public Accountants -------------------------------------------------- Board of Trustees Resource Asset Investment Trust We have audited the accompanying consolidated balance sheet of Resource Asset Investment Trust as of August 25, 1997. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statement referred to above presents fairly, in all material respects, the consolidated financial position of Resource Asset Investment Trust as of August 25, 1997 in conformity with generally accepted accounting principles. Philadelphia, Pennsylvania August 25, 1997 F-2 Resource Asset Investment Trust CONSOLIDATED BALANCE SHEET August 25, 1997 ASSETS Cash $ 1,000 ========== LIABILITIES AND SHAREHOLDER'S EQUITY Shareholder's equity Preferred shares - par value $0.01; authorized, 25,000,000 shares $ - Common shares - par value $0.01; authorized, 200,000,000 shares; issued and outstanding, 100 shares 1 Additional paid-in-capital 999 ---------- $ 1,000 ========== The accompanying notes are an integral part of this statement. F-3 Resource Asset Investment Trust NOTES TO CONSOLIDATED BALANCE SHEET August 25, 1997 NOTE A - FORMATION AND STRUCTURE OF THE COMPANY Resource Asset Investment Trust (RAIT or the Company), together with its subsidiaries--RAIT Partnership, L.P. (the Operating Partnership); RAIT General, Inc. (the General Partner), the General Partner of the Operating Partnership; and RAIT Limited, Inc. (the Initial Limited Partner), the Initial Limited Partner of the Operating Partnership--were each formed in August 1997. The Company, the General Partner and the Initial Limited Partner were incorporated in Maryland, and the Operating Partnership was organized as a Delaware limited partnership. The General Partner and the Initial Limited Partner will capitalize the Operating Partnership. The General Partner initially owns a 1% general partnership interest, and the Initial Limited Partner initially owns a 99% limited partnership interest in the Operating Partnership. RAIT was initially capitalized through the sale of 100 common shares of beneficial interest (Common Shares) for $1,000. RAIT's principal business activity will be to provide mortgage or other debt financing (Financing) in situations that do not conform to the underwriting standards of institutional lenders or sources that provide financing through securitization. The Company intends to purchase or originate Financing relating to multifamily residential, office and other commercial properties. The Company will emphasize wraparound loans and, to a lesser extent, other forms of junior lien and subordinated financing with principal amounts generally between $1 million and $8 million. The Company also anticipates the acquisition of real properties, or interests therein. The Operating Partnership will undertake the business of the Company, including the origination and acquisition of Financing and the acquisition of property interests. The Company's sole activity through August 25, 1997 consisted of the organization and start-up of the Company. Accordingly, no consolidated statement of operations is presented. NOTE B - FEDERAL INCOME TAXES The Company intends to qualify and will elect to be taxed as a Real Estate Investment Trust (REIT) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ending December 31, 1997. If the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income tax on its taxable income that is distributed to its shareholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 95% of its annual taxable income. F-4 Resource Asset Investment Trust NOTES TO CONSOLIDATED BALANCE SHEET - CONTINUED August 25, 1997 NOTE C - TRANSACTIONS WITH AFFILIATES Resource America, Inc. (RAI), which is the sponsor of the Company, will own 9.8% of the outstanding Common Shares upon consummation of an offering of Common Shares proposed to be made by the Company (assuming that the underwriters for such offering do not exercise their over-allotment option). See Note E. RAI, until such time as its ownership of outstanding Common Shares is less than 5%, has the right to nominate one member of the Board of Trustees. The Chairman and Chief Executive Officer of the Company is the spouse of the Chairman, Chief Executive Officer and President of RAI. A trustee of the Company is their son. A material portion of the Initial Investments will be purchased by the Company from RAI, and the Company anticipates that, subject to specified limitations, it will purchase additional investments from RAI. The Company may also from time to time (but is not obligated to) retain RAI to perform due diligence investigations on properties underlying proposed investments (except investments acquired from RAI). Brandywine Construction and Management, Inc. (Brandywine), an affiliate of RAI, may provide real property management or management supervisory services to properties underlying the Company's financing or included in the Company's property interests. In addition, the Chairman and Chief Executive Officer of the Company is the Chairman and Chief Executive Officer of JeffBanks, Inc., with which the Company may have banking relations and from which the Company may initially obtain loan administration services. Accordingly, the Company's relationship with RAI and its affiliates, and with JeffBanks, Inc., will be subject to various potential conflicts of interest. The Company has instituted certain procedures to minimize the potential effects of such conflicts, including (i) requiring that, upon the close of the Offering, a majority of the Company's trustees be Independent Trustees (as defined in the Company's Declaration of Trust), (ii) requiring that the acquisition price of any investments acquired from RAI (or in which an officer or trustee of the Company has an interest) be determined based upon independent appraisal of the underlying property, (iii) limiting the investments which may be acquired from RAI to a maximum of 30% of the Company's investments (excluding the Initial Investments) based upon the Company's investment cost (the amount of the investment plus legal, filing, and other related fees and expenses, (iv) requiring that any fees for services performed by RAI, Brandywine, JeffBanks, Inc. or their affiliates be no greater than prevailing fees in the area for similar services provided by unrelated third parties, (v) requiring that any service arrangements with an affiliated entity provide that services will be rendered only as and to the extent requested by the Company from time to time and that, in any event, the arrangements be cancelable by the Company on no more that 30 days' notice, (vi) requiring that any investment acquisition or services arrangement, and every transaction with RAI, Brandywine, JeffBanks and their affiliates, receive the prior approval of a majority of the Independent Trustees (who, in giving such approval, may rely upon information provided by RAI, Brandywine, JeffBanks, Inc. or their affiliates) and (vii) with respect to real estate management or management supervisory services performed by Brandywine, requiring that the aggregate of the fee received by Brandywine and the manager being supervised may not exceed the normal and customary fee for similar property management services with respect to similar F-5 Resource Asset Investment Trust NOTES TO CONSOLIDATED BALANCE SHEET - CONTINUED August 25, 1997 properties in the same area. The Company will not be required to obtain the approval of the Independent Trustees to retain RAI to perform a due diligence investigation where the amount of the fee for such services will not exceed the lesser of 1% of the property's appraised value of $10,000. NOTE D - OPTION PLAN The Company intends to adopt a qualified share option plan (the Option Plan), which provides for options to purchase Common Shares (or, at the election of the Company, units in the Operating Partnership that may be redeemed for cash or, at the election of the General Partner, Common Shares on a one-for-one basis). The maximum aggregate number of Common Shares that may be issued pursuant to options granted under the Option Plan will be determined by the Board of Trustees. The purpose of the Option Plan is to provide a means of performance-based compensation in order to provide incentive for the Company's key employees. Before completion of the offering of the Company's Common Shares (the Closing Date), the Company will grant to certain officers of the Company options to acquire Common Shares at an exercise price per share equal to the initial offering price of the Common Shares. The options are not exercisable immediately; rather, 25% of each option becomes exercisable on each of the first four anniversaries of the Closing Date. The options terminate on the tenth anniversary of the Closing Date. The Company has adopted Financial Accounting Standards (FAS) No. 123, Accounting for Stock-Based Compensation, on August 20, 1997. FAS No. 123 contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and net income per share, as if the fair value-based method of accounting defined in FAS No. 123 had been applied. The Company's stock option plans will be accounted for under APB Opinion No. 25. F-6 NOTE E - PUBLIC OFFERING OF COMMON SHARES The Company is in the process of filing a Registration Statement for sale of its Common Shares. Contingent upon the consummation of the public offering, the Company will be liable for organization and offering expenses in connection with the sale of the shares offered. Prior thereto, RAI has paid such expenses, subject to reimbursement therefor at the Closing Date. F-7 No person is authorized to give any information or to make any representation not contained in this Prospectus and any information or representation not contained herein must not be relied upon as having been authorized by the Company or any Underwriter. This Prospectus does not constitute an offer of any securities other than the securities to which it relates or an offer to any person in any jurisdiction where such an offer would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof. TABLE OF CONTENTS Page ---- Prospectus Summary...................................................... Formation and Structure................................................. Risk Factors............................................................ Use of Proceeds......................................................... Investment Objectives and Policies...................................... The Company............................................................. Distribution Policy..................................................... Capitalization.......................................................... Management's Discussion and Analysis of Financial Condition................................................ Description of Shares of Beneficial Interest............................ Certain Provisions of Maryland Law and of the Company's Declaration of Trust and Bylaws ..................................................... Common Shares Available for Future Sale................................. Operating Partnership Agreement......................................... Federal Income Tax Considerations....................................... Benefit Plan Considerations............................................. Certain Legal Aspects of Real Property Loans and Investments................................................. Underwriting............................................................ Legal Matters........................................................... Experts................................................................. Additional Information.................................................. Until _________, 1997, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ___________ Shares [LOGO] RESOURCE ASSET INVESTMENT TRUST Common Shares -------- PROSPECTUS -------- FRIEDMAN, BILLINGS, RAMSEY & CO., INC. ____________, 1997 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS. Item 31. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of the Common Shares being registered. Amount to be Paid --------- SEC registration fee........................... $ NASD filing fee................................ Nasdaq Stock Market listing fee................ Printing and engraving expenses............ * Legal fees and expenses............... * Accounting fees and expenses.......... * Blue Sky fees and expenses............ * Transfer agent and custodian fees..... * Miscellaneous......................... * --------- Total..................................... $ ========= - ------------------------ *Estimated Item 32. Sales to Special Parties Upon completion of this Offering, RAI will purchase __________ of the Company's Common Shares at a price of $______ per share (the public offering price, less underwriting discounts and commissions). As a result of such purchase, RAI will hold 9.8% of the Company's Common Shares outstanding (_____% if the Underwriters exercise their over-allotment option). These securities will be issued in reliance on the exemption from registration contained in Section 4(2) of the Securities Act. Item 33. Recent Sales of Unregistered Securities See Item 32, above. Item 34. Indemnification of Directors and Officers Maryland law permits a Maryland REIT to include in its trust agreement a provision limiting the liability of its trustees and officers to the trust and its shareholders for money II-1 damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Declaration of Trust of the Company contains such a provision which eliminates such liability to the maximum extent permitted by Maryland law. The Declaration of Trust of the Company authorizes it, to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (1) any present or former trustee or officer or (2) any individual who, while a trustee of the Company and at the request of the Company, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his status as a present or former trustee or officer of the Company. The Declaration of Trust of the Company obligates it, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (1) any present or former trustee or officer who is made a party to the proceeding by reason of his service in that capacity or (2) any individual who, while a trustee of the Company and at the request of the individual who, while a trustee of the Company and at the request of the Company, serves or has served as an officer, director, trustee, partner or otherwise in another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his service in that capacity. Maryland law requires a REIT (unless its trust agreement provides otherwise, which the Company's Declaration of Trust does not) to indemnify a trustee or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity. Maryland law permits a REIT to indemnify its present and former trustees and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (1) the act or omission of the trustee or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (2) the trustee or officer actually received an improper personal benefit in money, property or services or (3) in the case of any criminal proceeding, the trustee or officer had reasonable cause to believe that the act or omission was unlawful. However, a Maryland REIT may not indemnify for an adverse judgment in a suit by or in the right of the trust or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In addition, Maryland law requires the Company, as a condition to advancing expenses, to obtain (1) a written affirmation by the trustee or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by the Company and (2) a written statement by or on his behalf to repay the amount paid or reimbursed by the Company if it shall ultimately be determined that the standard of conduct was not met. II-2 In addition, the Company has entered into an Indemnity Agreement (Exhibit 10 hereto) with its officers and trustees. The Underwriting Agreement (Exhibit 1) also provides for indemnification by the Underwriters of the Company, its trustees and officers and persons who control the Company within the meaning of Section 15 of the Securities Act with respect to certain liabilities, including liabilities arising under the Securities Act. ITEM 35. Treatment of Proceeds from Shares Being Registered Not applicable. ITEM 36. Financial Statements and Exhibits (a) Financial Statements included in the Prospectus are: Consolidated Balance Sheet as of August 25, 1997 All other schedules have been omitted because they are either not applicable, not required or the information required has been disclosed in the financial statements and related notes or otherwise in the Prospectus. (b) Exhibits
1* Form of Underwriting Agreement 3.1(a) Declaration of Trust of the Company 3.1(b) Form of Amended and Restated Declaration of Trust 3.2 Bylaws of the Company 3.3 Articles of Incorporation of RAIT General, Inc. 3.4 By-laws of RAIT General, Inc. 3.5 Articles of Incorporation of RAIT Limited, Inc. 3.6 By-laws of RAIT Limited, Inc. 3.7 Certificate of Limited Partnership of RAIT Partnership, L.P. 3.8 Limited Partnership Agreement of RAIT Partnership, L.P. 4* Form of Certificate for Common Shares of the Company 5.1* Opinion of Ledgewood Law Firm, P.C. 5.2* Opinion of Arnold & Porter 8* Opinion of Ledgewood Law Firm, P.C. (as to tax matters) 10.1* Form of Indemnification Agreement 10.2* Form of Agreement between Company and Resource America, Inc. 23.1 Consent of Ledgewood Law Firm, P.C. (contained in Exhibits 5.1 and 8) 23.2 Consent of Arnold & Porter (contained in Exhibit 5.2) 23.3 Consent of Grant Thornton LLP 23.4* Consent of Johnson, McClellan, Sullins & Page 23.5* Consent of Joseph Dennis Pasquarella & Co. 23.6* Consent of M. Richard Cohen 24 Power of Attorney (included on signature page)
- ---------------------- * To be filed by amendment. II-3 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 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Philadelphia, Commonwealth of Pennsylvania, on the 2nd day of September, 1997. RESOURCE ASSET INVESTMENT TRUST By: /s/ Betsy Z. Cohen ---------------------------------------------------- Betsy Z. Cohen, Chairman and Chief Executive Officer II-5 POWER OF ATTORNEY Each person whose signature appears below in so signing also makes, constitutes and appoints Betsy Z. Cohen and Jay J. Eisner, and each of them acting alone, his or her true and lawful attorney-in-fact, with full power of substitution, for him or her in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission any and all amendments and post-effective amendments to this Registration Statement with exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or said attorney-in-fact's substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Betsy Z. Cohen - ---------------------- Chairman, Chief Executive September 2, 1997 Betsy Z. Cohen Officer and Trustee (Principal Executive Officer) /s/ Jay J. Eisner - ---------------------- President and Chief Operating September 2, 1997 Jay J. Eisner Officer /s/ Ellen J. DiStefano - ---------------------- Chief Financial Officer September 2, 1997 Ellen J. DiStefano /s/ Jonathan Z. Cohen - ---------------------- Trustee September 2, 1997 Jonathan Z. Cohen /s/ Jerome S. Goodman - ---------------------- Trustee September 2, 1997 Jerome S. Goodman /s/ Joel R. Mesznik - ---------------------- Trustee September 2, 1997 Joel R. Mesznik [SIGNATURES CONTINUED ON FOLLOWING PAGE] II-6 SIGNATURE TITLE DATE --------- ----- ---- /s/ Daniel Promislo - ---------------------- September 2, 1997 Daniel Promislo Trustee /s/ Jack L. Wolgin - ---------------------- September 2, 1997 Jack L. Wolgin Trustee II-7 EXHIBIT INDEX 1* Form of Underwriting Agreement 3.1(a) Declaration of Trust of the Company 3.1(b) Form of Amended and Restated Declaration of Trust 3.2 Bylaws of the Company 3.3 Articles of Incorporation of RAIT General, Inc. 3.4 By-laws of RAIT General, Inc. 3.5 Articles of Incorporation of RAIT Limited, Inc. 3.6 By-laws of RAIT Limited, Inc. 3.7 Certificate of Limited Partnership of RAIT Partnership, L.P. 3.8 Limited Partnership Agreement of RAIT Partnership, L.P. 4* Form of Certificate for Common Shares of the Company 5.1* Opinion of Ledgewood Law Firm, P.C. 5.2* Opinion of Arnold & Porter 8* Opinion of Ledgewood Law Firm, P.C. (as to tax matters) 10.1* Form of Indemnification Agreement 10.2* Form of Agreement between Company and Resource America, Inc. 23.1 Consent of Ledgewood Law Firm, P.C. (contained in Exhibits 5.1 and 8) 23.2 Consent of Arnold & Porter (contained in Exhibit 5.2) 23.3 Consent of Grant Thornton LLP 23.4* Consent of Johnson, McClellan, Sullins & Page 23.5* Consent of Joseph Dennis Pasquarella & Co. 23.6* Consent of M. Richard Cohen 24 Power of Attorney (included on signature page) - ---------------------- * To be filed by amendment. EX-3.1(A) 2 EXHIBIT 3.1(A) RESOURCE ASSET INVESTMENT TRUST TABLE OF CONTENTS ARTICLE 1 - THE TRUST; DEFINITIONS........................................... 1 Section 1.1. Name................................................... 1 Section 1.2. Resident Agent......................................... 1 Section 1.3. Nature of Trust........................................ 1 Section 1.4. Powers................................................. 2 Section 1.5. Definitions............................................ 2 ARTICLE 2 - TRUSTEES......................................................... 3 Section 2.1. Number................................................. 3 Section 2.2. Initial Board; Term.................................... 3 Section 2.3. Resignation, Removal or Death.......................... 4 Section 2.4. Vacancies.............................................. 4 Section 2.5. Legal Title............................................ 4 ARTICLE 3 - POWERS OF TRUSTEES............................................... 4 Section 3.1. General................................................ 4 Section 3.2. Specific Powers and Authority.......................... 5 Section 3.3. Limitations on Powers and Authority.................... 9 ARTICLE 4 - ADVISER.......................................................... 9 Section 4.1. Appointment............................................ 9 Section 4.2. Affiliation and Functions.............................. 10 ARTICLE 5 - INVESTMENT POLICY................................................ 10 ARTICLE 6 - SHARES........................................................... 10 Section 6.1. Authorized Shares...................................... 10 Section 6.2. Common Shares.......................................... 10 Section 6.3. Preferred Shares....................................... 11 Section 6.4. Dividends or Distributions............................. 11 Section 6.5. General Nature of Shares............................... 11 Section 6.6. Restrictions on Ownership and Transfer: Exchange For Excess Shares............................. 11 Section 6.7. Legend................................................. 18 Section 6.8. Excess Shares.......................................... 19 Section 6.9. Severability; Agent for Trust.......................... 21 ARTICLE 7 - SHAREHOLDERS..................................................... 21 Section 7.1. Meetings of Shareholders............................... 21 Section 7.2. Voting Rights of Shareholders.......................... 21 Section 7.3. Shareholder Action to be Taken by Meeting.............. 22 ARTICLE 8 - -i- LIABILITY OF SHAREHOLDERS, TRUSTEES, OFFICERS, EMPLOYEES AND AGENTS AND TRANSACTIONS BETWEEN AFFILIATES AND THE TRUST................................ 22 Section 8.1. Limitation of Shareholder Liability.................... 22 Section 8.2. Limitation of Trustee and Officer Liability............ 22 Section 8.3. Express Exculpatory Clauses in Instruments............. 22 Section 8.4. Indemnification........................................ 23 Section 8.5. Transactions Between the Trust and its Trustees, Officers, Employees and Agents......................... 23 ARTICLE 9 - AMENDMENT; REORGANIZATION; MERGER, ETC........................... 23 Section 9.1. Amendment.............................................. 23 Section 9.2. Merger, Consolidation or Sale of Trust Property........ 23 ARTICLE 10 - DURATION AND TERMINATION OF TRUST............................... 24 Section 10.1. Duration of Trust..................................... 24 Section 10.2. Termination of Trust.................................. 24 ARTICLE 11 - MISCELLANEOUS................................................... 24 Section 11.1. Governing Law......................................... 24 Section 11.2. Reliance by Third Parties............................. 25 Section 11.3. Provisions in Conflict with Law or Regulations........ 25 Section 11.4. Construction.......................................... 25 Section 11.5. Recordation........................................... 25 -ii- RESOURCE ASSET INVESTMENT TRUST DECLARATION OF TRUST (Amended and Restated as of ________________, 1997 at the Annual Meeting of Shareholders by affirmative vote of the holders of a majority of the outstanding shares of the Trust pursuant to Section 8-202(c) of Title 8 of the Maryland Corporations and Associations Code) This DECLARATION OF TRUST ("Declaration of Trust" or "Declaration") is amended and restated as of the date set forth above by the undersigned Trustees. WHEREAS, the Trustees desire to create a real estate investment trust under Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland, as amended ("Title 8"); and WHEREAS, the Trustees desire that this trust qualify as a "real estate investment trust" under the Internal Revenue Code of 1986, as amended (the "Code"), so long as such qualification, in the opinion of the Trustees, is advantageous to the Shareholders; and WHEREAS, the beneficial interest in the Trust shall be divided into transferable shares of one or more classes evidenced by certificates; NOW, THEREFORE, the Trustees hereby declare that they will hold all property which they have or may hereafter acquire as such Trustees, together with the proceeds thereof, in trust, and manage the Trust Property (as defined herein) for the benefit of the Shareholders as provided by this Declaration of Trust. ARTICLE 1 - THE TRUST; DEFINITIONS Section 1.1. Name. The name of the trust (the "Trust") is Resource Asset Investment Trust. So far as may be practicable, the business of the Trust shall be conducted and transacted under that name, which name (and the word "Trust" wherever used in this Declaration of Trust, except where the context otherwise requires) shall refer to the Trustees collectively but not individually or personally and shall not refer to the Shareholders or to any officers, employees or agents of the Trust or of such Trustees. Under circumstances in which the Trustees determine that the use of the name "Resource Asset Investment Trust" is not practicable, they may use any other designation or name for the Trust. Section 1.2. Resident Agent. The name of the resident agent for service of process of the Trust in the State of Maryland is The Corporation Trust Incorporated, whose post office address is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202. The Trust may have such offices or places of business within or without the State of Maryland as the Trustees may from time to time determine. Section 1.3. Nature of Trust. The Trust is a real estate investment trust within the meaning of Title 8. The Trust shall not be deemed to be a general partnership, limited partnership, joint venture, joint stock company or, except as provided in Section 11.4, a corporation (but nothing herein shall preclude the Trust from being treated for tax purposes as an association under the Code). Section 1.4. Powers. The Trust shall have all of the powers granted to real estate investment trusts generally by Title 8 or any successor statute and shall have any other and further powers as are not inconsistent with and are appropriate to promote and attain the purposes set forth in this Declaration of Trust. Section 1.5. Definitions. As used in this Declaration of Trust, the following terms shall have the following meanings unless the context otherwise requires: "Adviser" means the Person, if any, appointed, employed or contracted with by the Trust pursuant to Section 4.1. "Affiliate" or "Affiliated" means, as to any individual, corporation, partnership, trust or other association (other than the Trust), any Person (i) that holds beneficially, directly or indirectly, 10% or more of the outstanding stock or equity interests thereof or (ii) who is an officer, director, partner or trustee thereof or of any Person which controls, is controlled by, or is under common control with, such corporation, partnership, trust or other association or (iii) which controls, is controlled by or under common control with, such corporation, partnership, trust or other association. "Book Value Per Share" shall mean an amount equal to the quotient obtained by dividing (i) the Shareholders' Equity as shown in the annual or quarterly financial statements of the Trust most recently filed by the Trust with the Securities and Exchange Commission by (ii) the number of Shares outstanding as of the date of such financial statements. For purposes of clause (ii) of the preceding sentence, "outstanding" Shares shall consist of those Common Shares then actually issued and outstanding and those Common Shares issuable upon the exercise or conversion of any then outstanding "in-the-money" warrants, options or other convertible securities. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Person" means an individual, corporation, partnership, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity, or any government or agency or political subdivision thereof, and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. "Real Property" or "Real Estate" means land, rights in land (including leasehold interests), and any buildings, structures, improvements, furnishings, fixtures and equipment located on or used in connection with land and rights or interests in land. "REIT Provisions of the Code" means Sections 856 through 860 of the Code and any successor or other provisions of the Code relating to real estate investment trusts (including provisions as to the attribution of ownership of beneficial interests therein) and the regulations promulgated thereunder. "Securities" means Shares, any stock, shares or other evidences of equity or beneficial or other interests, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in, temporary or interim certificates for, receipts for, guarantees of, or warrants, options or rights to subscribe to, purchase or acquire, any of the foregoing, or shares or other securities of any successor in interest of the Trust. "Securities of the Trust" means any Securities issued by the Trust. "Shareholders" means holders of record of outstanding Shares. 2 "Shareholders' Equity" means the total shareholders' equity of the Trust or, if the Trust has a class of Preferred Shares outstanding as of the applicable date, "Shareholders' Equity" means the total "common" shareholders' equity of the Trust (computed with appropriate adjustments to reflect any entitlement of Preferred Shares to participate equally and ratably with the Common Shares in the assets of the Trust upon a liquidation of the Trust and computed to include amounts payable upon exercise or conversion of outstanding "in-the-money" warrants, options or other convertible securities issued by the Trust). "Shares" means shares of Preferred Shares or Common Shares (all as defined in Section 6.1). "Trustees" or "Board of Trustees" means, collectively, all individuals who have been duly elected and qualify as trustees of the Trust hereunder. "Trust Property" means any and all property, real, personal or otherwise, tangible or intangible, which is transferred or conveyed to the Trust or the Trustees (including all rents, income, profits and gains therefrom), which is owned or held by, or for the account of, the Trust. "Voting Shares" means the outstanding Shares entitled to vote generally in the election of trustees. ARTICLE 2 - TRUSTEES Section 2.1. Number. The number of Trustees shall be four, but such number may be increased or decreased by the unanimous vote of the Trustees then in office from time to time; provided, that the total number of Trustees shall be not fewer than three and not more than 15. No reduction in the number of Trustees shall cause the removal of any Trustee from office prior to the expiration of his term. Section 2.2. Initial Board; Term. The Trustees, as of the date on which this Declaration of Trust has been amended and restated, as set forth above (the "Initial Trustees"), shall be ________________________________________________________________________________ ________________________________________________________________________________ ___________________________________________________________________________, but in each case only for so long as he shall continue to serve as a Trustee of the Trust hereunder. The term of the Initial Trustees shall commence on the date hereof and shall continue until the annual meeting of Shareholders in 1998 and until their successors shall have been duly elected and shall have qualified. The names and addresses of the Initial Trustees who shall serve until the annual meeting of the Shareholders held in 1998 and until their successors are duly elected and qualified are: Name Address Beginning with the annual meeting of Shareholders in 1998 and at each succeeding annual meeting of Shareholders, the Trustees will be elected to hold office for a term expiring at the succeeding annual meeting. Each Trustee will hold office for the term for which he is elected and until his successor is duly elected and qualified. 3 Section 2.3. Resignation, Removal or Death. Any Trustee may resign by written notice to the remaining Trustees, effective upon execution and delivery to the Trust of such written notice or upon any future date specified in the notice. A Trustee may be removed from office only at a meeting of the Shareholders called for that purpose, by the affirmative vote of the holders of not less than a majority of the Shares entitled to vote in the election of Trustees; provided, however, that in the case of any Trustees elected solely by holders of a series of Preferred Shares, such Trustees may be removed by the affirmative vote of a majority of the Preferred Shares of that series then outstanding and entitled to vote in the election of Trustees, voting together as a single class. Upon the resignation or removal of any Trustee, or his otherwise ceasing to be a Trustee, he shall automatically cease to have any right, title or interest in and to the Trust Property and shall execute and deliver such documents as the remaining Trustees require for the conveyance of any Trust Property held in his name, and shall account to the remaining Trustees as they require for all property which he holds as Trustee. Upon the incapacity or death of any Trustee, his legal representative shall perform the acts described in the foregoing sentence. Section 2.4. Vacancies. Any vacancy (including a vacancy created by an increase in the number of Trustees) shall be filled, at any regular or special meeting of Trustees called for that purpose, by a majority of the Trustees (although less than a quorum). Any individual so elected as Trustee shall hold office until the next annual meeting of Shareholders and until his successor has been duly elected and qualified. Section 2.5. Legal Title. Legal title to all Trust Property shall be vested in the Trustees, but they may cause legal title to any Trust Property to be held by or in the name of any Trustee, or the Trust, or any other Person as nominee. The right, title and interest of the Trustees in and to the Trust Property shall automatically vest in successor and additional Trustees upon their qualification and acceptance of election or appointment as Trustees, and they shall thereupon have all the rights and obligations of Trustees, whether or not conveyancing documents have been executed and delivered pursuant to Section 2.3 or otherwise. Written evidence of the qualification and acceptance of election or appointment of successor and additional Trustees may be filed with the records of the Trust and in such other offices, agencies or places as the Trustees may deem necessary or desirable. ARTICLE 3 - POWERS OF TRUSTEES Section 3.1. General. Subject to the express limitations herein or in the bylaws of the Trust (the "Bylaws"), (i) the business and affairs of the Trust shall be managed under the direction of the Board of Trustees and (ii) the Trustees shall have full, exclusive and absolute power, control and authority over the Trust Property and over the business of the Trust as if they, in their own right, were the sole owners thereof. The Trustees may take any actions that, in their sole judgment and discretion, are necessary or desirable to conduct the business of the Trust. This Declaration of Trust shall be construed with a presumption in favor of the grant of power and authority to the Trustees. Any construction of this Declaration of Trust or determination made in good faith by the Trustees concerning their powers and authority hereunder shall be conclusive. The enumeration and definition of particular powers of the Trustees included in this Article 3 shall in no way be limited or restricted by reference to or inference from the terms of this or any other provision of this Declaration of Trust or construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Trustees under the general laws of the State of Maryland as now or hereafter in force. Section 3.2. Specific Powers and Authority. Subject only to the express limitations herein, and in addition to all other powers and authority conferred by this Declaration or by law, the Trustees, without any vote, action or consent by the Shareholders, shall have and may exercise, at any time or times, in the name of the Trust or on its behalf the following powers and authorities: 4 (a) Investments. Subject to Section 8.5, to invest in, purchase or otherwise acquire and to hold real, personal or mixed, tangible or intangible, property of any kind wherever located, or rights or interests therein or in connection therewith, all without regard to whether such property, interests or rights are authorized by law for the investment of funds held by trustees or other fiduciaries, or whether obligations the Trust acquires have a term greater or lesser than the term of office of the Trustees or the possible termination of the Trust, for such consideration as the Trustees may deem proper (including cash, property of any kind or Securities of the Trust); provided, however, that the Trustees shall take such actions as they deem necessary and desirable to comply with any requirements of Title 8 relating to the types of assets held by the Trust. (b) Sale, Disposition and Use of Property. Subject to Section 8.5, to sell, rent, lease, hire, exchange, release, partition, assign, mortgage, grant security interests in, encumber, negotiate, dedicate, grant easements in and options with respect to, convey, transfer (including transfers to entities wholly or partially owned by the Trust or the Trustees) or otherwise dispose of any or all of the Trust Property by deeds (including deeds in lieu of foreclosure with or without consideration), trust deeds, assignments, bills of sale, transfers, leases, mortgages, financing statements, security agreements and other instruments for any of such purposes executed and delivered for and on behalf of the Trust or the Trustees by one or more of the Trustees or by a duly authorized officer, employee, agent or nominee of the Trust, on such terms as they deem appropriate; to give consents and make contracts relating to the Trust Property and its use or other property or matters; to develop, improve, manage, use, alter and otherwise deal with the Trust Property; and to rent, lease or hire from others property of any kind; provided, however, that the Trust may not use or apply land for any purposes not permitted by applicable law. (c) Financings. To borrow or in any other manner raise money for the purposes and on the terms they determine, and to evidence the same by issuance of Securities of the Trust, which may have such provisions as the Trustees determine; to reacquire such Securities of the Trust; to enter into other contracts or obligations on behalf of the Trust; to guarantee, indemnify or act as surety with respect to payment or performance of obligations of any Person; to mortgage, pledge, assign, grant security interests in or otherwise encumber the Trust Property to secure any such Securities of the Trust, contracts or obligations (including guarantees, indemnifications and suretyships); and to renew, modify, release, compromise, extend, consolidate or cancel, in whole or in part, any obligation to or of the Trust or participate in any reorganization of obligors to the Trust. (d) Loans. Subject to the provisions of Section 8.5, to lend money or other Trust Property on such terms, for such purposes and to such Persons as they may determine. (e) Issuance of Securities. Subject to the provisions of Article 6, to create and authorize and direct the issuance (on either a pro-rata or a non-pro-rata basis) by the Trust, in shares, units or amounts of one or more types, series or classes, of Securities of the Trust, which may have such voting rights, dividend or interest rates, preferences, subordinations, conversion or redemption prices or rights, maturity dates, distribution, exchange, or liquidation rights or other rights as the Trustees may determine, without vote of or other action by the Shareholders, to such Persons for such consideration, at such time or times and in such manner and on such terms as the Trustees determine; to list any of the Securities of the Trust 5 on any securities exchange; and to purchase or otherwise acquire, hold, cancel, reissue, sell and transfer any Securities of the Trust. (f) Expenses and Taxes. To pay any charges, expenses or liabilities necessary or desirable, in the sole discretion of the Trustees, for carrying out the purposes of this Declaration of Trust and conducting the business of the Trust, including compensation or fees to Trustees, officers, employees and agents of the Trust, and to Persons contracting with the Trust, and any taxes, levies, charges and assessments of any kind imposed upon or chargeable against the Trust, the Trust Property, or the Trustees in connection therewith; and to prepare and file any tax returns, reports or other documents and take any other appropriate action relating to the payment of any such charges, expenses or liabilities. (g) Collection and Enforcement. To collect, sue for and receive money or other property due to the Trust; to consent to extensions of the time for payment, or to the renewal, of any Securities or obligations; to engage or to intervene in, prosecute, defend, compound, enforce, compromise, release, abandon or adjust any actions, suits, proceedings, disputes, claims, demands, security interests, or things relating to the Trust, the Trust Property, or the Trust's affairs; to exercise any rights and enter into any agreements; and take any other action necessary or desirable in connection with the foregoing. (h) Deposits. To deposit funds or Securities constituting part of the Trust Property in banks, trust companies, savings and loan associations, financial institutions and other depositories, whether or not such deposits will draw interest, subject to withdrawal on such terms and in such manner as the Trustees determine. (i) Allocation; Accounts. To determine whether moneys, profits or other assets of the Trust shall be charged or credited to, or allocated between, income and capital, including whether or not to amortize any premium or discount and to determine in what manner any expenses or disbursements are to be borne as between income and capital (regardless of how such items would normally or otherwise be charged to or allocated between income and capital without such determination); to treat any dividend or other distribution on any investment as, or apportion it between, income and capital; in their discretion to provide reserves for depreciation, amortization, obsolescence or other purposes in respect of any Trust Property in such amounts and by such methods as they determine; to determine what constitutes net earnings, profits or surplus; to determine the method or form in which the accounts and records of the Trust shall be maintained; and to allocate to the Shareholders equity account less than all of the consideration paid for Shares and to allocate the balance to paid-in capital or capital surplus. (j) Valuation of Property. To determine the value of all or any part of the Trust Property and of any services, Securities, property or other consideration to be furnished to or acquired by the Trust, and to revalue all or any part of the Trust Property, all in accordance with such appraisals or other information as are reasonable, in their sole judgment. (k) Ownership and Voting Powers. To exercise all of the rights, powers, options and privileges pertaining to the ownership of any mortgages, Securities, Real Estate and other Trust Property to the same extent that an individual owner might, including without limitation to vote or give any consent, request, or notice or waive any notice, either in person or may be 6 for any general or special meetings or action, and may include the exercise of discretionary powers. (l) Officers, Etc.; Delegation of Powers. To elect, appoint or employ such officers for the Trust and such committees of the Board of Trustees with such powers and duties as the Trustees may determine or the Trust's Bylaws provide; to engage, employ or contract with and pay compensation to any Person (including, subject to Section 8.5, any Trustee and any Person who is an Affiliate of any Trustee) as agent, representative, Adviser, member of an advisory board, employee or independent contractor (including advisers, consultants, transfer agents, registrars, underwriters, accountants, attorneys-at-law, real estate agents, property and other managers, appraisers, brokers, architects, engineers, construction managers, general contractors or otherwise) in one or more capacities, to perform such services on such terms as the Trustees may determine; to delegate to one or more Trustees, officers or other Persons engaged or employed as aforesaid or to committees of Trustees or to the Adviser, the performance of acts or other things (including granting of consents), the making of decisions and the execution of such deeds, contracts or other instruments, either in the names of the Trust, the Trustees or as their attorneys or otherwise, as the Trustees may determine; and to establish such committees as they deem appropriate. (m) Associations. Subject to Section 8.5, to cause the Trust to enter into joint ventures, general or limited partnerships, limited liability companies, participation or agency arrangements or any other lawful combinations, relationships, or associations of any kind. (n) Reorganizations, Etc. Without limiting the scope of Section 9.2, to cause to be organized or assist in organizing any Person under the laws of any jurisdiction to acquire all or any part of the Trust Property or carry on any business in which the Trust shall have an interest; to sell, rent, lease, hire, convey, negotiate, assign, exchange or transfer all or any part of the Trust Property to or with any Person in exchange for Securities of such Person or otherwise; and to lend money to, subscribe for and purchase the Securities of, and enter into any contracts with, any Person in which the Trust holds, or is about to acquire, Securities or any other interests. (o) Reverse Stock Splits. Upon the approval of not less than 80% of the Trustees, to cause the Shares of the Trust to be recapitalized or consolidated by effectuating a reverse stock split of one or more series or classes of Shares based upon a reverse stock split ratio (the "Ratio") approved by not less than 80% of the Trustees, such that following the consummation of such reverse stock split, each Share of the series or class(es) of Shares in question will automatically, without vote of or other action by the Shareholders, be deemed to be a fewer number of Shares computed in accordance with such Ratio; and, if determined by the Trustees to be appropriate or desirable, to cause any fractional Shares resulting therefrom to be canceled in exchange for a cash payment equal to (x) with respect to Common Shares, the "market value" of such Share determined in accordance with the provisions of Section 3-601 et seq. of the Maryland General Corporation Law (computed for the period ending on the business day prior to the effective date of such reverse stock split), or for Shares other than Common Shares traded on the American Stock Exchange, as determined by the Trustees in good faith, multiplied by (y) the applicable fraction. (p) Insurance. To purchase and pay for out of Trust Property insurance policies insuring the Trust and the Trust Property against any and all risks, and insuring the Shareholders, 7 Trustees, officers, employees and agents of the Trust individually against all claims and liabilities of every nature arising by reason of holding or having held any such status, office or position or by reason of any action alleged to have been taken or omitted (including those alleged to constitute misconduct, gross negligence, reckless disregard of duty or bad faith) by any such Person in such capacity, whether or not the Trust would have the power to indemnify such Person against such claim or liability. (q) Executive Compensation, Pension and Other Plans. To adopt and implement executive compensation, pension, profit sharing, stock option, stock bonus, stock purchase, stock appreciation rights, savings, thrift, retirement, incentive or benefit plans, trusts or provisions, applicable to any or all Trustees, officers, employees or agents of the Trust, or to other Persons who have benefitted the Trust, all on such terms and for such purposes as the Trustees may determine. (r) Distributions. To declare and pay dividends or other distributions to Shareholders, subject to the provisions of Section 6.4. (s) Indemnification. Without regard to the indemnification provided for in Section 8.4, to indemnify any Person, including any Adviser or independent contractor, with whom the Trust has dealings. (t) Charitable Contributions. To make donations for the public welfare or for community, charitable, religious, educational, scientific, civic or similar purposes, regardless of any direct benefit to the Trust. (u) Discontinue Operations; Bankruptcy. To discontinue the operations of the Trust; to petition or apply for relief under any provision of federal or state bankruptcy, insolvency or reorganization laws or similar laws for the relief of debtors; to permit any Trust Property to be foreclosed upon without raising any legal or equitable defenses that may be available to the Trust or the Trustees or otherwise defending or responding to such foreclosure; to confess judgment against the Trust; or to take such other action with respect to indebtedness or other obligations of the Trustees, in such capacity, the Trust Property or the Trust as the Trustees in their discretion may determine. (v) Trustees. To nominate persons for election as Trustees. (w) Fiscal Year. Subject to the Code, to adopt, and from time to time change, a fiscal year for the Trust. (x) Seal. To adopt and use a seal, but the use of a seal shall not be required for the execution of instruments or obligations of the Trust. (y) Bylaws. To adopt, implement and from time to time alter, amend or repeal Bylaws of the Trust relating to the business and organization of the Trust which are not inconsistent with the provisions of this Declaration of Trust. (z) Accounts and Books. To determine from time to time whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Trust, or any of them, shall be open to the inspection of Shareholders. 8 (aa) Voting Trust. To participate in, and accept Securities issued under or subject to, any voting trust. (ab) Proxies. To solicit proxies of the Shareholders at the expense of the Trust. (ac) Further Powers. To do all other acts and things and execute and deliver all instruments incident to the foregoing powers, and to exercise all powers which they deem necessary, useful or desirable to carry on the business of the Trust or to carry out the provisions of this Declaration of Trust, even if such powers are not specifically provided hereby. Section 3.3. Limitations on Powers and Authority. Notwithstanding any provision hereof to the contrary, in no event shall the Trustees have the power or authority to cause the Trust to do any of the following without the prior approval of the Shareholders: (a) Commodities Contracts. To invest in commodities or commodity future contracts other than interest rate futures intended to hedge the Trust against interest rate risk. (b) Trading Activities. To engage in trading (as compared with investment activities) or engage in the underwriting or agency distribution or sale of securities issued by others. (c) Certain Holdings. To hold property primarily for sale to customers in the ordinary course of business; provided, however, that the Trust may sell properties if necessary, advisable or desirable or if effected pursuant to an intent to liquidate the Trust. ARTICLE 4 - ADVISER Section 4.1. Appointment. The Trustees are responsible for setting the general policies of the Trust and for the general supervision of its business conducted by officers, agents, employees, advisers or independent contractors of the Trust. However, the Trustees are not required personally to conduct the business of the Trust, and they may (but need not) appoint, employ or contract with any Person (including a Person Affiliated with any Trustee) as an Adviser and may grant or delegate such authority to the Adviser as the Trustees may, in their sole discretion, deem necessary or desirable. The Trustees may determine the terms of retention and the compensation of the Adviser and may exercise broad discretion in allowing the Adviser to administer and regulate the operations of the Trust, to act as agent for the Trust, to execute documents on behalf of the Trust and to make executive decisions which conform to general policies and principles established by the Trustees. Section 4.2. Affiliation and Functions. The Trustees, by resolution or in the Bylaws, may provide guidelines, provisions or requirements concerning the affiliation and functions of the Adviser. ARTICLE 5 - INVESTMENT POLICY The fundamental investment policy of the Trust is to make investments in such a manner as to comply with the REIT Provisions of the Code and with the requirements of Title 8, with respect to the composition of the Trust's investments and the derivation of its income. The Trustees will use their best efforts to carry out this fundamental investment policy and to conduct the affairs of the Trust in such a manner as to continue to qualify the Trust for the tax treatment provided in the REIT Provisions of the Code; however, no Trustee, officer, employee or agent of the Trust shall be liable for any act or omission resulting in the loss of tax 9 benefits under the Code, except to the extent provided in Section 8.2. The Trustees may change from time to time, by resolution or in the Bylaws of the Trust, such investment policies as they determine to be in the best interests of the Trust, including prohibitions or restrictions upon certain types of investments. ARTICLE 6 - SHARES Section 6.1. Authorized Shares. The total number of shares of beneficial interest which the Trust is authorized to issue is __________, of which _________ shares shall be preferred shares, par value $.01 per share ("Preferred Shares"), and __________ shares shall be common shares, $0.01 par value per share ("Common Shares"). Section 6.2. Common Shares. (a) Dividend Rights. Subject to the preferential dividend rights of the Preferred Shares, if any, as may be determined by the Board of Trustees pursuant to Section 6.3, the holders of Common Shares shall be entitled to receive such dividends as may be declared by the Board of Trustees. (b) Rights Upon Liquidation. Subject to the preferential rights of the Preferred Shares, if any, as may be determined by the Board of Trustees pursuant to Section 6.3, in the event of any voluntary or involuntary liquidation, dissolution or winding up of, or any distribution of the assets of, the Trust, each holder of Common Shares shall be entitled to receive, ratably with each other holder of Common Shares, that portion of the assets of the Trust available for distribution to the holders of Common Shares that bears the same relation to the total amount of such assets of the Trust as the number of Common Shares held by such holder bears to the total number of Common Shares then outstanding. (c) Voting Rights. The holders of the Common Shares shall be entitled to vote on all matters (for which a common shareholder shall be entitled to vote thereon) at all meetings of the Shareholders of the Trust, and shall be entitled to one vote for each Common Share entitled to vote at such meeting, voting together with the holders of the Preferred Shares who are entitled to vote (except as otherwise may be determined by the Board of Trustees pursuant to Section 6.3). Section 6.3. Preferred Shares. With respect to the Preferred Shares, the Board of Trustees shall have the power from time to time (a) to classify or reclassify, in one or more series, any unissued Preferred Shares and (b) to reclassify any unissued shares of any series of Preferred Shares, in the case of either (a) or (b) by setting or changing the number of shares constituting such series and the designation, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of such shares and, in such event, the Trust shall file for record with the State Department of Assessments and Taxation of Maryland articles supplementary to this Declaration of Trust in substance and form as prescribed by Title 8. Section 6.4. Dividends or Distributions. The Trustees may from time to time declare and cause the Trust to pay to Shareholders such dividends or distributions in cash, property or other assets of the Trust or in Securities of the Trust or from any other source as the Trustees in their discretion shall determine. The Trustees shall endeavor to declare and pay such dividends and distributions as shall be necessary for the Trust to qualify as a real estate investment trust under the REIT Provisions of the Code; however, Shareholders shall have no right to any dividend or distribution unless and until declared by the Trustees. The exercise of the 10 powers and rights of the Trustees pursuant to this section shall be subject to the provisions of any class or series of Shares at the time outstanding. The receipt by any Person in whose name any Shares are registered on the records of the Trust or by his duly authorized agent shall be a sufficient discharge for all dividends or distributions payable or deliverable in respect of such Shares and from all liability to see to the application thereof. Section 6.5. General Nature of Shares. All Shares shall be personal property entitling the Shareholders only to those rights provided in this Declaration of Trust or in the resolution creating any class or series of Shares. The legal ownership of the Trust Property and the right to conduct the business of the Trust are vested exclusively in the Trustees; the Shareholders shall have no interest therein other than beneficial interest in the Trust conferred by their Shares and shall have no right to compel any partition, division, dividend or distribution of the Trust or any of the Trust Property. The death of a Shareholder shall not terminate the Trust or give his legal representative any rights against other Shareholders, the Trustees or the Trust Property, except the right, exercised in accordance with applicable provisions of the Bylaws, to receive a new certificate for Shares in exchange for the certificate held by the deceased Shareholder. Holders of Shares shall not have any preemptive right to subscribe to any securities of the Trust. Section 6.6. Restrictions on Ownership and Transfer: Exchange For Excess Shares. (a) Definitions. For the purposes of Sections 6.6, 6.7 and 6.8, the following terms shall have the following meanings: "Beneficial Ownership" shall mean ownership of Shares either directly or constructively through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have the correlative meanings. Accordingly, for purposes hereof, Beneficial Ownership shall be calculated for any Person by dividing two numbers, (a) the number that is the numerator being the sum of (i) such Person's ownership of outstanding Shares plus (ii) the maximum number of Shares issuable upon the exercise or conversion of outstanding warrants, preferred stock or other securities exercisable for or convertible into Shares owned by such Person and (b) the number that is the denominator being the sum of (i) all outstanding Shares plus (ii) the maximum number of Shares issuable upon the exercise or conversion of outstanding warrants, preferred stock or other securities exercisable for or convertible into Shares owned by such Person; provided that the Board of Trustees shall retain full authority to adopt such other approach to determining Beneficial Ownership as it may deem appropriate. Notwithstanding the foregoing, for purposes of determining compliance with this Section 6.6 by any Person to whom the Trust issues an option or warrant (or any Shareholder of any such Person), such option or warrant shall not be deemed to confer upon such Person Beneficial Ownership or Constructive Ownership of the Shares issuable upon the exercise thereof, and the Shares issuable upon the exercise thereof shall be excluded from both the numerator and denominator of the foregoing calculation. "Beneficiary" shall mean the beneficiary of the Special Trust as determined pursuant to Section 6.8(e). "Common Equity Shares" shall mean outstanding Shares that are either Common Shares or Excess Common Shares. 11 "Constructive Ownership" shall mean ownership of Shares either directly or constructively through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns" and "Constructively Owned" shall have the correlative meanings. Accordingly, for purposes hereof, Constructive Ownership shall be calculated for any Person by dividing two numbers, (a) the number that is the numerator being the sum of (i) such Person's ownership of outstanding Shares plus (ii) the maximum number of Shares issuable upon the exercise or conversion of outstanding warrants, preferred stock or other securities exercisable for or convertible into Shares owned by such Person and (b) the number that is the denominator being the sum of (i) all outstanding Shares plus (ii) the maximum number of Shares issuable upon the exercise or conversion of outstanding warrants, preferred stock or other securities exercisable for or convertible into Shares owned by such Person; provided that the Board of Trustees shall retain full authority to adopt such other approach to determining Constructive Ownership as it may deem appropriate. Notwithstanding the foregoing, for purposes of determining compliance with Sections 6.6(b) and (c) by any Person to whom the Trust issues an option or warrant (or any Shareholder of any such Person), such option or warrant shall not be deemed to confer upon such Person Beneficial Ownership or Constructive Ownership of the Shares issuable upon the exercise thereof, and the Shares issuable upon the exercise thereof shall be excluded from both the numerator and denominator of the foregoing calculation. "Event" shall have the meaning assigned to it in Section 6.6(c). "Excess Common Shares" shall mean Excess Shares that would, under Section 6.8(e)(i), automatically be exchanged for Common Shares in the event of a transfer of an interest in the Special Trust in which such Excess Shares are held. "Excess Preferred Shares" shall mean Excess Shares that would, under Section 6.8(e)(i), automatically be exchanged for Preferred Shares in the event of a transfer of an interest in the Special Trust in which such Excess Shares are held. "Excess Shares" shall mean, as applicable, Excess Common Shares or Excess Preferred Shares. "Exempt Parties" shall mean (A) ___________________________, (B) __________________, (C) _______________, (D) any Section 544 Subsidiary of any of the entities or individuals describe in (A), (B) or (C) above, and (E) any other Person who acquires shares from any of the foregoing in a transaction not registered under Section 5 of the Securities Act of 1933, as amended. This definition shall apply to any Person so long as, but only so long as, such Person Beneficially Owns capital stock (or has rights to acquire capital stock) in excess of the Ownership Limit. The term "Exempt Party" shall mean any of the foregoing. "Market Price" shall mean the last reported sales price reported on the American Stock Exchange of Shares on the trading day immediately preceding the relevant date, or if the Shares are not then traded on the American Stock Exchange, the last reported sales price of Shares on the trading day immediately preceding the relevant date as reported on any exchange or quotation system over which the Shares may be traded, or if the Shares are not then traded over any exchange or quotation system, then the market price of the Shares on the relevant date as determined in good faith by the Board of Trustees of the Trust. The Market 12 Price of the Common Shares shall be determined separately from the Market Price of any outstanding class of Preferred Shares. "Ownership Limit" shall mean ____% in value of the outstanding Shares. "Ownership Limitation Termination Date" shall mean the first day after the date on which the Board of Trustees determines that it is no longer in the best interests of the Trust to attempt to, or continue to, qualify as a REIT. "Permissible Ownership Threshold" shall mean as to ______________, _______________________ and _________________, respectively, ____%, ____% and ____%; provided that, once an Exempt Party transfers Shares such that such Exempt Party following such transfer Beneficially Owns and Constructively Owns less in value than the Ownership Limit, then such Exempt Party's Permissible Ownership Threshold shall equal the Ownership Limit. "Person" shall mean an individual, corporation, partnership, limited liability company, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity or any government or agency or political subdivision thereof and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, but does not include an underwriter which participates in a public offering of Shares for a period of 25 days following the purchase by such underwriter of those Shares. "Purported Beneficial Holder" shall mean, with respect to any event other than a purported Transfer which results in Excess Shares, the person for whom the Purported Record Holder of the Shares that were, pursuant to Section 6.6(c), automatically exchanged for Excess Shares upon the occurrence of such event held such Shares. "Purported Beneficial Transferee" shall mean, with respect to any purported Transfer which results in Excess Shares, the purported beneficial transferee for whom the Purported Record Transferee would have acquired Shares, if such Transfer had been valid under Section 6.6(b). "Purported Record Holder" shall mean, with respect to any event other than a purported Transfer which results in Excess Shares, the record holder of the Shares that were, pursuant to Section 6.6(c), automatically exchanged for Excess Shares upon the occurrence of such event. "Purported Record Transferee" shall mean, with respect to any purported Transfer which results in Excess Shares, the record holder of the Shares if such Transfer had been valid under Section 6.6(b). "REIT" shall mean a real estate investment trust under Section 856 of the Code. "Section 544 Subsidiary" of any individual or entity shall mean any entity, over 50% of the ownership interest in which is owned, directly or indirectly (applying the principles of Section 544 of the Code) by the individual or entity in question. 13 "Special Trust" shall mean the trust created pursuant to Section 6.8(a). "Transfer" shall mean any issuance, sale, transfer, gift, assignment, devise or other disposition of Shares or capital stock of any Person (including (i) the granting of any option or entering into any agreement for the sale, transfer or other disposition of Shares, (ii) the sale, transfer, exercise, assignment or other disposition of any securities or rights convertible into or exchangeable for Shares or (iii) the establishment of a put or the granting to a third party of a call right with respect to Shares), whether voluntary or involuntary, whether of record or beneficially and whether by operation of law or otherwise. "Trustee" shall mean, for purposes of this Article VI only, the Trust, as trustee for the Special Trust, and any successor trustee appointed by the Trust. (b) Restrictions on Ownership and Transfer. (i) Except as provided in Section 6.6(k), prior to the Ownership Limitation Termination Date, no Person (other than an Exempt Party) shall Beneficially Own or Constructively Own any Shares to the extent such ownership would exceed the Ownership Limit. In addition, except as provided in Section 6.6(k), prior to the Ownership Limitation Termination Date, no Exempt Party shall Beneficially Own or Constructively Own any Shares in excess of the Permissible Ownership Threshold for such Exempt Party. (ii) Except as provided in Section 6.6(k), prior to the Ownership Limitation Termination Date, any Transfer that, if effective, would result in any Person (other than an Exempt Party) Beneficially Owning or Constructively Owning Shares in excess of the Ownership Limit shall be void ab initio as to the Transfer of such Shares which would be otherwise Beneficially Owned or Constructively Owned by such Person in excess of such Ownership Limit; and the intended transferee shall acquire no rights in or to such Shares. (iii) Except as provided in Section 6.6(k), prior to the Ownership Limitation Termination Date, any Transfer that, if effective, would result in any Exempt Party Beneficially Owning or Constructively Owning Shares in excess of the Permissible Ownership Threshold for such Exempt Party shall be void ab initio as to the Transfer of such Shares which would be otherwise Beneficially Owned or Constructively Owned by such Exempt Party in excess of the Permissible Ownership Threshold for such Exempt Party; and such Exempt Party shall acquire no rights in or to such Shares. (iv) Prior to the Ownership Limitation Termination Date, any Transfer that, if effective, would result in Shares being beneficially owned by less than 100 Persons (determined without reference to any rules of attribution) shall be void ab initio as to the Transfer of such Shares which would be otherwise beneficially owned by the transferee; and the intended transferee shall acquire no rights in such Shares. (v) Prior to the Ownership Limitation Termination Date, any Transfer that, if effective, would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code shall be void ab initio as to the Transfer of the Shares 14 which would cause the Trust to be "closely held" within the meaning of Section 856(h) of the Code; and the intended transferee shall acquire no rights in such Shares. (vi) The Board of Trustees shall have the authority to select the Ownership Limitation Termination Date. (c) Exchange For Excess Stock. (i) If, notwithstanding the other provisions contained in this Section 6.6, at any time prior to the Ownership Limitation Termination Date, there is a purported Transfer such that any Person (other than an Exempt Party) would Beneficially Own or Constructively Own Shares in excess of the Ownership Limit, then, except as otherwise provided in Section 6.6(k), such number of Shares in excess of such Ownership Limit (rounded up to the nearest whole Share) shall be automatically exchanged for an equal number of shares of Excess Shares. Such exchange shall be effective as of the close of business on the business day prior to the date of the Transfer. (ii) If, notwithstanding the other provisions contained in this Section 6.6, at any time prior to the Ownership Limitation Termination Date, there is a purported Transfer such that an Exempt Party would Beneficially Own or Constructively Own Shares in excess of the applicable Permissible Ownership Threshold, then, except as otherwise provided in Section 6.6(k), such number of Shares in excess of the applicable Permissible Ownership Threshold (rounded up to the nearest whole Share) shall be automatically exchanged for an equal number of Excess Shares. Such exchange shall be effective as of the close of business on the business day prior to the date of the Transfer. (iii) If, notwithstanding the other provisions contained in this Section 6.6, at any time prior to the Ownership Limitation Termination Date, there is a purported Transfer which, if effective, would cause the Trust to become "closely held" within the meaning of Section 856(h) of the Code, then the Shares being Transferred which would cause the Trust to be "closely held" within the meaning of Section 856(h) of the Code (rounded up to the nearest whole Share) shall be automatically exchanged for an equal number of Excess Shares. Such exchange shall be effective as of the close of business on the business day prior to the date of the Transfer. (iv) If, notwithstanding the other provisions contained in this Section 6.6, at any time prior to the Ownership Limitation Termination Date, an event other than a purported Transfer (an "Event") occurs which would (i) cause any Person (other than an Exempt Party) to Beneficially Own or Constructively Own Shares in excess of the Ownership Limit, or (ii) cause an Exempt Party to Beneficially Own or Constructively Own Shares in excess of such Exempt Party's applicable Permissible Ownership Threshold, then, except as otherwise provided in Section 6.6(k), Shares Beneficially Owned or Constructively Owned by such Person or Exempt Party, as the case may be (rounded up to the nearest whole Share), shall be automatically exchanged for an equal number of Excess Shares to the extent necessary to eliminate such excess ownership. Such exchange shall be effective as of the close of business 15 on the business day prior to the date of the Event. In determining which Shares are exchanged, Shares directly held or Beneficially Owned by any Person who caused the Event to occur shall be exchanged before any Shares not so held are exchanged. Where several such Persons exist, the exchange shall be pro rata. (d) Remedies For Breach. If the Board of Trustees or its designee(s) shall at any time determine that a Transfer has taken place in violation of Section 6.6(b) or that a Person intends to acquire or has attempted to acquire beneficial ownership (determined without reference to any rules of attribution) of any Shares that would result in Shares being beneficially owned by less than 100 persons as contemplated by Section 6.6(b)(iv), or in Beneficial Ownership or Constructive Ownership of any Shares in violation of Section 6.6(b), the Board of Trustees or its designees shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer (or any Transfer related to such intent), including, but not limited to, refusing to give effect to such Transfer on the books of the Trust or instituting proceedings to enjoin such Transfer; provided, however, that any Transfers or attempted Transfers in violation of Sections 6.6(b)(ii), (iii), (iv) or (v) shall automatically result in the exchange described in Section 6.6(c), irrespective of any action (or non-action) by the Board of Trustees or its designees. (e) Notice of Ownership or Attempted Ownership in Violation of Section 6.6(b). Any Person who acquires or attempts to acquire Beneficial Ownership or Constructive Ownership of Shares in violation of Section 6.6(b) shall immediately give written notice to the Trust of such acquisition or attempted acquisition and shall provide to the Trust such other information as the Trust may request in order to determine the effect, if any, of such acquisition or attempted acquisition on the Trust's status as a REIT. (f) Owners Required to Provide Information. Prior to the Ownership Limitation Termination Date: (i) every Beneficial Owner or Constructive Owner of more than ___% in value of the outstanding Shares shall, within 30 days after January 1 of each year, give written notice to the Trust stating the name and address of such Beneficial Owner or Constructive Owner, the number of Shares Beneficially Owned or Constructively Owned, and a description of how such Shares are held. Each such Beneficial Owner or Constructive Owner shall provide to the Trust such additional information as the Trust may request in order to determine the effect, if any, of such Beneficial Ownership or Constructive Ownership on the Trust's status as a REIT. (ii) Each Person who is a Beneficial Owner or Constructive Owner of Shares and each Person (including the shareholder of record) who is holding Shares for a Beneficial Owner or Constructive Owner shall provide to the Trust such information as the Trust may request in order to determine the Trust's status as a REIT or to comply with regulations promulgated under the REIT provisions of the Code. (g) Remedies Not Limited. Nothing contained in this Section 6.6 shall limit the authority of the Board of Trustees to take such other action as it deems necessary or advisable to protect the Trust and the interests of its Shareholders by preserving the Trust's REIT status. 16 (h) Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Article VI including any definition contained in Section 6.6(a) and any ambiguity with respect to which Shares are to be exchanged for Excess Shares in a given situation, the Board of Trustees shall have the authority to determine the application of the provisions of this Section 6.6 with respect to any situation based on the facts known to it. (i) Increase in Ownership Limit. Subject to the limitations provided in Section 6.6(j), the Board of Trustees may from time to time increase the Ownership Limit. (j) Limitations on Modifications. (i) The Ownership Limit may not be increased if, after giving effect to such increase, five Beneficial Owners of Shares would Beneficially Own, in the aggregate, more than 49.9% of the outstanding Shares. (ii) Prior to an increase in the Ownership Limit pursuant to Section 6.6(i), the Board of Trustees may require such opinions of counsel or the Trust's tax accountants, affidavits, undertakings or agreements as it may deem necessary or advisable in order to determine or ensure the Trust's status as a REIT. (k) Exceptions. The Board of Trustees, with a ruling from the Internal Revenue Service or an opinion of counsel or the Trust's tax accountants to the effect that such exemption will not result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, may exempt a Person from the Ownership Limit or the Permissible Ownership Threshold, as the case may be, if the Board of Trustees obtains such representations and undertakings from such Person as the Board of Trustees may deem appropriate and such Person agrees that any violation or attempted violation of any of such representations or undertakings will result in, to the extent necessary or otherwise deemed appropriate by the Board of Trustees, the exchange of Shares held by such Person for Excess Shares in accordance with Section 6.6(c). (l) American Stock Exchange Transactions. Nothing in this Section 6.6 shall preclude the settlement of any transaction entered into through the facilities of the American Stock Exchange, any successor exchange or quotation system thereto, or any other exchange or quotation system over which the Shares may be traded from time to time. Section 6.7. Legend. (a) Each certificate for Common Shares hereafter issued shall bear the following legend: "The Common Shares represented by this certificate are subject to restrictions on ownership and transfer for the purpose of the Trust's maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). No Person may Beneficially Own or Constructively Own Shares in excess of ____% in value (or such greater percentage as may be determined by the Board of Trustees) of the outstanding Shares of the Trust (unless such Person is an Exempt Party). No Person who is an Exempt Party may Beneficially Own or Constructively Own Shares in excess of the Permissible Ownership Threshold for such Exempt Party. Any Person who attempts to Beneficially 17 Own or Constructively Own Shares in excess of the above limitations must immediately notify the Trust. All capitalized terms used in this legend have the meanings set forth in the Declaration of Trust, a copy of which, including the restrictions on ownership and transfer, will be sent without charge to each Shareholder who so requests. If the restrictions on ownership and transfer are violated, the Common Shares represented hereby will be automatically exchanged for Excess Shares which will be held in trust by the Trust." (b) Each certificate for Preferred Shares hereafter issued shall bear the following legend: "The Preferred Shares represented by this certificate are subject to restrictions on ownership and transfer for the purpose of the Trust's maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). No Person may Beneficially Own or Constructively Own Shares in excess of ____% in value (or such greater percentage as may be determined by the Board of Trustees) of the outstanding Shares of the Trust (unless such Person is an Exempt Party). No Person who is an Exempt Party may Beneficially Own or Constructively Own Shares in excess of the Permissible Ownership Threshold for such Exempt Party. Any Person who attempts to Beneficially Own or Constructively Own Shares in excess of the above limitations must immediately notify the Trust. All capitalized terms used in this legend have the meanings set forth in the Declaration of Trust, a copy of which, including the restrictions on ownership and transfer, will be sent without charge to each Shareholder who so requests. If the restrictions on ownership and transfer are violated, the Preferred Shares represented hereby will be automatically exchanged for Excess Shares which will be held in trust by the Trust." Section 6.8. Excess Shares. (a) Ownership in Trust. Upon any purported Transfer or Event that results in an exchange of Shares for Excess Shares pursuant to Section 6.6(c), such Excess Shares shall be deemed to have been transferred to the Trust, as Trustee of a Special Trust for the exclusive benefit of the Beneficiary or Beneficiaries to whom an interest in such Excess Shares may later be transferred pursuant to Section 6.8(e). Excess Shares so held in trust shall be issued and outstanding Shares of the Trust. The Purported Record Transferee or Purported Record Holder shall have no rights in such Excess Shares except as and to the extent provided in Section 6.8(e). (b) Dividend Rights. Excess Shares shall not be entitled to any dividends or distributions. Any dividend or distribution paid prior to the discovery by the Trust that the Shares with respect to which the dividend or distribution was made had been exchanged for Excess Shares shall be repaid to the Trust upon demand. (c) Rights Upon Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of, or any distribution of the assets of, the Trust, (i) subject to the preferential rights of the Preferred Shares, if any, as may be determined by the Board of 18 Trustees pursuant to Section 6.3 and the preferential rights of the Excess Preferred Shares, if any, each holder of Excess Common Shares shall be entitled to receive, ratably with each other holder of Common Shares and Excess Common Shares, that portion of the assets of the Trust available for distribution to the holders of Common Shares or Excess Common Shares which bears the same relation to the total amount of such assets of the Trust as the number of Excess Common Shares held by such holder bears to the total number of Common Shares and Excess Common Shares then outstanding and (ii) each holder of Excess Preferred Shares shall be entitled to receive that portion of the assets of the Trust which a holder of the Preferred Shares that were exchanged for such Excess Preferred Shares would have been entitled to receive had such Preferred Shares remained outstanding. The Trust, as holder of the Excess Shares in trust, or if the Trust shall have been dissolved, any trustee appointed by the Trust prior to its dissolution, shall distribute ratably to the Beneficiaries of the Special Trust, when determined, any such assets received in respect of the Excess Shares in any liquidation, dissolution or winding up of, or any distribution of the assets of the Trust. (d) Voting Rights. The holders of Excess Shares shall not be entitled to vote on any matters (except as required by law). (e) Restrictions On Transfer; Designation of Beneficiary. (i) Excess Shares shall not be transferrable. The Purported Record Transferee or Purported Record Holder may freely designate a Beneficiary of an interest in the Special Trust (representing the number of Excess Shares held by the Special Trust attributable to a purported Transfer or Event that resulted in the Excess Shares) if (i) the Excess Shares held in the Special Trust would not be Excess Shares in the hands of such Beneficiary and (ii) the Purported Beneficial Transferee or Purported Beneficial Holder does not receive a price, as determined on a Share-by-Share basis, for designating such Beneficiary that reflects a price for such Excess Shares that, (I) in the case of a Purported Beneficial Transferee, exceeds (x) the price such Purported Beneficial Transferee paid for the Shares in the purported Transfer that resulted in the exchanges of Shares for Excess Shares, or (y) if the Purported Beneficial Transferee did not give value for such Shares (having received such Shares pursuant to a gift, devise or other transaction), the Market Price of such Shares on the date of the purported Transfer that resulted in the exchange of Shares for Excess Shares or (II) in the case of a Purported Beneficial Holder, exceeds the Market Price of the Shares that were automatically exchanged for such Excess Shares on the date of such exchange. Upon such a transfer of an interest in the Special Trust, the corresponding shares of Excess Shares in the Special Trust shall be automatically exchanged for an equal number of Common Shares or Preferred Shares (depending upon the type of Shares that were originally exchanged for such Excess Shares) and such Common Shares or Preferred Shares shall be transferred of record to the transferee of the interest in the Special Trust if such Common Shares or Preferred Shares would not be Excess Shares in the hands of such transferee. Prior to any transfer of any interest in the Special Trust, the Purported Record Transferee or Purported Record Holder, as the case may be, must give advance notice to the Trust of the intended transfer and the Trust must have waived in writing its purchase rights under Section 6.8(f). (ii) Notwithstanding the foregoing, if a Purported Beneficial Transferee or Purported Beneficial Holder receives a price for designating a Beneficiary of an 19 interest in the Special Trust that exceeds the amounts allowable under Section 6.8(e)(i), such Purported Beneficial Transferee or Purported Beneficial Holder shall pay, or cause such Beneficiary to pay, such excess to the Trust. (f) Purchase Right in Excess Shares. Excess Shares shall be deemed to have been offered for sale to the Trust, or its designee, at a price per share equal to, (I) in the case of Excess Shares resulting from a purported Transfer, the lesser of (i) the price per share in the transaction that created such Excess Shares (or, in the case of a gift, devise or other transaction, the Market Price at the time of such gift, devise or other transaction) or (ii) the Market Price on the date the Trust, or its designee, accepts such offer or (II) in the case of Excess Shares created by an Event, the lesser of (i) the Market Price of the Shares originally exchanged for the Excess Shares on the date of such exchange or (ii) the Market Price of such Shares on the date the Trust, or its designee, accepts such offer. The Trust shall have the right to accept such offer for a period of ninety (90) days after the later of (i) the date of the purported Transfer or Event which resulted in an exchange of Shares for such Excess Shares and (ii) the date the Board of Trustees determines that a purported Transfer or other event resulting in an exchange of Shares for such Excess Shares has occurred, if the Trust does not receive a notice of any such Transfer pursuant to Section 6.6(e). Section 6.9. Severability; Agent for Trust. If any provision of Section 6.6, 6.7 or 6.8 or any application of any such provision is determined to be invalid by any federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. In any event, to the extent such court holds the Purported Record Transferee to be the record and beneficial owner of Shares which, had the provisions of Sections 6.6, 6.7 and 6.8 been enforced, would have been exchanged for Excess Shares, such Purported Record Transferee shall be deemed, at the option of the Trust, to have acted as agent on behalf of the Trust in acquiring such transferred Shares and to hold such Shares on behalf of the Trust. ARTICLE 7 - SHAREHOLDERS Section 7.1. Meetings of Shareholders. There shall be an annual meeting of the Shareholders, to be held at such time and place as shall be determined by or in the manner prescribed in the Bylaws at which the Trustees shall be elected and any other proper business may be conducted. Except as otherwise provided in this Declaration of Trust, special meetings of Shareholders may be called in the manner provided in the Bylaws. Special meetings of Shareholders may be called upon the written request of Shareholders holding an aggregate of not less than ten percent (10%) of the Common Shares. Special meetings of shareholders may also be called by holders of Preferred Shares to the extent, if any, determined by the Board of Trustees in connection with the establishment of a class or series of Preferred Shares. If there are no Trustees, the officers of the Trust shall promptly call a special meeting of the Shareholders entitled to vote for the election of successor Trustees. Any meeting may be adjourned and reconvened as the Trustees determine or as provided in the Bylaws. Section 7.2. Voting Rights of Shareholders. Subject to the provisions of any class or series of Preferred Shares then outstanding and the mandatory provisions of any applicable laws or regulations, the Shareholders shall be entitled to vote only on the following matters: (a) election or removal of Trustees as provided in Sections 7.1 and 2.3 and Section 8-202 of Title 8 and the Bylaws; (b) amendment of this Declaration of Trust as provided in Section 9.1; (c) a matter specified in Section 3.3; and (d) a merger of the Trust with or into another entity as and to the extent required by Section 8-501.1 of Title 8. Except with 20 respect to the foregoing matters, no action taken by the Shareholders at any meeting shall in any way bind the Trustees. Section 7.3. Shareholder Action to be Taken by Meeting. Any action required or permitted to be taken by the Shareholders of the Trust must be effected at a duly called annual or special meeting of Shareholders of the Trust and may not be effected by any consent in writing of such Shareholders. Notwithstanding anything contained in this Declaration of Trust to the contrary, the affirmative vote of at least a majority of the then outstanding Shares entitled to vote in the election of Trustees, voting together as a single class, shall be required to amend, repeal, or adopt any provision inconsistent with this Section 7.3 and the affirmative vote of such number or percentage of the then outstanding Shares as is specified in this Declaration of Trust or, if not so specified, in the Bylaws shall be required to take any other action required or permitted to be taken by the Shareholders. ARTICLE 8 - LIABILITY OF SHAREHOLDERS, TRUSTEES, OFFICERS, EMPLOYEES AND AGENTS AND TRANSACTIONS BETWEEN AFFILIATES AND THE TRUST Section 8.1. Limitation of Shareholder Liability. No Shareholder shall be liable for any debt, claim, demand, judgment or obligation of any kind of, against or with respect to the Trust by reason of his being a Shareholder, nor shall any Shareholder be subject to any personal liability whatsoever, in tort, contract or otherwise, to any Person in connection with the Trust Property or the affairs of the Trust. All written contracts to which the Trust is a party shall include a provision to the effect that the Shareholders shall not be personally liable thereon. Section 8.2. Limitation of Trustee and Officer Liability. To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of trustees and officers of a real estate investment trust, no Trustee or officer of the Trust shall be liable to the Trust or to any Shareholder for money damages. Neither the amendment nor repeal of this Section, nor the adoption or amendment of any other provision of this Declaration of Trust inconsistent with this Section, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. In the absence of any Maryland statute limiting the liability of trustees and officers of a Maryland real estate investment trust for money damages in a suit by or on behalf of the Trust or by any Shareholder, no Trustee or officer of the Trust shall be liable to the Trust or to any Shareholder for money damages except to the extent that (i) the Trustee or officer actually received an improper benefit or profit in money, property, or services, for the amount of the benefit or profit in money, property, or services actually received; or (ii) a judgment or other final adjudication adverse to the Trustee or officer is entered in a proceeding based on a finding in the proceeding that the Trustee's or officer's action or failure to act was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. Section 8.3. Express Exculpatory Clauses in Instruments. Neither the Shareholders nor the Trustees, officers, employees or agents of the Trust shall be liable under any written instrument creating an obligation of the Trust, and all Persons shall look solely to the Trust Property for the payment of any claim under or for the performance of that instrument. The omission of the foregoing exculpatory language from any instrument shall not affect the validity or enforceability of such instrument and shall not render any Shareholder, Trustee, officer, employee or agent liable thereunder to any third party, nor shall the Trustees or any officer, employee or agent of the Trust be liable to anyone for such omission. No amendment of this Declaration of Trust or repeal of any of its provisions shall limit or eliminate the limitation of liability provided 21 to Trustees and officers hereunder with respect to any act or omission occurring prior to such amendment or repeal. Section 8.4. Indemnification. The Trust shall indemnify (i) its Trustees and officers, whether serving the Trust or at its request any other entity, to the full extent required or permitted by the general laws of the State of Maryland applicable to ordinary business corporations now or hereafter in force, including the advance of expenses under the procedures and to the full extent permitted by such laws, and (ii) the Shareholders and other employees and agents of the Trust to such extent as shall be authorized by the Trustees or the Bylaws and as permitted by law. Nothing contained herein shall be construed to protect any Person against any liability to the extent such protection would violate Maryland statutory or decisional law applicable to real estate investment trusts organized under Title 8 or any successor provision. The foregoing rights of indemnification shall not be exclusive of any other rights to which those seeking indemnification may be entitled. The Trustees may take such action as is necessary to carry out these indemnification provisions and are expressly empowered to adopt, approve and amend from time to time such bylaws, resolutions or contracts implementing such provisions or such further indemnification arrangements as may be permitted by law. No amendment of this Declaration of Trust or repeal of any of its provisions shall limit or eliminate the right of indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal. Section 8.5. Transactions Between the Trust and its Trustees, Officers, Employees and Agents. Subject to any express restrictions in this Declaration of Trust or adopted by the Trustees in the Bylaws or by resolution, the Trust (which, for purposes of this Section 8.5, shall include the Trust and any of its subsidiaries) may enter into any contract or transaction of any kind (including without limitation for the purchase or sale of property or for any type of services, including those in connection with underwriting or the offer or sale of Securities of the Trust) with any Person, including any Trustee, officer, employee or agent of the Trust or any Person Affiliated with the Trust or a Trustee, officer, employee or agent of the Trust, whether or not any of them has a financial interest in such transaction; provided, however, that the following contracts and transactions may not be consummated by the Trust unless first approved by the affirmative vote of a majority of the Trustees who have no interest in the contract or transaction: any contract or transaction between the Trust and any Trustee, officer, employee or agent of the Trust or any person Affiliated with the Trust or a Trustee, officer, employee or agent of the Trust. ARTICLE 9 - AMENDMENT; REORGANIZATION; MERGER, ETC. Section 9.1. Amendment. (a) This Declaration of Trust may be amended by the affirmative vote of the holders of not less than a majority of the Shares then outstanding and entitled to vote thereon, except that Section 11.5 shall not be amended or repealed, nor shall provisions inconsistent therewith be adopted, except by the affirmative vote of the holders of not less than 80% of the Shares then outstanding and entitled to vote. (b) An amendment to this Declaration of Trust shall become effective as provided in Section 11.6. (c) This Declaration of Trust may not be amended except as provided in this Section 9.1. Section 9.2. Merger, Consolidation or Sale of Trust Property. Subject to the provisions of any class or series of Preferred Shares at the time outstanding and subject to Section 8-501.1 of Title 8, as and to 22 the extent applicable, the Trustees shall have the power to (i) merge the Trust with or into another entity, (ii) consolidate the Trust with one or more other entities into a new entity or (iii) sell or otherwise dispose of all or substantially all of the Trust Property. ARTICLE 10 - DURATION AND TERMINATION OF TRUST Section 10.1. Duration of Trust. The Trust shall continue perpetually unless terminated pursuant to Section 10.2 or pursuant to any applicable provision of Title 8. Section 10.2. Termination of Trust. (a) Subject to the provisions of any class or series of Preferred Shares at the time outstanding and subject to Section 8-501.1 of Title 8, as and to the extent applicable, the Trustees shall have the power to terminate the Trust. Upon the termination of the Trust: (i) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration of Trust shall continue, including the powers to fulfill or discharge the Trust's contracts, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining Trust Property to one or more Persons at public or private sale for consideration which may consist in whole or in part of cash, Securities or other property of any kind, discharge or pay its liabilities and do all other acts appropriate to liquidate its business. (ii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and agreements as they deem necessary for their protection, the Trustees may distribute the remaining Trust Property, in cash or in kind or partly in each, among the Shareholders according to their respective rights, so that after payment in full or the setting apart for payment of such preferential amounts, if any, to which the holders of any Shares (other than Common Shares) at the time outstanding shall be entitled, the remaining Trust Property available for payment and distribution to Shareholders shall, subject to any participating or similar rights of Shares (other than Common Shares) at the time outstanding, be distributed ratably among the holders of Common Shares at the time outstanding. (b) After termination of the Trust, the liquidation of its business, and the distribution to the Shareholders as herein provided, a majority of the Trustees shall execute and file with the Trust's records a document certifying that the Trust has been duly terminated, and the Trustees shall be discharged from all liabilities and duties hereunder, and the rights and interests of all Shareholders shall cease. ARTICLE 11 - MISCELLANEOUS Section 11.1. Governing Law. This Declaration of Trust is executed by the undersigned Trustees and delivered in the State of Maryland with reference to the laws thereof, and the rights of all parties and the validity, construction and effect of every provision hereof shall be subject to and construed according to the laws of the State of Maryland without regard to conflicts of laws provisions thereof. 23 Section 11.2. Reliance by Third Parties. Any certificate shall be final and conclusive as to any Persons dealing with the Trust if executed by an individual who, according to the records of the Trust or of any recording office in which this Declaration of Trust may be recorded, appears to be the Secretary or an Assistant Secretary of the Trust or a Trustee, and if certifying to: (i) the number or identity of Trustees, officers of the Trust or Shareholders; (ii) the due authorization of the execution of any document; (iii) the action or vote taken, and the existence of a quorum, at a meeting of Trustees or Shareholders; (iv) a copy of this Declaration or of the Bylaws as a true and complete copy as then in force; (v) an amendment to this Declaration; (vi) the termination of the Trust; or (vii) the existence of any fact or facts which relate to the affairs of the Trust. No purchaser, lender, transfer agent or other Person shall be bound to make any inquiry concerning the validity of any transaction purporting to be made on behalf of the Trust by the Trustees or by any officer, employee or agent of the Trust. Section 11.3. Provisions in Conflict with Law or Regulations. (a) The provisions of this Declaration of Trust are severable, and if the Trustees shall determine, with the advice of counsel, that any one or more of such provisions (the "Conflicting Provisions") are in conflict with the REIT Provisions of the Code, Title 8 or other applicable federal or state laws, the Conflicting Provisions shall be deemed never to have constituted a part of this Declaration of Trust, even without any amendment of this Declaration pursuant to Section 9.1; provided, however, that such determination by the Trustees shall not affect or impair any of the remaining provisions of this Declaration of Trust or render invalid or improper any action taken or omitted prior to such determination. No Trustee shall be liable for making or failing to make such a determination. (b) If any provision of this Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such holding shall not in any manner affect or render invalid or unenforceable such provision in any other jurisdiction or any other provision of this Declaration of Trust in any jurisdiction. Section 11.4. Construction. In this Declaration of Trust, unless the context otherwise requires, words used in the singular or in the plural include both the plural and singular and words denoting any gender include all genders. The title and headings of different parts are inserted for convenience and shall not affect the meaning, construction or effect of this Declaration. In defining or interpreting the powers and duties of the Trust and its Trustees and officers, reference may be made, to the extent appropriate and not inconsistent with the Code or Title 8, to Titles 1 through 3 of the Corporations and Associations Article of the Annotated Code of Maryland. In furtherance and not in limitation of the foregoing, in accordance with the provisions of Title 3, Subtitles 6 and 7, of the Corporations and Associations Article of the Annotated Code of Maryland, the Trust shall be included within the definition of "corporation" for purposes of such provisions. Section 11.5. Recordation. This Declaration of Trust and any amendment hereto shall be filed for record with the State Department of Assessments and Taxation of Maryland and may also be filed or recorded in such other places as the Trustees deem appropriate, but failure to file for record this Declaration or any amendment hereto in any office other than in the State of Maryland shall not affect or impair the validity or effectiveness of this Declaration or any amendment hereto. A restated Declaration shall, upon filing, be conclusive evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Declaration and the various amendments thereto. IN WITNESS WHEREOF, this Amended and Restated Declaration of Trust has been signed on this ____ day of _________________, 1997 by the undersigned Trustees, each of whom acknowledges, under 24 penalty of perjury, that this document is his free act and deed, and that to the best of his knowledge, information, and belief, the matters and facts set forth herein are true in all material respects. 25 EX-3.1(B) 3 EXHIBIT 3.1(B) RESOURCE ASSET INVESTMENT TRUST AMENDED AND RESTATED DECLARATION OF TRUST Dated as of______________________ , 1997 TABLE OF CONTENTS Article Page ------- ---- I Formation.....................................................1 II Name..........................................................1 III Purposes and Powers ..........................................2 IV Resident Agent................................................2 V Board of Trustees ............................................3 VI Shares of Beneficial Interest.................................7 VII Restrictions on Transfer and Shares-in-Trust.................11 VIII Shareholders.................................................30 IX Liability Limitation, Indemnification and Transactions with the Trust..................................32 X Amendments...................................................34 XI Merger, Consolidation or Sale of Trust Property..............35 XII Duration and Termination of Trust............................36 XIII Miscellaneous................................................37 Resource Asset Investment Trust, a Maryland real estate investment trust (the "Trust") under Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland ("Title 8"), desires to amend and restate its Declaration of Trust as currently in effect and as hereinafter amended. The following provisions are all the provisions of the Declaration of Trust currently in effect and as hereinafter amended: ARTICLE I FORMATION The Trust is a real estate investment trust (a "REIT") within the meaning of Title 8. The Trust shall not be deemed to be a general partnership, limited partnership, joint venture, joint stock company or a corporation, provided that nothing herein shall preclude the Trust from being treated for tax purposes as an association under the Internal Revenue Code of 1986, as amended (the "Code"). ARTICLE II NAME The name of the Trust is: Resource Asset Investment Trust Under circumstances in which the Board of Trustees of the Trust (the "Board of Trustees" or "Board") determines that the use of the name of the Trust is not practicable, the Trust may use any other designation or name for the Trust. ARTICLE III PURPOSES AND POWERS Section 1. Purposes. The purposes for which the Trust is formed are to invest in and to acquire, hold, manage, administer, control and dispose of loans relating to real property, real property and interests in real property, including, without limitation or obligation, engaging in business as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Such activities may be entered into directly by the Trust, through qualified REIT subsidiaries of the Trust, or through partnerships of which the general partner is the Trust or a qualified REIT subsidiary of the Trust. Section 2. Powers. The Trust shall have all of the powers granted to REITs by Title 8 and all other powers set forth in the Declaration of Trust which are not inconsistent with law and are appropriate to promote and attain the purposes set forth in the Declaration of Trust. ARTICLE IV RESIDENT AGENT The name of the resident agent of the Trust in the State of Maryland is Resagent, Inc., whose post office address is 7 St. Paul Street, Suite 1407, Baltimore, Maryland 21202. The resident agent is a domestic corporation of and resides in the State of Maryland. The Trust may have such offices or places of business within or outside the State of Maryland as the Board of Trustees of the Trust may from time to time determine. - 2 - ARTICLE V BOARD OF TRUSTEES Section 1. Powers (A) Subject to any express limitations contained in the Declaration of Trust or in the Bylaws, (i) the business and affairs of the Trust shall be managed under the direction of the Board of Trustees and (ii) the Board shall have full, exclusive and absolute power, control and authority over any and all property of the Trust. The Board may take any action as it, in its sole judgment and discretion, deems necessary or appropriate to conduct the business and affairs of the Trust. The Declaration of Trust shall be construed with a presumption in favor of the grant of power and authority to the Board. Any construction of the Declaration of Trust or determination made in good faith by the Board concerning its powers and authority hereunder shall be conclusive. The enumeration and definition of particular powers of the Trustees included in the Declaration of Trust or in the Bylaws shall in no way be construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Board of Trustees under the general laws of the State of Maryland or any other applicable laws. (B) Except as otherwise provided in the Bylaws of the Trust (the "Bylaws"), the Board, without any action by the shareholders of the Trust, shall have and may exercise, on behalf of the Trust, without limitation, the power to adopt, amend and repeal Bylaws; to elect officers in the manner prescribed in the Bylaws; to solicit proxies from holders of shares of beneficial interest of the Trust; and to do any other acts and deliver any other documents necessary or appropriate to the foregoing powers. - 3 - (C) It shall be the duty of the Board of Trustees to ensure that the Trust satisfies the requirements for qualification as a REIT under the Code, including, but not limited to, the ownership of outstanding shares of its beneficial interest, the nature of its assets, the sources of its income, and the amount and timing of its distributions to its shareholders. The Board of Trustees shall take no action to disqualify the Trust as a REIT or to otherwise revoke the Trust's election to be taxed as a REIT without the affirmative vote of a majority of the number of shares of beneficial interest entitled to vote on such matter at a meeting of the Shareholders. Section 2. Number; Initial Board; Term. (A) The number of Trustees shall be established by the Board of Trustees from time to time by majority vote, but shall not be less than three nor more than nine, but such upper and lower limits may be increased or decreased by a vote of at least seventy-five percent (75%) of the Trustees then in office from time to time; provided that the number of Trustees so established shall not be less than the number required by Maryland law. No reduction in the number of Trustees shall cause the removal of any Trustee from office prior to the expiration of his term. (B) The Trustee, as of the date on which this Declaration of Trust has been amended and restated, as set forth above, is Betsy Z. Cohen, but only for so long as such Trustee shall continue to serve as a Trustee of the Trust hereunder. The term of each of the following Trustees (the "Initial Trustees") shall commence on the date hereof and shall continue - 4 - until the annual meeting of Shareholders in 1998 and until their successors shall have been duly elected and shall have qualified: Name Address ---- ------- Betsy Z. Cohen Jonathan Z. Cohen Jerome S. Goodman Daniel Promislo Joel R. Mesznik Jack L. Wogin (C) Beginning with the annual meeting of Shareholders in 1998 and at each succeeding annual meeting of Shareholders, the Trustees will be elected to hold office for a term expiring at the succeeding annual meeting. Each Trustee will hold office for the term for which he is elected and until his successor is duly elected and qualified. (D) The Trustees may fill any vacancy on the Board of Trustees, whether resulting from an increase in the number of Trustees or otherwise, at any regular meeting of the Trustees or any special meeting called for such purpose by a majority vote of the remaining Trustees, subject to the provisions of Section 4 below. It shall not be necessary to list in the Declaration of Trust the names and addresses of any Trustees hereinafter elected. Section 3. Resignation, Removal or Death. Any Trustee may resign by written notice to the Board, effective upon execution and delivery to the Trust of such written notice or upon any future date specified in the notice. Subject to the rights of holders of one or more classes - 5 - or series of Preferred Shares to elect one or more Trustees, a Trustee may be removed at any time, with or without cause, at a meeting of the shareholders, by the affirmative vote of the holders of not less than two-thirds of the Shares then outstanding and entitled to vote generally in the election of Trustees. Section 4. Independent Trustees. Notwithstanding anything herein to the contrary, at all times (except during a period not to exceed sixty (60) days following the death, resignation, incapacity or removal from office of a Trustee prior to expiration of the Trustee's term of office), a majority of the Board of Trustees shall be comprised of persons who, within the last two years, have not been (i) Affiliates (as such term is defined in Section 5, below) of Resource America, Inc., JeffBanks, Inc., Brandywine Construction & Management, Inc. or their Affiliates, (ii) officers of the Trust or any subsidiary of the Trust, or (iii) have had any material business or professional relationship with the Trust, any subsidiary of the Trust, Resource America, Inc., Brandywine Construction & Management, Inc., JeffBanks, Inc. or their Affiliates (each such person serving on the Board of Trustees being an "Independent Trustee"). Independent Trustees shall nominate replacements for vacancies among the Independent Trustees' positions. In the event that, after the closing of the Initial Public Offering, a majority of the Trustees are not Independent Trustees by reason of the resignation or removal of one or more Independent Trustees or otherwise, the remaining Independent Trustees (or, if there are no Independent Trustees, the remaining members of the Board of Trustees) shall promptly elect that number of Independent Trustees necessary to cause the Board of Trustees to include a majority of Independent Trustees. Section 5. Definition of Affiliate. For purposes of Section 4, above, "Affiliate" of a person shall mean (i) any person that, directly or indirectly, controls or is controlled by or is under common control with such person, (ii) any other person that owns, beneficially, directly or indirectly, five percent (5%) or more of the outstanding capital shares, shares or equity - 6 - interests of such person, or (iii) any officer, director, employee, partner or trustee of such person or of any person controlling, controlled by or under common control with such person (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of such person). The term "person" means and includes individuals, corporations, general and limited partnerships, stock companies or associations, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, or other entities and governments and agencies and political subdivisions thereof. For the purpose of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, through the ownership of voting securities, partnership interests or other equity interests. Section 6. Business Activities by Trustees. Unless otherwise agreed between the Trust and the Trustees, each individual Trustee, including each Independent Trustee, may engage in other business activities of the type conducted by the Trust and is not required to present to the Trust any investment opportunities presented to them even though the investment opportunities may be within the scope of the Trust's investment policies. ARTICLE VI SHARES OF BENEFICIAL INTEREST Section 1. Authorized Shares. The beneficial interest of the Trust shall be divided into shares of beneficial interest (the "Shares"). The Trust has authority to issue Two Hundred Million (200,000,000) common shares of beneficial interest, $.01 par value per share ("Common Shares"), and Twenty Five Million (25,000,000) preferred shares of beneficial interest, $.01 par - 7 - value per share ("Preferred Shares"). The Trustees, without any action by the shareholders of the Trust, by a majority vote, may amend the Declaration of Trust from time to time to increase or decrease the aggregate number of Shares or the number of Shares of any class that the Trust has authority to issue. Section 2. Common Shares. Subject to the provisions of Article VII, each Common Share shall entitle the holder thereof to one vote on each matter upon which holders of Common Shares are entitled to vote. The Board of Trustees may reclassify any unissued Common Shares from time to time in one or more classes or series of Shares. Section 3. Preferred Shares. The Board of Trustees may classify any unissued Preferred Shares and reclassify any previously classified but unissued Preferred Shares of any series from time to time, in one or more series of Shares. Section 4. Classified or Reclassified Shares. Prior to issuance of classified or reclassified Shares of any class or series, the Board of Trustees by resolution shall (a) designate that class or series to distinguish it from all other classes and series of Shares; (b) specify the number of Shares to be included in the class or series; (c) set, subject to the provisions of Article VII and subject to the express terms of any class or series of Shares outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each series; and (d) cause the Trust to file articles supplementary with the State Department of Assessments and Taxation of Maryland ("SDAT"). Any of the terms of any class or series of Shares set pursuant to clause (c) of this Section 4 may be made dependent upon facts or events ascertainable outside the Declaration of Trust (including determinations by the Board of Trustees - 8 - or other facts or events within the control of the Trust) and may vary among holders thereof, provided that the manner in which such facts, events or variations shall operate upon the terms of such class or series of Shares is clearly and expressly set forth in articles supplementary filed with the SDAT. Section 5. Authorization by Board of Share Issuance. The Board of Trustees may authorize the issuance from time to time of Shares of any class or series, whether now or hereafter authorized, or securities or rights convertible into Shares of any class or series, whether now or hereafter authorized, for such consideration (whether in cash, property, past or future services, obligation for future payment or otherwise) as the Board of Trustees may deem advisable (or without consideration in the case of a Share split or Share dividend), subject to such restrictions or limitations, if any, as may be set forth in the Declaration of Trust or the Bylaws of the Trust. Notwithstanding any other provision in the Declaration of Trust, no determination shall be made by the Board of Trustees nor shall any transaction be entered into by the Trust which would cause any Shares or other beneficial interest in the Trust not to constitute "transferable shares" or "transferable certificates of beneficial interest" under Section 856(a)(2) of the Code or which would cause any distribution to constitute a preferential dividend as described in Section 562(c) of the Code. Section 6. Dividends and Distributions. The holders of all Common Shares will participate equally in dividends payable to holders of Common Shares when and as authorized and declared by the Board of Trustees and in net assets available for distribution to holders of Common Shares upon liquidation or dissolution. The Board of Trustees may from time to time authorize and declare to shareholders such dividends or distributions, in cash or other assets of - 9 - the Trust or in securities of the Trust or from any other source as the Board of Trustees in its discretion shall determine. The Board of Trustees shall endeavor to declare and pay such dividends and distributions as shall be necessary for the Trust to qualify as a REIT under the Code; however, shareholders shall have no right to any dividend or distribution unless and until authorized and declared by the Board. The exercise of the powers and rights of the Board of Trustees pursuant to this Section shall be subject to the provisions of any class or series of Shares at the time outstanding. Section 7. General Nature of Shares. All Shares shall be personal property entitling the shareholders only to those rights provided in the Declaration of Trust. The shareholders shall have no interest in the property of the Trust and shall have no right to compel any partition, division, dividend or distribution of the Trust or of the property of the Trust. The death of a shareholder shall not terminate the Trust. The Trust is entitled to treat as shareholders only those persons in whose names Shares are registered as holders of Shares on the beneficial interest ledger of the Trust. Section 8. Fractional Shares. The Trust may, without the consent or approval of any shareholder, issue fractional Shares, eliminate a fraction of a Share by rounding up or down to a full Share, arrange for the disposition of a fraction of a Share by the person entitled to it, or pay cash for the fair value of a fraction of a Share. Section 9. Declaration of Trust and Bylaws. All shareholders are subject to the provisions of the Declaration of Trust and the Bylaws of the Trust. - 10 - ARTICLE VII RESTRICTIONS ON TRANSFER AND SHARES-IN-TRUST Section 1. Restrictions on Transfer. (A) Definitions. The following terms shall have the following meanings (1) "Beneficial Ownership" shall mean ownership of Equity Shares (or options to acquire Equity Shares) by a Person who would be treated as an owner of such Equity Shares either directly or indirectly through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns," and "Beneficially Owned" shall have correlative meanings. (2) "Beneficiary" shall mean, with respect to any Share Trust, one or more organizations described in each of Section 170(b)(1)(A) (other than clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code that are named by the Share Trust as the beneficiary or beneficiaries of such Share Trust, in accordance with the provisions of Section 2(A) hereof. (3) "Board of Trustees" shall mean the Board of Trustees of the Trust. (4) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (5) "Constructive Ownership" shall mean ownership of Equity Shares (or options to acquire Equity Shares) by a Person who would be treated as an owner of such Equity Shares either directly or indirectly through the application of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns," and "Constructively Owned" shall have correlative meanings. - 11 - (6) "Equity Shares" shall mean shares that are either Preferred Shares or Common Shares. The term "Equity Shares" shall include all Preferred Shares or Common Shares that are held as Shares-in-Trust in accordance with the provisions of Section 2 hereof. (7) "Exchange Rights" shall mean the rights granted under the RAIT Partnership, L.P. Partnership Agreement to the limited partners to exchange, under certain circumstances, their limited partnership interests for cash (or, at the option of the Trust, Common Shares). (8) "Excluded Holder" shall mean Resource America, Inc. (9) "Excluded Holder Limit" shall mean, (i) the lesser of (A) 15% of the number of outstanding Common Shares or (B) the Adjusted Excluded Holder Percentage (as defined in Section 1(I) of this Article VII). The Excluded Holder Limit shall be adjusted on any day that the Adjusted Excluded Holder Percentage changes as provided in Section 1(I) of this Article VII. The Excluded Holder shall be subject to the Ownership Limit with respect to any Preferred Shares acquired by the Excluded Holder. (10) "Initial Public Offering" means the sale of Common Shares pursuant to the Trust's first effective registration statement for such Common Shares filed under the Securities Act of 1933, as amended. (11) "Market Price" on any date shall mean the average of the Closing Price for the five consecutive Trading Days ending on such date. The "Closing Price" on any date shall mean the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted - 12 - to trading as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Equity Shares are listed or admitted to trading or, if the Equity Shares are not listed or admitted to trading on any national securities exchange, the last quoted price, or if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or, if such system is no longer in use, the principal other automated quotations system that may then be in use or, if the Equity Shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Equity Shares selected by the Board of Trustees. "Trading Day" shall mean a day on which the principal national securities exchange on which the Equity Shares are listed or admitted to trading is open for the transaction of business or, if the Equity Shares are not listed or admitted to trading on any national securities exchange, shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. (12) "Non-Transfer Event" shall mean an event (other than a purported Transfer) that would cause (i) any Person (other than the Excluded Holder with respect to Common Shares) to Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit or (ii) the Excluded Holder to Beneficially Own or Constructively Own Common Shares in excess of the Excluded Holder Limit, including, but not limited to, the granting of any option or entering into any agreement for the sale, transfer or other disposition - 13 - of Equity Shares or the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Equity Shares. (13) "Ownership Limit" initially shall mean 8.5% of the number of outstanding Common Shares and 9.8% of the outstanding number of any series of Preferred Shares. After any adjustment provided for in Section 1(J) of this Article VII, the Ownership Limit with respect to Common Shares shall be increased (but not above 9.8%) as set forth in such Section. (14) "Partnership Unit" shall mean a fractional, undivided share of the partnership interests of RAIT Partnership, L.P., a Delaware limited partnership. (15) "Permitted Transferee" shall mean any Person designated as a Permitted Transferee in accordance with the provisions of Section 2(E) hereof. (16) "Person" shall mean an individual, corporation, partnership, estate, trust, a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity and also includes a "group" as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. (17) "RAIT Partnership Agreement" shall mean the agreement of limited partnership of RAIT Partnership, L.P., a Delaware limited partnership, as amended and restated. (18) "Prohibited Owner" shall mean, with respect to any purported Transfer or Non-Transfer Event, any Person who, but for the provisions of Section 1(C) hereof, would own record title to Equity Shares. - 14 - (19) "REIT" shall mean a real estate investment trust under Section 856 of the Code. (20) "Restriction Termination Date" shall mean the first day after the date of the Initial Public Offering on which the Board of Trustees and the shareholders of the Trust determine, pursuant to Article V, Section 1(C), that it is no longer in the best interests of the Trust to attempt to, or continue to, qualify as a REIT. (21) "Shares-in-Trust" shall mean any Equity Shares designated Shares-in-Trust pursuant to Section 1(C) hereof. (22) "Share Trust" shall mean any separate trust created pursuant to Section 1(C) hereof and administered in accordance with the terms of Section 2 hereof, for the exclusive benefit of any Beneficiary. (23) "Share Trustee" shall mean any person or entity unaffiliated with both the Trust and any Prohibited Owner, such Share Trustee to be designated by the Trust to act as trustee of any Share Trust, or any successor trustee thereof. (24) "Transfer" (as a noun) shall mean any sale, transfer, gift, assignment, devise or other disposition of Equity Shares, whether voluntary or involuntary, whether of record, constructively or beneficially and whether by operation of law or otherwise. "Transfer" (as a verb) shall have the correlative meaning. (B) Restriction on Transfers. (1) Except as provided in Section 1(G) hereof, from the date of the Initial Public Offering and prior to the Restriction Termination Date, (i) no Person (other than the Excluded Holder with respect to Common Shares) shall Beneficially Own or Constructively Own - 15 - outstanding Equity Shares in excess of the Ownership Limit and (ii) the Excluded Holder shall not Beneficially Own or Constructively Own outstanding Common Shares in excess of the Excluded Holder Limit. (2) Except as provided in Section 1(G) hereof and subject to Section 1(H) hereof, from the date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer that, if effective, would result in (i) any Person (other than the Excluded Holder with respect to Common Shares) Beneficially Owning or Constructively Owning Equity Shares in excess of the Ownership Limit or (ii) the Excluded Holder Beneficially Owning or Constructively Owning Common Shares in excess of the Excluded Holder Limit, shall be void ab initio as to the Transfer of that number of Equity Shares which would be otherwise Beneficially Owned or Constructively Owned by such Person in excess of the Ownership Limit or the Excluded Holder Limit, as applicable, and the intended transferee shall acquire no rights in such excess Equity Shares. (3) From the date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer that, if effective, would result in the Equity Shares being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution) shall be void ab initio as to the Transfer of that number of shares which would be otherwise beneficially owned (determined without reference to any rules of attribution) by the transferee, and the intended transferee shall acquire no rights in such excess Equity Shares; provided, however, that this Section 1(B)(3) shall not apply to the Transfer of Equity Shares from the Trust to the underwriters of the Initial Public Offering. - 16 - (4) From the date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer of Equity Shares that, if effective, would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code shall be void ab initio as to the Transfer of that number of Equity Shares which would cause the Trust to be "closely held" within the meaning of Section 856(h) of the Code, and the intended transferee shall acquire no rights in such excess Equity Shares. (5) Except as provided in Section 1(G) hereof and subject to Section 1(H) hereof, from the date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer of Equity Shares that, if effective, would cause the Trust to Constructively Own 10% or more of the ownership interests in a tenant of the Trust's real property, within the meaning of Section 856(d)(2)(B) of the Code, shall be void ab initio as to the Transfer of that number of Equity Shares which would cause the Trust to Constructively Own 10% or more of the ownership interests in a tenant of the Trust's real property, within the meaning of Section 856(d)(2)(B) of the Code, and the intended transferee shall acquire no rights in such excess Equity Shares. (C) Transfer to Share Trust. (1) If, notwithstanding the other provisions contained in this Section 1, at any time after the date of the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event such that (i) any Person (other than the Excluded Holder with respect to Common Shares) would either Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit or (ii) the Excluded Holder would either Beneficially Own or Constructively Own Common Shares in excess of the Excluded - 17 - Holder Limit, then, (x) except as otherwise provided in Section 1(G) hereof, the purported transferee shall acquire no right or interest (or, in the case of a Non-Transfer Event, the person holding record title to the Equity Shares Beneficially Owned or Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease to own any right or interest) in such number of Equity Shares which would cause such Beneficial Owner or Constructive Owner to Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit or the Excluded Holder Limit, as applicable, (y) such number of Equity Shares in excess of the Ownership Limit or the Excluded Holder Limit, as applicable (rounded up to the nearest whole share), shall be designated Shares-in-Trust and, in accordance with the provisions of Section 2 hereof, transferred automatically and by operation of law to the Share Trust to be held in accordance with that Section 2 and (z) the Prohibited Owner shall submit such number of Equity Shares to the Trust for registration into the name of the Share Trust. Such transfer to a Share Trust and the designation of shares as Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. (2) If, notwithstanding the other provisions contained in this Section 1, at any time after the date of the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event that, if effective, would (i) result in the Equity Shares being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution), (ii) result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, or (iii) cause the Trust to Constructively Own 10% or more of the ownership interests in a tenant of the Trust's real property, within the meaning of - 18 - Section 856(d)(2)(B) of the Code, then (x) the purported transferee shall not acquire any right or interest (or, in the case of a Non-Transfer Event, the person holding record title of the Equity Shares with respect to which such Non-Transfer Event occurred, shall cease to own any right or interest) in such number of Equity Shares, the ownership of which by such purported transferee or record holder would (A) result in the Equity Shares being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution), (B) result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, or (C) cause the Trust to Constructively Own 10% or more of the ownership interests in a tenant of the Trust's real property, within the meaning of Section 856(d)(2)(B) of the Code, (y) such number of Equity Shares (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with the provisions of Section 2 hereof, transferred automatically and by operation of law to the Share Trust to be held in accordance with that Section 2, and (z) the Prohibited Owner shall submit such number of Equity Shares to the Trust for registration into the name of the Share Trust. Such transfer to a Share Trust and the designation of shares as Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. If, for any reason, the transfer to the Share Trust is not automatically effective to prevent the result described in (A), (B) or (C) of this paragraph, then the Transfer or Non-Transfer Event to the extent of the number of shares calculated in clause (y) of this paragraph shall be void. (D) Remedies For Breach. If the Trust, or its designees, shall at any time determine in good faith that a Transfer has taken place in violation of Section 1(B) hereof or that a Person intends to acquire or has attempted to acquire Beneficial Ownership or Constructive - 19 - Ownership of any Equity Shares in violation of Section 1(B) hereof, the Trust shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or acquisition, including, but not limited to, refusing to give effect to such Transfer on the books of the Trust or instituting proceedings to enjoin such Transfer or acquisition. (E) Notice of Restricted Transfer. Any Person who acquires or attempts to acquire Equity Shares in violation of Section 1(B) hereof, or any Person who owned Equity Shares that were transferred to the Share Trust pursuant to the provisions of Section 1(C) hereof, shall immediately give written notice to the Trust of such event and shall provide to the Trust such other information as the Trust may request in order to determine the effect, if any, of such Transfer or Non-Transfer Event, as the case may be, on the Trust's status as a REIT. (F) Owners Required To Provide Information. From the date of the Initial Public Offering and prior to the Restriction Termination Date: (1) Every Beneficial Owner or Constructive Owner of more than 5%, or such lower percentages as required pursuant to regulations under the Code, of the outstanding Equity Shares of the Trust shall, within 30 days after January 1 of each year, provide to the Trust a written statement or affidavit stating the name and address of such Beneficial Owner or Constructive Owner, the number of Equity Shares Beneficially Owned or Constructively Owned, and a description of how such shares are held. Each such Beneficial Owner or Constructive Owner shall provide to the Trust such additional information as the Trust may request in order to determine the effect, if any, of such Beneficial Ownership or Constructive Ownership on the Trust's status as a REIT and to ensure compliance with the Ownership Limit and the Excluded Holder Limit. - 20 - (2) Each Person who is a Beneficial Owner or Constructive Owner of Equity Shares and each Person (including the shareholder of record) who is holding Equity Shares for a Beneficial Owner or Constructive Owner shall provide to the Trust a written statement or affidavit stating such information as the Trust may request in order to determine the Trust's status as a REIT and to ensure compliance with the Ownership Limit and the Excluded Holder Limit. (G) Exception to Ownership Limit. The Ownership Limit shall not apply to the acquisition of Equity Shares by an underwriter that participates in a public offering of such shares for a period of 90 days following the purchase by such underwriter of such shares provided that the restrictions contained in Section 1(B) hereof will not be violated following the distribution by such underwriter of such shares. In addition, the Board of Trustees, upon receipt of a ruling from the Internal Revenue Service or an opinion of counsel in each case to the effect that the restrictions contained in Section 1(B)(3) and/or Section 1(B)(4) hereof will not be violated and that REIT status will not otherwise be lost, may exempt a Person from the Ownership Limit if such Person is not an individual for purposes of Section 542(a)(2) of the Code, provided that (i) the Board of Trustees obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no individual's Beneficial Ownership or Constructive Ownership of Equity Shares will cause the Trust to lose its status as a REIT and (ii) such Person agrees that any violation or attempted violation of such representations and undertakings will result in a transfer to the Share Trust of Equity Shares pursuant to Section 1(C) hereof. - 21 - (H) Redetermination of Excluded Holder Limit. The Excluded Holder Limit shall be redetermined whenever the Adjusted Excluded Holder Percentage (as defined below) is changed by the Board of Trustees. The "Adjusted Excluded Holder Percentage" shall equal the percentage of the number of outstanding Common Shares Beneficially or Constructively Owned by the Excluded Holder assuming the following: (i) all of the Partnership Units Beneficially or Constructively Owned by the Excluded Holder are exchanged for Common Shares; (ii) no other Partnership Units are exchanged for Common Shares; (iii) all of the options to acquire Common Shares that are Beneficially or Constructively Owned by the Excluded Holder are exercised; and (iv) no other options to acquire Common Shares are exercised. The Adjusted Excluded Holder Percentage may (but is not required to) be redetermined by the Board of Trustees whenever there is a change in either the number of Common Shares outstanding or the number of Common Shares Beneficially or Constructively Owned by the Excluded Holder, in each case based on the assumptions set out in the immediately preceding sentence. In redetermining the Adjusted Excluded Holder Percentage, the Board of Trustees may take into account any options with respect to Common Shares that are expected to be issued to the Excluded Holder (or to any other Person if the Excluded Holder will be considered to Beneficially or Constructively Own the Common Shares that are the subject of the options) in the future. (I) Redetermination of Ownership Limit. Whenever the Excluded Holder Limit is redetermined pursuant to Section 1(I) of this Article VII, the Ownership Limit shall be redetermined to equal the percentage obtained by dividing (i) 49% minus the new Excluded Holder Limit by (ii) four. - 22 - (J) Limitations on Redetermination of Excluded Holder Limit and Ownership Limit. (1) Neither the Ownership Limit nor the Excluded Holder Limit may be increased (nor may any additional ownership limitation be created with respect to any shareholder of the Trust) if, after giving effect to such increase (or creation), the Trust would be (or potentially could be if five or more individuals Beneficially Owned a percentage of outstanding Common Shares equal to the applicable limits) "closely held" within the meaning of Section 856(h) of the Code. (2) In no event shall the Adjusted Excluded Holder Percentage be less than 9.8%. (3) In no event shall the Ownership Limit be less than 8.5% or greater than 9.8%. (4) Prior to any redetermination of the Adjusted Excluded Holder Limit, the Board may require such opinions of counsel, affidavits, undertakings, or agreements as it may deem necessary or advisable in order to determine or assure the Trust's status as a REIT. Section 2. Shares-in-Trust. (A) Share Trust. Any Equity Shares transferred to a Share Trust and designated Shares-in-Trust pursuant to Section 1(C) hereof shall be held for the exclusive benefit of the Beneficiary. The Trust shall name a beneficiary of each Share Trust within five days after discovery of the existence thereof. Any transfer to a Share Trust, and subsequent designation of Equity Shares as Shares-in-Trust, pursuant to Section 1(C) hereof shall be effective as of the - 23 - close of business on the business day prior to the date of the Transfer or Non-Transfer Event that results in the transfer to the Share Trust. Shares-in-Trust shall remain issued and outstanding Equity Shares of the Trust and shall be entitled to the same rights and privileges on identical terms and conditions as are all other issued and outstanding Equity Shares of the same class and series. When transferred to a Permitted Transferee in accordance with the provisions of Section 2(E) hereof, such Shares-in-Trust shall cease to be designated as Shares-in-Trust. (B) Dividend Rights. The Share Trust, as record holder of Shares-in-Trust, shall be entitled to receive all dividends and distributions as may be declared by the Board of Trustees on such Equity Shares and shall hold such dividends or distributions in trust for the benefit of the Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall repay to the Share Trust the amount of any dividends or distributions received by it that (i) are attributable to any Equity Shares designated Shares-in-Trust and (ii) the record date for which was on or after the date that such shares became Shares-in-Trust. The Trust shall take all measures that it determines reasonably necessary to recover the amount of any such dividend or distribution paid to a Prohibited Owner, including, if necessary, withholding any portion of future dividends or distributions payable on Equity Shares Beneficially Owned or Constructively Owned by the Person who, but for the provisions of Section 1(C) hereof, would Constructively Own or Beneficially Own the Shares-in-Trust; and, as soon as reasonably practicable following the Trust's receipt or withholding thereof, shall pay over to the Share Trust for the benefit of the Beneficiary the dividends so received or withheld, as the case may be. (C) Rights Upon Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of, or any distribution of the assets of, the Trust, each - 24 - holder of Shares-in-Trust shall be entitled to receive, ratably with each other holder of Equity Shares of the same class or series, that portion of the assets of the Trust which is available for distribution to the holders of such class and series of Equity Shares. The Share Trust shall distribute to the Prohibited Owner the amounts received upon such liquidation, dissolution, or winding up, or distribution; provided, however, that the Prohibited Owner shall not be entitled to receive amounts pursuant to this Section 2(C) in excess of, (i) in the case of a purported Transfer in which the Prohibited Owner gave value for Equity Shares and which Transfer resulted in the transfer of the shares to the Share Trust, the price per share, if any, such Prohibited Owner paid for the Equity Shares and, (ii) in the case of a Non-Transfer Event or Transfer in which the Prohibited Owner did not give value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to the Share Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer. Any remaining amount in such Share Trust shall be distributed to the Beneficiary. (D) Voting Rights. The Share Trustee shall be entitled to vote all Shares-in-Trust. Any vote by a Prohibited Owner as a holder of Equity Shares prior to the discovery by the Trust that the Equity Shares are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be void ab initio with respect to such Shares-in-Trust and the Prohibited Owner shall be deemed to have given, as of the close of business on the business day prior to the date of the purported Transfer or Non-Transfer Event that results in the transfer to the Share Trust of Equity Shares under Section 1(C) hereof, an irrevocable proxy to the Share Trustee to vote the Shares-in-Trust in the manner in which the Share Trustee, in its sole and absolute discretion, - 25 - desires. If, however, the company has already taken irreversible corporate action, then the Share Trustee shall not have the authority to rescind and revote such vote. (E) Designation of Permitted Transferee. The Share Trustee shall have the exclusive and absolute right to designate a Permitted Transferee of any and all Shares-in-Trust. In an orderly fashion so as not to materially adversely affect the Market Price of the Shares-in-Trust, the Share Trustee shall designate any Person as Permitted Transferee, provided, however, that (i) the Permitted Transferee so designated purchases for valuable consideration (whether in a public or private sale), at a price as set forth in Section 2(G) hereof, the Shares-in-Trust and (ii) the Permitted Transferee so designated may acquire such Shares-in-Trust without such acquisition resulting in a transfer to a Share Trust and the redesignation of such Equity Shares so acquired as Shares-in-Trust under Section 1(C) hereof. Upon the designation by the Share Trustee of a Permitted Transferee in accordance with the provisions of this Section 2(E), the Share Trustee shall (i) cause to be transferred to the Permitted Transferee that number of Shares-in-Trust acquired by the Permitted Transferee, (ii) cause to be recorded on the books of the Trust that the Permitted Transferee is the holder of record of such number of Equity Shares, (iii) cause the Shares-in-Trust to be canceled and (iv) distribute to the Beneficiary any and all amounts held with respect to the Shares-in-Trust after making the payment to the Prohibited Owner pursuant to Section 2(F) hereof. (F) Compensation to Record Holder of Equity Shares that Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following discovery of the Shares-in-Trust and subsequent designation of the Permitted Transferee in accordance with Section 2(E) hereof or following the acceptance of the offer to purchase such shares in accordance with Section 2(G) - 26 - hereof) to receive from the Share Trustee following the sale or other disposition of such Shares- in-Trust the lesser of (i) in the case of (a) a purported Transfer in which the Prohibited Owner gave value for Equity Shares and which Transfer resulted in the transfer of the shares to the Share Trust, the price per share, if any, such Prohibited Owner paid for the Equity Shares, or (b) a Non-Transfer Event or Transfer in which the Prohibited Owner did not give value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to the Share Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer and (ii) the price per share received by the Share Trustee from the sale or other disposition of such Shares-in-Trust in accordance with Section 2(E) hereof. Any amounts received by the Share Trustee in respect of such Shares-in-Trust and in excess of such amounts to be paid the Prohibited Owner pursuant to this Section 2(F) shall be distributed to the Beneficiary in accordance with the provisions of Section 2(E) hereof. Each Beneficiary and Prohibited Owner waive any and all claims that they may have against the Share Trustee and the Share Trust arising out of the disposition of Shares-in-Trust, except for claims arising out of the gross negligence or willful misconduct of, or any failure to make payments in accordance with this Section 2 by such Share Trustee or the Trust. (G) Purchase Right in Shares-in-Trust. Shares-in-Trust shall be deemed to have been offered for sale to the Trust, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that created such Shares-in-Trust (or, in the case of devise, gift or Non-Transfer Event, the Market Price at the time of such devise, gift or Non- Transfer Event) and (ii) the Market Price on the date the Trust, or its designee, accepts such - 27 - offer. The Trust shall have the right to accept such offer for a period of ninety days after the later of (i) the date of the Non-Transfer Event or purported Transfer which resulted in such Shares-in-Trust and (ii) the date the Trust determines in good faith that a Transfer or Non- Transfer Event resulting in Shares-in-Trust has occurred, if the Trust does not receive a notice of such Transfer or Non-Transfer Event pursuant to Section 1(E) hereof. Section 3. Remedies Not Limited. Subject to Section 1(H) hereof, nothing contained in this Article VII shall limit the authority of the Trust to take such other action as it deems necessary or advisable to protect the Trust and the interests of its shareholders by preservation of the Trust's status as a REIT and to ensure compliance with the Ownership Limit and the Excluded Holder Limit. Section 4. Ambiguity. In the case of an ambiguity in the application of any of the provisions of Article VII, including any definition contained in Section 1(A) hereof, the Board of Trustees shall have the power to determine the application of the provisions of this Article VII with respect to any situation based on the facts known to it. Section 5. Legend. Each certificate for Equity Shares shall bear the following legend: "The [Common or Preferred] Shares represented by this certificate are subject to restrictions on transfer for the purpose of the Trust's maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain further restrictions and except as provided in the Declaration of Trust of the Trust, no Person may (i) Beneficially or Constructively Own Common Shares in excess of 8.5% (or such other percentage as may be determined by the Board of Trustees) of the number of outstanding Common Shares, unless such Person is the Excluded Holder (in which case the - 28 - Excluded Holder Limit shall be applicable); (ii) Beneficially or Constructively Own Preferred Shares of any series of Preferred Shares in excess of 9.8% of the number of outstanding Preferred Shares of such series, (iii) Beneficially Own Equity Shares that would result in the Equity Shares being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution), (iv) Beneficially Own Equity Shares that would result in the Trust being "closely held" under Section 856(h) of the Code, or (v) Constructively Own Equity Shares that would cause the Trust to Constructively Own 10% or more of the ownership interests in a tenant of the Trust's real property, within the meaning of Section 856(d)(2)(B) of the Code. Any Person who attempts to Beneficially or Constructively Own shares of Equity Shares in excess of the above limitations must immediately notify the Trust in writing. If any restrictions above are violated, the Equity Shares represented hereby will be transferred automatically to a Share Trust and shall be designated Shares-in-Trust to a trustee of a trust for the benefit of one or more charitable beneficiaries. In addition, upon the occurrence of certain events, attempted transfers in violation of the restrictions described above may be void ab initio. All capitalized terms in this legend have the meanings defined in the Trust's Amended and Restated Declaration of Trust, as the same may be further amended from time to time, a copy of which, including the restrictions on transfer, will be sent without charge to each shareholder who so requests. Such requests must be made to the secretary of the trust at its principal office or to the transfer agent." Section 6. Severability. If any provision of this Article VII or any application of any such provision is determined to be invalid by any federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications - 29 - of such provision shall be affected only to the extent necessary to comply with the determination of such court. ARTICLE VIII SHAREHOLDERS Section 1. Meetings. There shall be an annual meeting of the shareholders, commencing in 1998, to be held on proper notice at such time (after the delivery of the annual report) and convenient location as shall be determined by or in the manner prescribed in the Bylaws, for the election of the Trustees, if required, and for the transaction of any other business within the powers of the Trust. Except as otherwise provided in this Declaration of Trust, special meetings of shareholders may be called in the manner provided in the Bylaws. If there are no Trustees, the officers of the Trust shall promptly call a special meeting of the shareholders entitled to vote for the election of successor Trustees. Any meeting may be adjourned and reconvened as the Trustees determine or as provided in the Bylaws. With respect to any meeting of shareholders (or a special meeting in lieu of an annual meeting), the nomination of persons for election to the Board of Trustees and the proposal of business to be considered by shareholders may be made only (a) by the Board of Trustees or (b) by a shareholder who is entitled to vote at the meeting and has complied with advance-notice procedures set forth in the Bylaws. With respect to a special meeting of shareholders, only the business specified in the Company's notice of meeting may be brought before the meeting. Section 2. Voting Rights. Subject to the provisions of any class or series of Shares then outstanding, the shareholders shall be entitled to vote only on the following matters: (a) termination of REIT status as provided in Article V, Section (1)(C), (b) election of Trustees as - 30 - provided in Article V, Section 2(A) and the removal of Trustees as provided in Article V, Section 3; (c) amendment of the Declaration of Trust as provided in Article X; (d) termination of the Trust as provided in Article XII, Section 2; (e) merger or consolidation of the Trust, or the sale or disposition of substantially all of the Trust Property, as provided in Article XI; and (f) such other matters with respect to which a vote of the shareholders is required by applicable law or the Board of Trustees has adopted a resolution declaring that a proposed action is advisable and directing that the matter be submitted to the shareholders for approval or ratification. Except with respect to the foregoing matters, no action taken by the shareholders at any meeting shall in any way bind the Board of Trustees. Section 3. Preemptive and Appraisal Rights. Except as may be provided by the Board of Trustees in setting the terms of classified or reclassified Shares pursuant to Article VI, Section 4, no holder of Shares shall, as such holder, (a) have any preemptive or preferential right to purchase or subscribe for any additional Shares of the Trust or any other security of the Trust which it may issue or sell or (b), except as expressly required by Title 8, have any right to require the Trust to pay him the fair value of his Shares in an appraisal or similar proceeding. Section 4. Extraordinary Actions. Except as specifically provided in Article V, Sections 1(C), 2(A) and 3 and Article X, Sections 2 and 3, and Article XII, Section 2 of this Declaration of Trust, notwithstanding any provision of law permitting or requiring any action to be taken or authorized by the affirmative vote of the holders of a greater number of votes, any such action shall be effective and valid if taken or authorized by the affirmative vote of holders of Shares entitled to cast a majority of all the votes entitled to be cast on the matter. - 31 - Section 5. Board Approval. The submission of any action to the shareholders for their consideration shall first be approved by the Board of Trustees. Section 6. Action By Shareholders Without a Meeting. The Bylaws of the Trust may provide that any action required or permitted to be taken by the shareholders may be taken without a meeting by the written consent of the shareholders entitled to cast a sufficient number of votes to approve the matter as required by statute, the Declaration of Trust or the Bylaws of the Trust, as the case may be. ARTICLE IX LIABILITY LIMITATION, INDEMNIFICATION AND TRANSACTIONS WITH THE TRUST Section 1. Limitation of Shareholder Liability. No shareholder shall be liable for any debt, claim, demand, judgment or obligation of any kind of, against or with respect to the Trust by reason of his being a shareholder, nor shall any shareholder be subject to any personal liability whatsoever, in tort, contract or otherwise, to any person in connection with the property or the affairs of the Trust by reason of his being a shareholder. Section 2. Limitation of Trustee and Officer Liability. To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of trustees and officers of a REIT, no Trustee or officer of the Trust shall be liable to the Trust or to any shareholder for money damages. Neither the amendment nor repeal of this Section, nor the adoption or amendment of any other provision of the Declaration of Trust or Bylaws of the Trust inconsistent with this section, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such - 32 - amendment, repeal or adoption. In the absence of any Maryland statute limiting the liability of trustees and officers of a Maryland REIT for money damages in a suit by or on behalf of the Trust or by any shareholder, no Trustee or officer of the Trust shall be liable to the Trust or to any shareholder for money damages except to the extent that (a) the Trustee or officer actually received an improper benefit or profit in money, property, or services, for the amount of the benefit or profit in money, property, or services actually received; or (b) a judgment or other final adjudication adverse to the Trustee or officer is entered in a proceeding based on a finding in the proceeding that the Trustee's or officer's action or failure to act was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. Section 3. Express Exculpatory Clauses in Instruments. Neither the Shareholders nor the Trustees, officers, employees or agents of the Trust shall be liable under any written instrument creating an obligation of the Trust, and all Persons shall look solely to the Trust Property for the payment of any claim under or for the performance of that instrument. The omission of the foregoing exculpatory language from any instrument shall not affect the validity or enforceability of such instrument and shall not render any Shareholder, Trustee, officer, employee or agent liable thereunder to any third party, nor shall the Trustees or any officer, employee or agent of the Trust be liable to anyone for such omission. Section 4. Indemnification. The Trust shall have the power, to the maximum extent permitted by Maryland law in effect from time to time, to obligate itself to indemnify, and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (a) any individual who is a present or former shareholder, Trustee or officer of the Trust or (b) any individual who, while a Trustee of the Trust and at the request of the Trust, serves or has served - 33 - as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his status as a present or former shareholder, Trustee or officer of the Trust. The Trust shall have the power, with the approval of its Board of Trustees, to provide such indemnification and advancement of expenses to a person who served as a predecessor of the Trust in any of the capacities described in (a) or (b) above, and to any employee or agent of the Trust or a predecessor of the Trust. Section 5. Transactions Between the Trust and its Trustees, Officers, Employees and Agents. Subject to any express restrictions in the Declaration of Trust or adopted by the Trustees in the Bylaws or by resolution, the Trust may enter into any contract or transaction of any kind with any person, including any Trustee, officer, employee or agent of the Trust or any person affiliated with a Trustee, officer, employee or agent of the Trust, whether or not any of them has a financial interest in such transaction. ARTICLE X AMENDMENTS Section 1. General. The Trust reserves the right from time to time to make any amendment to the Declaration of Trust, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in the Declaration of Trust, of any Shares. All rights and powers conferred by this Declaration of Trust on shareholders, Trustees and officers are granted subject to this reservation. An amendment to the Declaration of Trust (a) shall be signed and acknowledged by at least two-thirds of the - 34 - Trustees, (b) shall be filed for record with SDAT as provided in Article XIII, Section 5 and (c) shall become effective as of the later of the time the SDAT accepts the amendment for record or the time established in the amendment, not to exceed 30 days after the amendment is accepted for record. All references to the Declaration of Trust shall include all amendments thereto. Section 2. By Trustees. The Trustees by a two-thirds vote may amend the Declaration of Trust from time to time, in the manner provided by Title 8, without any action by the shareholders, to qualify as a REIT under the Code or under Title 8. Section 3. By Shareholders. Other than amendments pursuant to Section 2 of this Article X, any amendment to the Declaration of Trust shall be valid only if approved by the affirmative vote of at least a majority of all the votes entitled to be cast on the matter, except that any amendment to Article V, Article VII, Article X, Sections 2 and 3, and Article XII, Section 2 of this Declaration of Trust shall be valid only if approved by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter. ARTICLE XI MERGER, CONSOLIDATION OR SALE OF TRUST PROPERTY Subject to the provisions of any class or series of Shares at the time outstanding, the Trust may (a) merge the Trust into another entity, (b) consolidate the Trust with one or more other entities into a new entity or (c) sell, lease, exchange or otherwise transfer all or substantially all of the Trust Property. Any such action must be approved b the Board of Trustees and, after notice to all shareholders entitled to vote on the matter, by the affirmative vote of a majority of all the votes entitled to be cast on the matter. As used herein, a sale, lease, exchange or other transfer of substantially all of the assets of the Trust shall mean a sale, - 35 - lease, exchange or other transfer of 90% or more of the total assets of the Company (based upon the most recent appraised values) within a twelve-month period. ARTICLE XII DURATION AND TERMINATION OF TRUST Section 1. Duration. The Trust shall continue perpetually unless terminated pursuant to Section 2 of this Article XII or pursuant to any applicable provision of Title 8. Section 2. Termination. (A) Subject to the provision of any class or series of Shares at the time outstanding, the Trust may be terminated at any meeting of shareholders, by the affirmative vote of two thirds of all the votes entitled to be cast on the matter. Upon the termination of the Trust: (1) The Trust shall carry on no business except for the purpose of winding up its affairs. (2) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under the Declaration of Trust shall continue, including the powers to fulfill or discharge the Trust's contracts, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining property of the Trust to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities and do all other acts appropriate to liquidate its business. (3) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and agreements as they deem necessary - 36 - for their protection, the Trust may distribute the remaining property of the Trust among the shareholders so that after payment in full or the setting apart for payment of such preferential amounts, if any, to which the holders of any Shares at the time outstanding shall be entitled, the remaining property of the Trust shall, subject to any participating or similar rights of Shares at the time outstanding, be distributed ratably among the holders of Common Shares at the time outstanding. (B) After termination of the Trust, the liquidation of its business and the distribution to the shareholders as herein provided, a majority of the Trustees shall execute and file with the Trust's records a document certifying that the Trust has been duly terminated, and the Trustees shall be discharged from all liabilities and duties hereunder, and the rights and interests of all shareholders shall cease ARTICLE XIII MISCELLANEOUS Section 1. Governing Law. The Declaration of Trust is executed by the undersigned Trustee and delivered in the State of Maryland with reference to the laws thereof, and the rights of all parties and the validity, construction and effect of every provision hereof shall be subject to and construed according to the laws of the State of Maryland without regard to conflicts of laws provisions thereof. Section 2. Reliance by Third Parties. Any certificate shall be final and conclusive as to any person dealing with the Trust if executed by the Secretary or an Assistant Secretary of the Trust or a Trustee, and if certifying to: (a) the number or identity of Trustees, officers of the Trust or shareholders; (b) the due authorization of the execution of any document; (c) the - 37 - action or vote taken, and the existence of a quorum, at a meeting of the Board of Trustees or shareholders; (d) a copy of the Declaration of Trust or of the Bylaws as a true and complete copy as then in force; (e) an amendment to the Declaration of Trust; (f) the termination of the Trust; or (g) the existence of any fact relating to the affairs of the Trust. No purchaser, lender, transfer agent or other person shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trust on its behalf or by any officer, employee or agent of the Trust. Section 3. Severability. (A) The provisions of the Declaration of Trust are severable, and if the Board of Trustees shall determine, with the advice of counsel, that any one or more of such provisions (the "Conflicting Provisions") are in conflict with the Code, Title 8 or other applicable federal or state laws, the Conflicting Provisions, to the extent of the conflict, shall be deemed never to have constituted a part of the Declaration of Trust, even without any amendment of the Declaration of Trust pursuant to Article X and without affecting or impairing any of the remaining provisions of the Declaration of Trust or rendering invalid or improper any action taken or omitted prior to such determination. No Trustee shall be liable for making or failing to make such a determination. In the event of any such determination by the Board of Trustees, the Board shall amend the Declaration of Trust in the manner provided in Article X, Section 2. (B) If any provision of the Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such holding shall apply only to the extent of any such invalidity or unenforceability and shall not in any manner affect, impair or render invalid or - 38 - unenforceable such provision in any other jurisdiction or any other provision of the Declaration of Trust in any jurisdiction. Section 4. Construction. In the Declaration of Trust, unless the context otherwise requires, words used in the singular or in the plural include both the plural and singular and words denoting any gender include all genders. The title and headings of different parts are inserted for convenience and shall not affect the meaning, construction or effect of the Declaration of Trust. In defining or interpreting the powers and duties of the Trust and its Trustees and officers, reference may be made by the Trustees or officers, to the extent appropriate and not inconsistent with the Code or Title 8, to Titles 1 through 3 of the Corporations and Associations Article of the Annotated Code of Maryland. In furtherance and not in limitation of the foregoing, in accordance with the provisions of Title 3, Subtitles 6 and 7, of the Corporations and Associations Article of the Annotated Code of Maryland, the Trust shall be included within the definition of "corporation" for purposes of such provisions. Section 5. Recordation. The Declaration of Trust and any amendment hereto shall be filed for record with the SDAT and may also be filed or recorded in such other places as the Trustees deem appropriate, but failure to file for record the Declaration of Trust or any amendment hereto in any office other than in the State of Maryland shall not affect or impair the validity or effectiveness of the Declaration of Trust or any amendment hereto. A restated Declaration of Trust shall, upon filing, be conclusive evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Declaration of Trust and the various amendments thereto. - 39 - IN WITNESS WHEREOF, this Amended and Restated Declaration of Trust has been signed on this_____ day of________________ 1997 by the undersigned President of the Trust and witnessed by the undersigned Secretary of the Trust, each of whom acknowledges that this document is his free act and deed, and that to the best of his knowledge, information, and belief, the matters and facts set forth herein are true in all material respects and that the statement is made under the penalties for perjury. RESOURCE ASSET INVESTMENT TRUST ATTEST: --------------------------------- , President IN WITNESS WHEREOF, this Amended and Restated Declaration of Trust has been signed on this____ day of____________ 1997 by the sole Trustee of the Trust who acknowledges that this document is his free act and deed, and that to the best of his knowledge, information, and belief, the matters and facts set forth herein are true in all material respects and that the statement is made under the penalties for perjury. __________________________(SEAL) , Trustee - 40 - EX-3.2 4 EXHIBIT 3.2 RESOURCE ASSET INVESTMENT TRUST BYLAWS ARTICLE I. NAME AND SEAL ARTICLE II. REGISTERED AND PRINCIPAL OFFICES ARTICLE III. MEETING OF SHAREHOLDERS ARTICLE IV. TRUSTEES AND BOARD MEETINGS ARTICLE V. OFFICERS ARTICLE VI. INDEMNIFICATION OF TRUSTEES, OFFICERS AND OTHER PERSONS ARTICLE VII. FINANCIAL REPORTS TO SHAREHOLDERS ARTICLE VIII. RELATION OF TRUSTEES AND OFFICERS TO TRUST ARTICLE IX. RECORDS OF TRUST ARTICLE X. SHARES OF CAPITAL STOCK ARTICLE XI. DIVIDENDS AND OTHER DISTRIBUTIONS TO SHAREHOLDERS ARTICLE XII. MISCELLANEOUS ARTICLE XIII. AMENDMENTS ARTICLE XIV. ADOPTION OF BYLAWS RESOURCE ASSET INVESTMENT TRUST BYLAWS ARTICLE I. NAME. Section 101. Name. The name of the trust is RESOURCE ASSET INVESTMENT TRUST. Section 102. State of Formation. The trust has been formed under the laws of the State of Maryland. ARTICLE II. REGISTERED AND PRINCIPAL OFFICES. Section 201. Registered Office. The registered office of the trust in the State of Maryland shall be at 7 St. Paul Street, Suite 1400, Baltimore, Maryland 21202. Section 202. Offices. The principal office of the trust and any other offices of the trust shall be located at such places, within and without the State of Maryland, as the Board of Trustees may from time to time determine or as the business of the trust may require. ARTICLE III. MEETINGS OF SHAREHOLDERS. Section 301. Place of Meetings. All meetings of the holders ("shareholders") of shares of beneficial interest ("shares") of the trust shall be held at such place or places, within or without the State of Maryland, as shall be determined by the Board of Trustees from time to time. Section 302. Annual Meetings. At least once in each calendar year on a date and at a time determined by the Board of Trustees, a meeting of the shareholders shall be held at which time they shall elect Trustees and transact such other business as may properly be brought before the meeting. Section 303. Special Meetings. Special meetings of the shareholders may be called at any time by the Chairman of the Board, Chief Executive Officer, President or the Board of Trustees and shall be called upon the request in writing of holders of 50% or more of the outstanding shares entitled to vote. Special meetings of the shareholders shall be held on a date fixed by the Secretary of the trust which shall be not more than ninety (90) days after the date of the call, or after receipt of the request. If the Secretary shall neglect or refuse to fix the date or to give notice as required by Section 304, below, the person or persons making the request may do so. - 1 - Section 304. Notice of Meetings. Written notice of every meeting of shareholders, stating the time and place thereof, shall be given as herein provided by, or at the direction of, the person authorized to call the meeting, to each shareholder of record entitled to vote at the meeting, not less than ten (10) nor more than ninety (90) days prior to the day named for the meeting, unless a greater period of notice is required by statute in a particular case. In the case of a special meeting of shareholders, the notice shall also set forth the purpose of the meeting. When a meeting is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at any adjourned meeting, other than by announcement at the meeting at which such adjournment is taken. Except as set forth in Section 404, below, business to be conducted at any annual, special in lieu of annual or special meeting of shareholders may be proposed only by the Board of Trustees or by a shareholder who is entitled to vote at the meeting and who has filed his proposed item of business with the Secretary of the trust within the time limits set forth in the Securities Exchange Act of 1934, as amended, or, if the trust is not subject to the requirements of such Act,forty-five (45) days prior to the meeting. Only the business specified in the notice of meeting may be brought before the meeting. Section 305. Quorum. The shareholders present, in person or by proxy, at a shareholders' meeting duly called shall constitute a quorum for the transaction of business except as otherwise provided by law or by resolution of the Board of Trustees prior to such meeting. If however, such quorum shall not be present, those present thereat may adjourn the meeting to such time and place as they may determine. Section 306. Voting. Each shareholder shall be entitled to one (1) vote, in person or by proxy, for each full share having voting power standing registered in his name on the record date for the meeting of shareholders. Section 307. Vote by Ballot. Upon the demand of any shareholder made before the voting begins, the vote for Trustees, and the vote upon any other question or matter before a shareholder meeting, shall be by ballot. Section 308. Proxy Voting. At each meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person or by proxy appointed by an instrument in writing subscribed by such shareholder and delivered to the Secretary at the meeting. No unrevoked proxy shall be valid after eleven (11) months from the date of its execution, unless a longer time is expressly provided therein. - 2 - Section 309. Unpaid Shares. No share upon which any installment is due the trust and unpaid shall be voted at any meeting. Section 310. Voting List. The officer or agent having charge of the transfer books shall make, at least five (5) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, setting forth the address of and the number of shares held by each, which list shall be kept on file at the registered office of the trust, and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting, and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original share ledger or transfer book, or a duplicate thereof (kept at the office of the transfer agent for the trust) shall be prima facie evidence as to who are the shareholders entitled to examine such list or share ledger or transfer book, or to vote in person or by proxy, at any meeting of shareholders. Section 311. Action by Less Than Unanimous Consent. Any action which may be taken at a meeting of the shareholders or of a class of shareholders may be taken without a meeting, if a consent or consents in writing to such action, setting forth the action so taken, shall be (1) signed by shareholders entitled to cast such a percentage of the number of votes which all such shareholders are entitled to cast thereon as is required by law for the taking of action at a meeting of the shareholders or of a class of shareholders and (2) filed with the Secretary of the Trust. Section 312. Cumulative Voting. Unless the Declaration of Trust (the "Declaration") of the trust expressly provides for cumulative voting, in all elections for Trustees, every shareholder entitled to vote shall have the right, in person or by proxy, to cast one vote per share; there shall be no cumulative voting. ARTICLE IV. TRUSTEES AND BOARD MEETINGS. Section 401. Management by Board of Trustees. The business, property and affairs of the trust shall be managed by its Board of Trustees. The Board of Trustees may exercise all such powers of the trust and do all such lawful acts and things as are not by statute or by the Declaration or by these Bylaws directed or required to be exercised or done by the shareholders. Section 402. Number of Trustees. The Board of Trustees shall consist of not less than three (3) nor more than nine (9) Trustees. Within these limits, the number of Trustees shall be - 3 - as established by resolution of the Board of Trustees, provided, however, that no reduction in the number of Trustees shall in any way affect the terms of Trustees then in office. A majority of the Trustees shall be Independent Trustees (as such term is defined in the Declaration). Section 403. Qualifications of Trustees. The Trustees need not be residents of the State of Maryland or shareholders in the trust. Section 404. Election of Trustees. The Trustees shall be elected by the shareholders at the annual meeting of shareholders of the trust. Each Trustee shall be elected for the term of one year, or until his successor shall be elected and shall qualify. Only such persons as are duly nominated by (1) the incumbent trustees or (2) by a shareholder who is entitled to vote at the meeting and who has filed his nominations with the Secretary of the trust at least twenty (20) days before the time scheduled for said meeting, shall be eligible for election. Section 405. Vacancies. If the office of any Trustee shall become vacant by reason of death, resignation, disqualification or other cause, such vacancy or vacancies, including vacancies resulting from an increase in the number of Trustees, shall be filled by a majority of the remaining members of the Board, though less than a quorum; provided, however, that any such vacancy occurring among the Independent Trustees shall be filled as set forth in the Declaration. Each person so elected by the Board of Trustees to fill a vacancy shall be a Trustee until his or her successor is elected by the shareholders who may make such election at the next annual meeting of shareholders, or at any earlier special meeting of the shareholders duty called for that purpose, and until such successor shall qualify. Section 406. Removal of Trustees. The entire Board of Trustees, or any individual Trustee, may be removed from office without assigning any cause by the vote of shareholders entitled to cast at least two-thirds of the votes which all shareholders would be entitled to cast at any annual election of such Trustees. In case the Board of Trustees or any one or more Trustees be so removed, new Trustees may be elected at the same meeting. The Board of Trustees may declare vacant the office of a Trustee if he be declared of unsound mind by an order of court, or convicted of felony, or for any other proper cause, or if, within sixty (60) days after notice of his election, he does not accept such office either in writing or by attending a meeting of the Board of Trustees and fulfill such other requirements of qualification as these Bylaws may specify. - 4 - Section 407. Resignations. Any Trustee may resign at any time. Such resignation shall be in writing, but the acceptance thereof shall not be necessary to make it effective. Section 408. Compensation of Trustees. The compensation, if any, of Trustees shall be as determined by the Board of Trustees. In addition to compensation, if any, for services as a Trustee, a Trustee may serve the trust in other capacities and receive separate compensation therefor. Section 409. Place of Board Meetings. Meetings of the Board of Trustees may be held at any place or places, within or outside the State of Maryland, as shall be determined by the Board of Trustees from time to time, or as may be designated in the notice calling the meeting. Section 410. Regular Meetings. Regular meetings of the Board of Trustees shall be held in each year at such times as the Board of Trustees may provide, from time to time, by resolution with appropriate notice to the members of the Board of Trustees. Section 411. Special Meetings. Unless the Board of Trustees shall otherwise direct, special meetings of the Board of Trustees may be called by or at the request of the Chairman, Chief Executive Officer or President of the trust on appropriate notice to each Trustee, which notice shall, in any event, be given at least twenty-four (24) hours before the time for which the meeting is scheduled. Special meetings shall be called by the Chairman, Chief Executive Officer, President or Secretary in like manner and on like notice on the written request of any two (2) Trustees. The person or persons authorized to call special meetings of the Board of Trustees may fix any place, either within or outside the State of Maryland, as the place for holding any special meeting of the Board of Trustees called by them. Any business may be transacted at a special meeting. Section 412. Notice of Meetings. Unless otherwise required by law or these Bylaws, neither the business to be transacted at, nor the purpose of, any meeting of the Board of Trustees need be specified in the notice or waiver of notice of such meeting. Notwithstanding anything herein to the contrary, no action of the Board of Trustees or trust action taken pursuant thereto shall be deemed unauthorized solely because the provisions of this Article concerning notice of Trustees' meetings have not been complied with, provided that said Board action is taken in a meeting at which a quorum of Trustees is present, and such action is approved or subsequently ratified by a majority of Trustees then in office. Section 413. Quorum. A majority of the Trustees in office shall be necessary to constitute a quorum for the transaction of business, and the acts of a majority of the Trustees present at a - 5 - meeting at which a quorum is present shall be the acts of the Board of Trustees. Notwithstanding the foregoing, a majority of the Independent Trustees must approve any investment acquisition or services arrangement entered into by the trust, and every transaction between the trust and Resource America, Inc., Brandywine Construction & Management, Inc., JeffBanks, Inc. and their affiliates (as such term is defined in the Declaration), provided that (i) the Trustees may rely upon information provided by such persons in giving their approval, and (ii) no such approval is required for due diligence investigations by Resource America, Inc. of a particular real property investment or loan made or proposed to be made by the trust, if the fee for such services does not exceed the lesser of 1% of the appraised value of the real property to be acquired, or of the real property underlying the loan to be originated or acquired, or $10,000. Section 414. Informal Action by Board of Trustees Without Meeting. Any action which may be taken at a meeting of the Board of Trustees may be taken without a meeting and without notice or a waiver of notice, if a consent in writing, setting forth the action so taken or the action to be taken by the trust, shall be signed by all the Trustees and shall be filed with the Secretary of the trust. Section 415. Executive Committee. The Board of Trustees may, by resolution adopted by a majority of the whole Board, delegate two (2) or more of its number to constitute an Executive Committee, which, to the extent provided in such resolution, shall have and exercise the authority of the Board of Trustees, in the management of the business of the trust, subject to the provisions of the Declaration and these Bylaws regarding the Independent Trustees and required approvals of the Independent Trustees. Section 416. Other Committees. Committees other than the Executive Committee may be established, from time to time, by resolution adopted by a majority of the whole Board. Each such committee shall consist of at least two Trustees and shall have such powers as the Board of Trustees shall prescribe by the resolution forming such Committee. Section 417. Presence at Meetings. Any one or more Trustees or shareholders may participate in a meeting of the Board of Trustees or a committee of the Board of Trustees or of the shareholders by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and any person so participating shall be deemed present at the meeting for all purposes. - 6 - ARTICLE V. OFFICERS, AGENTS AND EMPLOYEES. Section 501. Executive Officers. The executive officers of the trust shall be elected annually by the Board of Trustees and shall be a Chairman, a Chief Executive Officer, a President, a Chief Financial Officer and a Secretary. One or more Vice Presidents, and such other officers and assistant officers also may be elected or appointed as the Board of Trustees may authorize from time to time. Any two offices, except those of President and Vice President, may be filled by the same person. In addition to the powers and duties prescribed by these Bylaws, the officers and assistant officers shall have such authority and shall perform such duties as from time to time shall be prescribed by the Board of Trustees. The officers and assistant officers of the trust shall hold office at the pleasure of the Board of Trustees. The Board of Trustees may add to the title of any officer or assistant officer a word or words descriptive of his powers or the general character of his duties. If the office of any officer or assistant officer becomes vacant for any reason, the vacancy shall be filled by the Board of Trustees. Section 502. Agents or Employees. The Board of Trustees may by resolution designate the officer or officers who shall have authority to appoint such agents or employees as the needs of the trust may require. In the absence of such designation, this function may be performed by the Chief Executive Officer and may be delegated by him to others in whole or in part. Section 503. Salaries. The salaries of all officers of the trust shall be fixed by the Board of Trustees or by authority conferred by resolution of the Board of Trustees. The Board of Trustees also may fix the salaries or other compensation of assistant officers, agents and employees of the trust, but in the absence of such action this function shall be performed by the Chief Executive Officer or by others under his supervision. Section 504. Removal of Officers, Agents or Employees. Any officer, assistant officer, agent or employee of the trust may be removed or his authority revoked by resolution of the Board of Trustees whenever in its judgment the best interests of the trust will be served thereby, but such removal or revocation shall be without prejudice to the rights, if any, of the person so removed to receive compensation or other benefits in accordance with the terms of existing contracts. Any agent or employee of the trust likewise may be removed by the Chief Executive Officer, President or, subject to his or their supervision, by the person having authority with respect to the appointment of such agent or employee. - 7 - Section 505. Chairman of the Board and President; Powers and Duties. (a) The Chairman of the Board, if elected or appointed, shall preside at all meetings of the shareholders and of the Board of Trustees and shall have such powers and duties as the Board of Trustees may prescribe. (b) The Chief Executive Officer shall be the chief executive officer of the trust. He shall have general charge and supervision of the business of the trust and shall exercise or perform all the powers and duties usually incident to the office of Chief Executive Officer. In the absence of the Chairman of the Board of Trustees, the Chief Executive Officer shall preside at all meetings of the shareholders and of the Board of Trustees. He shall from time to time make such reports of the affairs of the trust as the Board of Trustees may require and shall annually present to the annual meeting of the shareholders a report of the business of the trust for the preceding fiscal year. (c) The President shall be the chief operating officer of the trust. He shall have charge and supervision over the daily operations of the trust, subject to the direction of the Board of Trustees and the Chief Executive Officer, and shall exercise or perform all of the powers and duties usually incident to the office of a chief operating officer. The President shall, in the absence or disability of the Chief Executive Officer, perform the duties and exercise the powers of the Chief Executive Officer. (d) The Chairman of the Board, Chief Executive Officer and President shall be, ex officio, members of the Executive Committee (if any) and of every other committee appointed by the Board of Trustees. Section 506. Vice President; Powers and Duties. The Vice President, if any, shall, in the absence or disability of the President, perform the duties and exercise the powers of the President; and if there be more than one Vice President, their seniority in performing such duties and exercising such powers shall be determined by the Board of Trustees or, in default of such determination, by the order in which they were first elected or appointed. Each Vice President also shall have such powers and perform such duties as may be assigned to him by the Board of Trustees. Section 507. Secretary's Powers and Duties. The Secretary shall attend all sessions of the Board of Trustees and all meetings of the shareholders and act as clerk thereof, and record all the votes and minutes thereof in books to be kept for that purpose. The Secretary shall perform like duties for the Executive Committee of the Board of Trustees (if any) when required. He shall give, or cause to be given, notice of all - 8 - meetings of the shareholders and of the Board of Trustees, and shall perform such other duties as may be prescribed by the Board of Trustees or by the Chief Executive Officer. Section 508. Chief Financial Officer; Powers and Duties. The Chief Financial Officer shall cause full and accurate accounts of receipts and disbursements to be kept in books belonging to the trust. He shall see to the deposit of all moneys and other valuable effects in the name and to the credit of the trust in such depositary or depositaries as may be designated by the Board of Trustees, subject to disbursement or disposition upon orders signed in such manner as the Board of Trustees shall prescribe. He shall render to the Chief Executive Officer and to the Trustees, at the regular meetings of the Board of Trustees or whenever the President or the Board of Trustees may require it, an account of all his transactions as Chief Financial Officer and of the results of operations and financial condition of the trust. Only if required by the Board, the Chief Financial Officer shall give the trust a bond in such sum, and with such surety or sureties as may be satisfactory to the Board of Trustees for the faithful discharge of the duties of his office, and for the restoration to the trust, in case of his death, resignation, retirement or removal from office, of all books, records, money, and other property of whatever kind in his possession or under his control belonging to the trust. Section 509. Delegation of Officers' Duties. Any officer may delegate duties to his assistant (if any) appointed by the Board of Trustees; and in case of the absence of any officer or assistant officer of the trust, or for any other reason that the Board of Trustees may deem sufficient, the Board of Trustees may delegate or authorize the delegation of his powers or duties, for the time being, to any person. ARTICLE VI. INDEMNIFICATION OF TRUSTEES, OFFICERS AND OTHER PERSONS. Section 601. Indemnification. The trust may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a trustee, officer, employee or agent of the trust, or is or was serving at the request of the trust as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against reasonable expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding unless his act or omission was the result of active and deliberate dishonesty, or if he actually received an improper personal benefit in money, property or services, or with respect to any criminal action or proceeding, had reasonable - 9 - cause to believe his act or omission was unlawful. The termination of any action, suit or proceeding by judgment, order or settlement shall not create a presumption that the person did not meet the required standards of conduct set forth in this Section 601. The termination of any action, suit or proceeding by conviction, or a plea of nolo contendere or its equivalent, or by entry of an order of probation prior to judgment, shall create a rebuttable presumption that the person did not meet such standard of conduct. Notwithstanding the foregoing, it is the express policy of the trust that indemnification of any person under this Section 601 shall be to the fullest extent allowed by, but subject to the limitations and conditions set forth in, Section 2-418 of the Maryland General Corporation Law (or any successor provisions thereto), as made applicable to real estate investment trusts by Section 8-301(15) of Title 8 of the Code of Maryland and, accordingly, if such law provides other, further or expanded indemnification rights, this Section 601 shall be deemed to incorporate the same. Section 602. Reliance on Certain Information. In performing his duties, a trustee shall be entitled to rely on any information, opinion, report or statement, including any financial statement and other financial data, in each case prepared or presented by any of the following: (1) One or more officers or employees of the trust whom the trustee reasonably believes to be reliable and competent in the matters presented. (2) A lawyer, certified public accountant or other person as to matters which the trustee reasonably believes to be within the person's professional or expert competence. (3) A committee of the Board upon which he does not serve, as to matters within its designated authority, which the trustee reasonably believes to merit confidence; provided however that a trustee shall not be considered to be acting in good faith if he has any knowledge concerning the matter in question that would cause his reliance to be unwarranted. Section 603. Payments By Trust. The indemnification provided for in this Article VI shall be paid by the trust only as authorized in the specific proceeding upon a determination that indemnification of the person is proper under the circumstances because he has met the applicable standard of conduct and that expenses are reasonable. Such determination is to be made by the Board of Trustees by majority vote of a quorum consisting of trustees who were not parties to such action, suit or proceeding, or in any other manner authorized by law which the Board of Trustees shall direct. - 10 - Section 604. Payment of Expenses. Reasonable expenses incurred by a person who is a party to a proceeding may be paid or reimbursed by the trust in advance of the final disposition of such proceeding upon receipt of (i) a written affirmation by the person of the person's good faith belief that the standard of conduct necessary for indemnification by the trust has been met, and (ii) an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that the standard of conduct has not been met. Section 605. Nonexclusivity. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under Maryland law, the Declaration, any bylaw, agreement, resolution of shareholders or trustees or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a trustee, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 606. Insurance. The trust shall have power to purchase and maintain insurance on behalf of any person who is or was a trustee, officer, employee or agent of the trust, or is or was serving at the request of the trust as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, other enterprise or employee benefit plan against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the trust would have the power to indemnify him against such liability under the specified statutory authority or the provisions of this Article VI. ARTICLE VII. FINANCIAL REPORTS TO SHAREHOLDERS. Section 701. Annual and Quarterly Reports. The Trustees shall send or cause to be sent to the shareholders of the trust (i) an annual financial report containing audited financial statements certified by independent public accountants, and (ii) quarterly financial reports containing unaudited financial information with respect to the three remaining quarters of the trust's fiscal year. Section 702. Optional Financial Reports. Nothing in these Bylaws shall be construed to prohibit the Board of Trustees from sending financial or other reports to the shareholders from time to time in such form as they may deem necessary or advisable in their discretion. It is hereby expressly provided that such reports need not be prepared by an independent public or certified accountant. - 11 - ARTICLE VIII. LIABILITY OF TRUSTEES AND RELATION OF OFFICERS TO TRUST. Section 801. Fiduciary Relationship. Trustees and officers of the trust shall discharge the duties of their respective positions in good faith, in a manner they reasonably believe to be in the best interests of the trust and with the care which ordinarily prudent persons in like positions would use under similar circumstances. Section 802. Liability of Trustees to the Trust. The Trustees and officers of the trust shall not be personally liable for monetary damages as such for any action except to the extent that (i) it is proved that any such person actually received an improper benefit or profit in money, property or services or (ii) a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the person's action or failure to act was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. ARTICLE IX. RECORDS OF THE TRUST. Section 901. Proceedings of Shareholders and Trustees. There shall be kept at the principal office of the trust an original or duplicate record of the proceedings of the shareholders and of the Trustees, and the original or a copy of its Bylaws, including all amendments or alterations thereof to date, together with other necessary and appropriate corporate records. Section 902. Shareholders' Right to Examine Records of Trust. Every shareholder shall, upon written demand, have a right to examine, in person or by agent or attorney, during the usual hours for business, the Bylaws, minutes of the proceedings of the shareholders and Trustees, annual statements of affairs and voting trust agreements on file at the trust's principal office, and make copies or extracts therefrom. A shareholder shall, upon written demand, have a right to receive a sworn statement from the President or Chief Financial Officer of the trust showing all shares and securities issued by the trust during a specified period of not more than 12 months before the date of the request, including: (i) the number of shares or amounts of each class of shares or other securities issued during the specified period; (ii) the consideration received per share or unit; and (iii) the value of any consideration other than money as set forth in a resolution of the Board of Trustees. In addition, one or more persons who together are and have been for at least six months holders of record of at least 5% of the outstanding shares of any class may (i) in person or by agent, on written request, inspect and copy during usual business hours the trust's books of account and its share ledger; (ii) present to - 12 - any officer or resident agent of the trust a written request for a statement of its affairs; and (iii) in the case the trust does not maintain the original or a duplicate stock ledger at its principal office, present to any officer or resident agent of the trust a written request for a list of its shareholders. Within 20 days after a request for information is made by the person or persons referred to in the preceding sentence, the trust shall prepare and have available on file at its principal office (a) in the case of a request for a statement of affairs, a statement verified under oath by the President, Chief Financial Officer or a vice-president which sets forth in reasonable detail the trust's assets and liabilities as of a reasonably current date; and (b) in the case of a request for a list of shareholders, a list verified under oath by one of its officers or its transfer agent or registrar which sets forth the name and address of each shareholder and the number of shares of each class which the shareholder holds. ARTICLE X. SHARES OF BENEFICIAL INTEREST. Section 1001. Share Certificates. Every shareholder in the trust shall be entitled to receive a certificate representing the shares owned by him. Said share certificates shall be numbered and registered in the books of the trust, as they are issued. Section 1002. Contents of Share Certificates. Said share certificates shall state: (1) the name of the trust; (2) the name of the registered holder of the shares represented thereby; (3) the number and class of shares and the designation of the series, if any, which the certificate represents; and (4) the par value of each share represented, or a statement that the shares are without par value. If the trust is authorized to issue more than one (l) class of shares, then upon the face or back of the certificate there shall be set forth (or a statement shall appear that the trust will furnish to any shareholder, upon request and without charge), a full summary statement of the designations, preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and distributions, qualifications and terms and conditions of redemption of the shares of each class authorized to be issued and, if the trust is authorized to issue any preferred or special class in series, the variations in the relative rights and preferences between the shares of each such series so far as the same have been fixed and determined, and the authority of the Board of Trustees to fix and determine the relative rights and preferences of subsequent series. Section 1003. Signatures on Share Certificates. Each such certificate shall be signed by the Chief Executive Officer, President or Vice President, and by the Secretary (or an Assistant Secretary), or by such other officers as may be designated by the Board of Trustees. If a certificate is signed - 13 - (1) by a transfer agent or an assistant transfer agent or (2) by a transfer clerk acting on behalf of the trust and a transfer agent or registrar, the signature of any such authorized officer may be facsimile. In case any officer who has signed, or whose facsimile signature has been used on, any certificate or certificates shall cease to be such officer of the trust, before such certificate is issued, it may be issued by the trust with the same effect as if the officer had not ceased to be such at the date of its issuance. Section 1004. Lost or Destroyed Certificates. Upon request of the Board of Trustees, any person claiming a share certificate to be lost or destroyed shall make an affidavit or affirmation of that fact and, in the manner and to the extent required by the Board of Trustees, shall give the trust a bond of indemnity with sufficient surety to protect the trust or any person injured by the issue of a new certificate from any liability or expense which it or they may incur by reason of the fact that the original certificate remains outstanding, whereupon a new certificate may be issued of the same tenor and for the same number of shares as the one alleged to be lost or destroyed, but always subject to the approval of the Board of Trustees. Section 1005. Transfer of Shares. All transfers of shares of the trust shall be made upon the books of the trust upon surrender to the trust or the transfer agent of the trust of a certificate or certificates for shares, duly endorsed by the person named in the certificate or by attorney, lawfully constituted in writing, or accompanied by proper evidence of succession, assignment or authority to transfer. Thereupon, it shall be the duty of the trust to cause the issuance of a new certificate to the person entitled thereto, the cancellation of the old certificates and the recordation of the transaction upon its books. Section 1006. Agreements Restricting Transfer of Shares. The Board of Trustees may authorize the trust to become party to agreements with shareholders and others relating to transfer, repurchase, and issuance, of shares of the trust; provided, however, that such agreement must be filed with the trust and all share certificates affected thereby shall have clearly imprinted thereon a legend containing such agreement or referring thereto. Section 1007. Registered Shareholders. The trust may treat the person registered on its books as the holder of any shares as the absolute owner thereof, and as the one entitled to vote such shares and receive dividends thereon. Section 1008. Determination of Shareholders of Record. The Board of Trustees may fix a time not more than ninety (90) days prior to the date of any meeting of shareholders, or the date fixed for the payment of any dividend or distribution, or the - 14 - date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the shareholders entitled to notice of, or to vote at, any such meeting, or entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion, or exchange of shares. In such case only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to notice of, or to vote at, such meeting, or to receive payment of such dividends, or to receive such allotment or rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the trust after any record date fixed as aforesaid. Unless a record date is fixed for the determination of shareholders entitled to receive notice of, or vote at, a shareholders' meeting, transferees of shares which are transferred on the books of the trust within ten (10) days next preceding the date of such meeting shall not be entitled to notice of or vote at such meeting. Section 1009. Control Share Acquisition Statute Not Applicable to Trust. Subtitle 7 of Title 3 of the Code of Maryland, Section 3-701 et seq., relating to the voting rights of certain control shares, as defined therein, shall not be applicable to the trust, the shareholders or any acquiring person, as defined therein. ARTICLE XI. DIVIDENDS AND OTHER DISTRIBUTIONS TO SHAREHOLDERS. Section 1101. Dividends. Subject to applicable Maryland law, and in accordance with the provisions thereof at the pertinent time, the Board of Trustees of the trust may from time to time declare, and the trust may pay, dividends on its outstanding shares in cash or property other than its own shares, except when the trust is insolvent, or when the payment thereof would render the trust insolvent, or when the declaration or payment thereof would be contrary to any restriction contained in the Declaration. Section 1102. Distribution of Shares of the Trust. The Board of Trustees of the trust may, from time to time, distribute pro rata to holders of any class or classes of its issued shares, treasury shares and authorized but unissued shares. In lieu of issuing fractional shares in any such distributions the trust may pay in cash the fair value therefor as determined by the Board of Trustees to shareholders entitled thereto. Section 1103. Reserves. There may be set aside out of any funds of the trust available for dividends such sum or sums as the Trustees from time to time, in their absolute discretion determine as a reserve or reserves to meet contingencies or for equalizing dividends, or for repairing or maintaining any - 15 - property of the trust, or for the purchase of additional assets or for such other purpose as the Board of Trustees shall think conducive to the interests of the trust. The Board of Trustees may abolish or modify any such reserve. ARTICLE XII. MISCELLANEOUS. Section 1201. Fiscal Year. The fiscal year of the trust shall be as fixed by resolution of the Board of Trustees. If the Board of Trustees shall not do so, the Chief Executive Officer shall fix the fiscal year. Section 1202. Signing Checks. All checks or demands for money and notes of the trust shall be signed by such officer, officers, or other person or persons as the Board of Trustees may from time to time designate. Section 1203. Designation of Presiding and Recording Officers. The Trustees or shareholders, at any meeting of Trustees or shareholders, as the case may be, shall have the right to designate any person, whether or not an officer, Trustee or shareholder to preside over, or record the proceedings of, such meeting. Section 1204. Written Notice of Meetings. Whenever written notice is required to be given to any person pursuant to law, the Declaration or these Bylaws, it may be given to such person, either personally or by sending a copy thereof through the mail, or by telegram, charges prepaid, to his address appearing on the books of the trust, or to his business or other address supplied by him to the trust for the purpose of notice. If the notice is sent by mail or by telegraph, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office for transmission to such person. Such notice shall specify the place, day and hour of the meeting and, in case of a special meeting of the shareholders, the general nature of the business to be transacted. Section 1205. Waiver of Notice. Whenever any written notice is required to be given pursuant to law, by the Declaration or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Except in the case of a special meeting of shareholders, neither the business to be transacted at, nor the purpose of, the meeting need be specified in the waiver of notice of such meeting. Attendance of a person, either in person or by proxy, at any meeting, shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. - 16 - Section 1206. Text of Proposed Resolution in Written Notice. Whenever the language of a proposed resolution is included in a written notice to shareholders, the shareholders' meeting considering the resolution may adopt it, with such clarifying or other amendments as do not enlarge its original purpose, without further notice to shareholders not present in person or by proxy. Section 1207. Interpretation of ByLaws. All words, terms and provisions of these Bylaws shall be defined by and in accordance with Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland and other applicable laws as such laws and these Bylaws are interpreted by the trust's counsel. Section 1208. Headings; Pronouns. The headings of the several Articles and Sections of these Bylaws are for convenience of reference only, and shall not be relied upon in the interpretation hereof. Pronouns used herein shall be deemed to include the masculine, feminine and neuter, singular and plural, as their context may require. ARTICLE XIII. AMENDMENTS. Section 1301. Amendment by the Board of Trustees. These Bylaws may be altered, amended or repealed by the affirmative vote of a majority of the Board of Trustees at any regular or special meeting of the Board of Trustees duly convened after appropriate notice to the Trustees of such proposed alteration, amendment or repeal. The shareholders of the trust do not have the right to amend these Bylaws. Section 1303. Recording Amendments and Alterations. The text of all amendments and alterations to these Bylaws shall be attached to the Bylaws with a notation of the date of each such amendment or alteration. ARTICLE XIV. ADOPTION OF BYLAWS RECORD OR AMENDMENT. Section 1401. These Bylaws have been adopted and filed with the undersigned to be effective as of the _____ day of ______________, 1997. __________________________________ , Secretary - 17 - Section 1402. Amendments to Bylaws. Section Amended Date Amended --------------- ------------ - 18 - EX-3.3 5 EXHIBIT 3.3 ARTICLES OF INCORPORATION OF RAIT GENERAL, INC. FIRST: The undersigned, Diane Vecchio, whose post office address is 1521 Locust Street, Suite 800, Philadelphia, PA 19102, being at least eighteen years of age, does hereby form a corporation under the general laws of the State of Maryland. SECOND: The name of this corporation (which is hereinafter called the Corporation) is: RAIT General, Inc. THIRD: The purpose for which the Corporation is formed is as follows: The Corporation shall be formed in any or all lawful business and to have the general powers as set forth in Section 2-103 of the Maryland General Corporation Law. FOURTH: The post office address of the principal office of the Corporation in Maryland is 7 St. Paul Street, Suite 1400, Baltimore, MD 21202 and the name and post office of the registered agent of the Corporation in Maryland is Resagent, Inc., 7 St. Paul Street, Suite 1400, Baltimore, MD 21202. Said agent is a resident corporation in Maryland and actually resides therein. FIFTH: The total number of shares of stock which the Corporation has authority to issue is: 1,000. SIXTH: The number of directors of the Corporation shall be one, which number may be increased pursuant to the By-laws of the Corporation, but shall never be less than one; and the name of the director who shall act until the first annual meeting or until her successor is duly chosen and qualified is: Betsy Z. Cohen. SEVENTH: Except to the extent provided for in Section 2-405.2 of the Maryland General Corporation Law as it may exist on the date hereof or as it may be hereafter amended, the directors and officers of this Corporation shall not be liable to the Corporation or its stockholders for any money damages. IN WITNESS WHEREOF, I have signed these Articles of Incorporation and acknowledge the same to be my act on this 12th day of August, 1997. Witness: /s/ Diane Vecchio - --------------------------------- --------------------------------- DIANE VECCHIO, (Seal) INCORPORATOR EX-3.4 6 EXHIBIT 3.4 TO COME EX-3.5 7 EXHIBIT 3.5 ARTICLES OF INCORPORATION OF RAIT LIMITED, INC. FIRST: The undersigned, Diane Vecchio, whose post office address is 1521 Locust Street, Suite 800, Philadelphia, PA 19102, being at least eighteen years of age, does hereby form a corporation under the general laws of the State of Maryland. SECOND: The name of this corporation (which is hereinafter called the Corporation) is: RAIT Limited, Inc. THIRD: The purpose for which the Corporation is formed is as follows: The Corporation shall be formed in any or all lawful business and to have the general powers as set forth in Section 2-103 of the Maryland General Corporation Law. FOURTH: The post office address of the principal office of the Corporation in Maryland is 7 St. Paul Street, Suite 1400, Baltimore, MD 21202 and the name and post office of the registered agent of the Corporation in Maryland is Resagent, Inc., 7 St. Paul Street, Suite 1400, Baltimore, MD 21202. Said agent is a resident corporation in Maryland and actually resides therein. FIFTH: The total number of shares of stock which the Corporation has authority to issue is: 1,000. SIXTH: The number of directors of the Corporation shall be one, which number may be increased pursuant to the By-laws of the Corporation, but shall never be less than one; and the name of the director who shall act until the first annual meeting or until her successor is duly chosen and qualified is: Betsy Z. Cohen. SEVENTH: Except to the extent provided for in Section 2-405.2 of the Maryland General Corporation Law as it may exist on the date hereof or as it may be hereafter amended, the directors and officers of this Corporation shall not be liable to the Corporation or its stockholders for any money damages. IN WITNESS WHEREOF, I have signed these Articles of Incorporation and acknowledge the same to be my act on this 12th day of August, 1997. Witness: /s/ Diane Vecchio - -------------------------------- -------------------------------- DIANE VECCHIO, (Seal) INCORPORATOR EX-3.6 8 EXHIBIT 3.6 TO COME EX-3.7 9 EXHIBIT 3.7 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 08/15/1997 971273483 - 2785695 STATE of DELAWARE CERTIFICATE of LIMITED PARTNERSHIP THE UNDERSIGNED, desiring to form a limited partnership pursuant to the Delaware Revised Uniform Limited Partnership Act, 6 Delaware Code, Chapter 17, do hereby certify as follows: FIRST: The name of the limited partnership is RAIT PARTNERSHIP, L.P. SECOND: The name and address of the Registered Agent is: Andrew Lubin, 2317 Pennsylvania Avenue, Wilmington, DE THIRD: The name and mailing address of each general partner is as follows: RAIT General, Inc., 1521 Locust Street, 6th Floor, Philadelphia, PA 19102 IN WITNESS WHEREOF, the undersigned has executed this Certificate of Limited Partnership of RAIT Partnership, L.P. as of August 13, 1997. RAIT GENERAL, INC. /s/ Jay Eisner -------------------------------------------- Jay Eisner, President of the General Partner EX-3.8 10 EXHIBIT 3.8 RAIT PARTNERSHIP, L.P. LIMITED PARTNERSHIP AGREEMENT TABLE OF CONTENTS
ARTICLE I - CONTINUATION......................................................................................- 1 - Section 1.1 Continuation............................................................................- 1 - Section 1.2 Name....................................................................................- 1 - Section 1.3 Place of Business; Registered Agent.....................................................- 1 - ARTICLE II - INTERPRETIVE PROVISIONS..........................................................................- 2 - Section 2.1 Certain Definitions.....................................................................- 2 - Section 2.2 Rules of Construction....................................................................- 8 - ARTICLE III - BUSINESS PURPOSE................................................................................- 9 - Section 3.1 Business................................................................................- 9 - Section 3.2 Authorized Activities...................................................................- 9 - ARTICLE IV - CAPITAL CONTRIBUTIONS............................................................................- 9 - Section 4.1 Capital Contributions ..................................................................- 9 - Section 4.2 Additional Partnership Interests.......................................................- 10 - Section 4.3 No Third Party Beneficiaries...........................................................- 10 - Section 4.4 Return of Capital Account; Interest....................................................- 11 - Section 4.5 Preemptive Rights......................................................................- 11 - Section 4.6 REIT Share Purchases...................................................................- 11 - Section 4.7 Limited Liability......................................................................- 11 - ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS....................................................................- 11 - Section 5.1 General................................................................................- 11 - Section 5.2 Distributions of Net Cash Flow.........................................................- 12 - Section 5.3 Distributions of Capital Proceeds......................................................- 12 - Section 5.4 Amounts Withheld.......................................................................- 12 - ARTICLE VI - PARTNERSHIP MANAGEMENT..........................................................................- 12 - Section 6.1 Management and Control of Partnership Business.........................................- 12 - Section 6.2 No Management by Limited Partners; Limitation of Liability.............................- 12 - Section 6.3 Limitations on Partners................................................................- 13 - Section 6.4 Business with Affiliates...............................................................- 13 - Section 6.5 Compensation; Reimbursement of Expenses................................................- 13 - Section 6.6 Liability for Acts and Omissions.......................................................- 13 - ARTICLE VII - ADMINISTRATIVE, FINANCIAL AND TAX MATTERS......................................................- 14 - Section 7.1 Books and Records......................................................................- 14 - Section 7.2 Annual Audit and Accounting............................................................- 14 - Section 7.3 Partnership Funds......................................................................- 14 - Section 7.4 Reports and Notices....................................................................- 14 - Section 7.5 Tax Matters............................................................................- 15 - Section 7.6 Withholding............................................................................- 15 - ARTICLE VIII - TRANSFER OF INTERESTS; ADMISSION OF PARTNERS..................................................- 16 - Section 8.1 Transfer by General Partner............................................................- 16 - Section 8.2 Obligations of a Prior General Partner.................................................- 16 - Section 8.3 Additional or Successor General Partner................................................- 16 - Section 8.4 Restrictions on Transfer and Withdrawal by Limited Partner.............................- 16 -
i
Section 8.5 Substituted Limited Partner............................................................- 17 - Section 8.6 Timing and Effect of Transfers.........................................................- 18 - Section 8.7 Additional Limited Partners............................................................- 18 - Section 8.8 Amendment of Agreement and Certificate.................................................- 18 - ARTICLE IX - REDEMPTION......................................................................................- 18 - Section 9.1 Right of Redemption....................................................................- 19 - Section 9.2 Timing of Redemption...................................................................- 19 - Section 9.3 Redemption Price.......................................................................- 19 - Section 9.4 Assumption of Redemption Obligation....................................................- 19 - Section 9.5 Further Assurances.....................................................................- 19 - Section 9.6 Effect of Redemption...................................................................- 21 - ARTICLE X - DISSOLUTION AND LIQUIDATION......................................................................- 20 - Section 10.1 Term and Dissolution...................................................................- 20 - Section 10.2 Liquidation of Partnership Assets.....................................................- 20 - Section 10.3 Effect of Treasury Regulations........................................................- 21 - Section 10.4 Time for Winding Up...................................................................- 21 - ARTICLE XI - AMENDMENTS AND MEETINGS.........................................................................- 21 - Section 11.1 Amendment Procedure...................................................................- 21 - Section 11.2 Meetings and Voting...................................................................- 22 - ARTICLE XII - MISCELLANEOUS PROVISIONS.......................................................................- 23 - Section 12.1 Title to Property.....................................................................- 23 - Section 12.2 Other Activities of Limited Partners..................................................- 23 - Section 12.3 Power of Attorney.....................................................................- 23 - Section 12.4 Further Assurances....................................................................- 24 - Section 12.5 Titles and Captions...................................................................- 24 - Section 12.6 Applicable Law........................................................................- 24 - Section 12.7 Binding Agreement.....................................................................- 24 - Section 12.8 Waiver of Partition...................................................................- 24 - Section 12.9 Counterparts and Effectiveness........................................................- 24 - Section 12.10 Survival of Representations..........................................................- 25 - Section 12.11 Entire Agreement.....................................................................- 25 - EXHIBITS Exhibit 1 - Schedule of Partners Exhibit 2 - Redemption Notice Exhibit 3 - Allocation Provisions
ii RAIT LIMITED PARTNERSHIP, L.P. LIMITED PARTNERSHIP AGREEMENT THIS LIMITED PARTNERSHIP AGREEMENT (the "Agreement") is made this day _________ of ___________, 1997, by and among RAIT GENERAL, INC., a Maryland corporation, as General Partner, and RAIT LIMITED, INC., a Maryland corporation, as Initial Limited Partner,together with any Persons who or which become Partners in the Partnership in accordance with the terms hereof. RECITALS: A. Pursuant to a Certificate of Limited Partnership (the "Certificate") filed on August __, 1997 with the Delaware Secretary of State, Resource Asset Investment Limited Partnership (the "Partnership") was formed for the purpose, inter alia, of providing mortgage and other financing to borrowers owning real estate and acquiring, owning, developing, operating and, if and when appropriate, selling, certain real estate and interests, both direct and indirect, in real estate; and B. The parties have reached certain understandings with respect to their relative sharing of the benefits and burdens to be derived from the business operations of the Partnership, and desire to enter into this Agreement in order to (i) set forth herein such understandings and agreements; and (ii) set forth their rights, obligations and understandings with respect to the Partnership and its business. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I - CONTINUATION Section 1.1 Continuation. The Partners hereby continue the Partnership as a limited partnership under the Act. The General Partner shall take all action required by law to perfect and maintain the Partnership as a limited partnership under the Act and under the laws of all other jurisdictions in which the Partnership may elect to conduct business, including but not limited to, the filing of any required amendment to the Certificate with the Delaware Secretary of State, and qualification of the Partnership as a foreign limited partnership in the jurisdictions in which such filing shall be required, as determined by the General Partner. The General Partner shall also promptly register the Partnership under applicable assumed or fictitious name statutes or similar laws. Section 1.2 Name. The name of the Partnership is RAIT Partnership, L.P. Section 1.3 Place of Business; Registered Agent. The principal office of the Partnership is located at 1521 Locust Street, Philadelphia, PA 19102, which office may be changed to such other place as the General Partner may from time to time designate. The registered agent for the Partnership in the State of Delaware is Andrew Lubin, whose address is 2317 Pennsylvania Avenue, Wilmington, DE. Section 1.4 Term. The Partnership shall terminate on December 31, 2050 unless sooner terminated as provided in this Agreement or by operation of law. ARTICLE II - INTERPRETIVE PROVISIONS Section 2.1 Certain Definitions. The following terms have the definitions hereinafter indicated whenever used in this Agreement with initial capital letters. In addition, certain terms are defined in Exhibit 3 hereto. Act: The Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time. Additional Limited Partner: A person admitted to the Partnership as an Additional Limited Partner in accordance with Section 8.7 hereof and who is shown as such on the books and records of the Partnership. Affiliate: With respect to any referenced Person, (i) such Person or a member of his immediate family, (ii) any Person who directly or indirectly owns, controls or holds the power to vote ten percent (10%) or more of the outstanding voting securities of the Person in question; (iii) any Person ten percent (10%) or more of whose outstanding securities are directly or indirectly owned, controlled by, or held with power to vote by the Person in question; (iv) any Person directly or indirectly controlling, controlled by, or under direct common control with the Person in question; (v) if the Person in question is a corporation, any executive officer or director of such Person or of any corporation directly or indirectly controlling such Person; and (vi) if the Person in question is a partnership, any general partner of such partnership or any limited partner owning or controlling ten percent (10%) or more of either the capital or profits interest in such partnership. As used herein, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. Agreement: This Limited Partnership Agreement and all Exhibits attached hereto, as the same may he amended or restated and in effect from time to time. Assignee: Any Person to whom one or more Partnership Units have been Transferred as permitted under this Agreement, but who has not become a Substituted Limited Partner in accordance with the provisions hereof and who shall have the rights set forth in Section 8.5(B). Bankrupt(cy): Either (i) a referenced Person's making an assignment for the benefit of creditors; (ii) the filing by a referenced Person of a voluntary petition in bankruptcy; (iii) a referenced Person's being adjudged insolvent or having entered against him an order for relief in any bankruptcy or insolvency proceeding; (iv) the filing by a referenced Person of an answer seeking any reorganization, composition, readjustment, liquidation, dissolution or similar relief under any law or regulation; (v) the filing by a referenced Person of an answer or other pleading admitting or failing to contest the material allegations of a petition filed against him in any proceeding of reorganization, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation; or (vi) a referenced Person's seeking, consenting to or acquiescing in the appointment of a trustee, receiver or liquidator for all or substantially all of his property (or court appointment of such trustee, receiver or liquidator). Capital Account: The account maintained by the Partnership for each Partner described in Exhibit 3 hereto. Page 2 Capital Contribution: With respect to each Partner, the total amount of cash or cash equivalents, or the Gross Asset Value of Contributed Property which such Partner contributes or is deemed to contribute to the Partnership pursuant to the terms of this Agreement, including the Capital Contribution made by a predecessor holder(s) of the Interest of such Partner. Capital Proceeds: The net proceeds received by the Partnership from, or attributable to, (i) any financing obtained by the Partnership after payment of the then-outstanding principal balance and accrued but unpaid interest on liabilities of the Partnership then payable pursuant to the terms thereof from the proceeds of such financing; (ii) the sale or condemnation (other than a temporary taking) of all or substantially all of any Property Interest or the Partnership's interest therein after payment of the then-outstanding principal balance and accrued but unpaid interest on liabilities of the Partnership then payable pursuant to the terms thereof; (iii) the receipt of any proceeds from a policy of title or fire and extended coverage insurance; and (iv) any reserves previously set aside from Capital Proceeds or Capital Contributions which are deemed available for distribution by the General Partner. Cash Payment: The payment to a Redeeming Party of a cash amount determined by multiplying (i) the number of Partnership Units tendered for redemption by such Redeeming Party pursuant to a validly proffered Redemption Notice by (ii) the Unit Value on the date the Redemption Notice is received by the General Partner. Certificate: The Partnership's Certificate of Limited Partnership filed in the office of the Delaware Secretary of State, as amended from time to time, as required by the terms of this Agreement and the Act. Code: The Internal Revenue Code of 1986, as amended from time to time. Consent: Either the written consent of a Person or the affirmative vote of such Person at a meeting duly called and held pursuant to this Agreement, as the case may be, to do the act or thing for which the consent is required or solicited, or the act of granting such consent, as the context may require. Except as expressly provided otherwise in this Agreement, reference to a requirement for the "Consent" of a Partner shall require the commercially reasonable judgment of such Partner in light of the facts and circumstances, rather than the unfettered discretionary decision of such Partner. Contributed Property: Each property or other asset (excluding cash) contributed or deemed contributed to the Partnership (whether as a result of a Code Section 708 termination or otherwise). Contribution Agreement(s): The Contribution Agreement by and among the Partnership, the General Partner and a Property Interest Owner, pursuant to which, among other things, such Property Interest Owner agrees to contribute its Property Interest and other assets owned by such Property Interest Owner to the Partnership in consideration for Partnership Units. Conversion Multiple: The factor applied for converting Partnership Units to REIT Shares, which shall initially be 1.0; provided, however, in the event that the General Partner (i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares, (ii) subdivides its outstanding REIT Shares, or (iii) combines its outstanding REIT Shares into a smaller number of REIT Shares, the Conversion Multiple shall be adjusted by multiplying the Conversion Multiple by a fraction, the numerator of which shall be Page 3 the number of REIT Shares issued and outstanding on the record date (assuming for such purposes that such dividend, distribution, subdivision or combination has occurred as of such time), and the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on the Record Date for such dividend, distribution, subdivision or combination. Any adjustment to the Conversion Multiple shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. Depreciation: As defined in Exhibit 3 to this Agreement. Fiscal Year: The calendar year or such other twelve (12)-month period designated by the General Partner. General Partner: RAIT General, Inc., its respective successors who or which become Successor General Partner(s) in accordance with the terms of this Agreement. For the first taxable year following the IPO, the General Partner intends to qualify as a qualified REIT subsidiary as defined under Code Section 856. General Partner Interest: A Partnership Interest held by the General Partner that is a general partnership interest. A General Partner Interest may be expressed as a number of Partnership Units. Gross Asset Value: With respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (A) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the relative equity value of such asset, as agreed to by the contributing Partner and the Partnership and set forth in the Contribution Agreement. (B) The Gross Asset Values of all Partnership Assets shall be adjusted to equal their respective gross fair market values, as determined by the General Partner, as of the following times: (1) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (2) the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership Assets as consideration for an interest in the Partnership; and (3) the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to clauses (1) and (2) above shall be made only if the General Partner reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership. (C) The Gross Asset Value of any Partnership Asset distributed to any Partner shall be the gross fair market value of such asset on the date of distribution; and (D) The Gross Asset Values of Partnership Assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and Section (C) of Exhibit 3 hereto; provided, however, that Gross Asset Values shall not be adjusted pursuant to this clause (D) to the extent the General Partner determines that an adjustment pursuant to clause (B) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this clause (D). Page 4 If the Gross Asset Value of an asset has been determined or adjusted pursuant to clauses (A), (B), or (D) above, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Partnership profits and losses. Gross Receipts: With respect to any Fiscal Year or other accounting period designated by the General Partner, the sum of all cash receipts of the Partnership, including without limitation, all cash receipts earned from interest and other sums paid with respect to Loans, the rental of commercial space within the Property Interests and from other business operations of the Partnership but excluding tenant security deposits until applied to rent or other charges, but excluding Capital Proceeds and Capital Contributions. Involuntary Withdrawal: As to any (i) individual, such individual's death, incapacity or adjudication of incompetence; (ii) corporation, its dissolution or revocation of its charter (unless such revocation is promptly corrected upon notice thereof); (iii) partnership, the dissolution and commencement of winding up of its affairs; (iv) trust, the termination of the trust (but not the substitution of trustees); (v) estate, the distribution by the fiduciary of the estate's complete interest in the Partnership; and (vi) Partner, the Bankruptcy of such Partner. IPO: IPO means the first sale of REIT Shares by RAIT pursuant to RAIT's first effective registration statement for such REIT Shares filed under the Securities Act of 1933, as amended. IRS: The Internal Revenue Service, an agency of the United States government. Limited Partner(s): The Initial Limited Partner and any Person subsequently admitted to the Partnership as a Limited Partner. Management Company: Brandywine Construction & Management, Inc., a Pennsylvania corporation and an Affiliate of the Initial Limited Partner, or any successor management and leasing company selected by the General Partner from time to time. Loans: Mortgages or other debt financings owned by the Partnership. Net Capital Contributions: As to any Partner on any day, the Partner's Capital Contributions adjusted as follows: A. Increased by the amount of any Partnership liabilities which, in connection with distributions pursuant to the terms hereof, are assumed by such Partner or are secured by any Partnership Asset distributed to such Partner, and B. Reduced by the amount of cash and the Gross Asset Value of any Partnership Asset distributed to such Partner pursuant to Section 5.3(A)(2) hereof and the amount of any liabilities of such Partner assumed by the Partnership or which are secured by any property contributed by such Partner to the Partnership. In the event any interest in the Partnership is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the adjusted Capital Contribution of the transferor to the extent it relates to the transferred interest in the Partnership. Page 5 Net Cash Flow: Gross Receipts and any other funds deemed available for distribution by the General Partner, including any amounts previously set aside as reserves or escrows, less Operating and Capital Expenses. Notice: A writing containing the information required by this Agreement to be communicated to a Person and personally delivered to such Person or sent by recognized air courier capable of giving receipt therefor, freight prepaid, to such Person at the last known address of such Person as shown on the books of the Partnership, the date of personal delivery or of the air courier's receipt, as the case may be, being deemed the date of such Notice; provided, however, that any written communication containing such information actually received by a Person shall constitute Notice for all purposes of this Agreement. Facsimile transmission promptly confirmed by original communication delivered as herein provided shall be an acceptable means of notice, with the date of receipt of the facsimile being deemed the date of Notice. Any Partner may change its address or the address to which copies of Notices should be sent by Notice to the other Partners. Operating and Capital Expenses: All expenditures payable by the Partnership including, without limitation (i) any and all operating expenses, management expenses, taxes and insurance; (ii) principal and interest due on Partnership obligations; (iii) capital expenditures; (iv) reimbursement to Partners for advances, if any, pursuant to this Agreement; and (v) reserves deemed reasonably necessary by the General Partner. Partners: The General Partner and the Limited Partners as a collective group. The term "Partner" shall mean a General Partner or a Limited Partner. Such terms shall be deemed to include such other Persons who become Partners pursuant to the terms of this Agreement. Partnership: The Delaware limited partnership referred to herein as RAIT Partnership, L.P. as such partnership may from time to time be constituted. Partnership Assets: At any particular time, any assets or property (tangible or intangible, choate or inchoate, fixed or contingent) held or owned by the Partnership. Partnership Interest or Interest: As to any Partner, such Partner's ownership interest in the Partnership, representing a Capital Contribution by either a Limited Partner or a General Partner and including such Partner's right to distributions under this Agreement, and any other rights or benefits which such Partner has in the Partnership, together with any and all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be expressed as a number of Partnership Units. Partnership Unit: A fractional, undivided share of the Partnership Interests of all Partners issued pursuant to Section 4.1 hereof. As of the date of this Agreement, the aggregate number of Partnership Units outstanding is ___________, with each such Partnership Unit representing approximately a % Percentage Interest. Percentage Interest: As to any Partner, the percentage in the Partnership as initially shown opposite the name of such Partner on Exhibit 1 attached hereto, as determined by dividing the Partnership Units then owned by such Partner by the total number of Partnership Units then outstanding, as the same may be automatically adjusted from time to time to reflect the issuance and redemption of Page 6 Partnership Units in accordance with this Agreement, without requiring the amendment of Exhibit 1 to reflect any such issuance or redemption. Person: An individual, or a trust, estate, partnership, association, company or corporation, as such terms are defined in Code Section 7701. Property Interest: Any real estate property owned by any Property Interest Owner and contributed to the Partnership pursuant to the Contribution Agreement for such Property Interest. Property Interest Owner(s): Any Person which owns a Property Interest that is being contributed to the Partnership. RAIT: Resource Asset Investment Trust, a Maryland real estate investment trust that is the owner of all of the capital stock of the General Partner and the Initial Limited Partner. RAIT intends to qualify for its first taxable year following the IPO, and thereafter, as a real estate investment trust as defined under Code Section 856. Record Date: The date established by the General Partner for distribution of Net Cash Flow pursuant to Section 5.2 hereof, which record date shall be the same as the record date established by the General Partner for a distribution to its shareholders of some or all of its portion of such distribution. Redeeming Party: A Limited Partner or Assignee (other than the General Partner) who tenders Partnership Units for redemption pursuant to a Redemption Notice. Redemption Date: The date for redemption of Partnership Units as set forth in Section 9.2. Redemption Effective Date: The first date on which a Redeeming Party may elect to redeem Partnership Units, which date shall be thirty-six (36) months following the date of this Agreement. Redemption Notice: A Notice to the General Partner by a Redeeming Party, substantially in the form attached as Exhibit 2, pursuant to which the Redeeming Party requests the redemption of Partnership Units in accordance with Article IX. Redemption Obligation: The obligation of the Partnership to redeem the Partnership Units as set forth in Section 9.1(A). Redemption Restriction: A restriction on the ability of the Partnership to redeem the Partnership Units as set forth in Section 9.1(A). REIT Declaration: The Declaration of Trust of RAIT as filed with the Maryland State Department of Assessments and Taxation on ______, 1997, as the same may be amended, or amended and restated, and in effect from time to time. REIT Share: A share of common stock representing an ownership interest in RAIT. Page 7 REIT Share Rights: Rights to acquire additional REIT Shares issued to all holders of REIT Shares, whether in the form of rights, options, warrants or convertible or exchangeable securities, to the extent the same have been issued without additional consideration after the initial acquisition of such REIT Shares. Share Payment: The payment to a Redeeming Party of a number of REIT Shares determined by multiplying (i) the number of Partnership Units tendered for redemption by such Redeeming Party pursuant to a validly proffered Redemption Notice by (ii) the Conversion Multiple. In the event the General Partner grants any REIT Share Rights prior to such conversion, any Share Payment shall include for the Redeeming Party his ratable share of such REIT Share Rights. Subsidiary: With respect to any Person, any corporation or other entity of which a majority of (i) the voting power of the voting equity securities, or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person. Substituted Limited Partner: That Person or those Persons admitted to the Partnership as substitute Limited Partner(s) in accordance with the provisions of this Agreement. A Substituted Limited Partner, upon his admission as such, shall succeed to the rights, privileges and liabilities of his predecessor in interest as a Limited Partner. Successor General Partner: Any Person who is admitted to the Partnership as substitute General Partner pursuant to this Agreement. A Successor General Partner, upon its admission as such, shall succeed to the rights, privileges and liabilities of its predecessor in interest as a General Partner in accordance with the provisions of the Act. Tax Matters Partner: The General Partner, or such other Partner who becomes Tax Matters Partner pursuant to the terms of this Agreement. Transfer: With respect to any Partnership Unit(s), a transaction in which a Partner purports to assign his Partnership Interest to another Person and includes any sale, assignment, gift, pledge, mortgage, exchange, hypothecation, encumbrance or other disposition by law or otherwise; provided, however, the redemption of any Partnership Interest pursuant to Article IX hereof shall not constitute a "transfer" for purposes hereof. Any purported Transfer not made in accordance with the terms of this Agreement shall have no legal effect and shall be null and void ab initio. Unit Value: With respect to any Partnership Unit, the average of the daily market price for a REIT Share for the ten (10) consecutive trading days immediately preceding the date of receipt of a Redemption Notice by the General Partner. If the REIT Shares are traded on a securities exchange or the NASDAQ National Market System, the market price for each such trading day shall be the closing price on such day or, if no sales take place on such day, the average of the closing bid and asked prices on such day. If the REIT Shares are not traded on a securities exchange or the NASDAQ National Market System, the market price for each such trading day shall be determined by the General Partner using any reasonable method of valuation. If a Share Payment would include any REIT Share Rights, the value of such REIT Share Rights shall be determined by the General Partner using any reasonable method of valuation, taking into account the Unit Value determined hereunder and the factors used to make such determination and the value of such REIT Share Rights shall be included in the Unit Value. Page 8 Section 2.2 Rules of Construction. The following rules of construction shall apply to this Agreement: (A) All section headings in this Agreement are for the convenience of reference only and are not intended to qualify the meaning of any section. (B) All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders, the singular shall include the plural, and vice versa, as the context may require. (C) Each provision of this Agreement shall be considered severable from the rest, and if any provision of this Agreement or its application to any Person or circumstances shall be held invalid and contrary to any existing or future law or unenforceable to any extent, the remainder of this Agreement and the application of any other provision to any Person or circumstances shall not be affected thereby and shall be interpreted and enforced to the greatest extent permitted by law so as to give effect to the original intent of the parties hereto. (D) Unless otherwise specifically and expressly limited in the context, any reference herein to a decision, determination, act, action, exercise of a right, power or privilege, or other procedure by the General Partner shall mean and refer to the decision, determination, act, action, exercise or other procedure by the General Partner in its sole and absolute discretion. Notwithstanding the foregoing, such discretion shall reflect the commercially reasonable judgment of the General Partner in light of the facts and circumstances, rather than the unfettered discretionary decision of the General Partner. ARTICLE III - BUSINESS PURPOSE Section 3.1 Business. The business of the Partnership shall be (i) to provide mortgage or other financing to borrowers owning real estate; (ii) to acquire, own, develop, operate and, if and when appropriate, sell, real estate and interests, both direct and indirect, in real estate; (iii) to conduct any business that may be lawfully conducted by a limited partnership pursuant to the Act, provided, however, that following the IPO such business shall be limited so as to permit the General Partner to elect and maintain its status as a real estate investment trust (unless the General Partner elects to no longer qualify as a real estate investment trust); (iv) to enter into any partnership, joint venture or other relationship to engage in any of the foregoing or the ownership of interests in any entity engaged in any of the foregoing; (v) to make loans or other financial accommodations; (vi) to do any of the foregoing with respect to any Affiliate or Subsidiary; and (vii) to do anything necessary or incidental to the foregoing. Section 3.2 Authorized Activities. In carrying out the purposes of the Partnership, but subject to all other provisions of this Agreement, the Partnership is authorized to engage in any kind of lawful activity, and perform and carry out contracts of any kind, necessary or advisable in connection with the accomplishment of the purposes and business of the Partnership described herein and for the protection and benefit of the Partnership; provided that the General Partner shall use its best efforts to prevent the Partnership from taking, or refraining from taking, any action which, in the judgment of the General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of the General Partner to qualify and continue to qualify as a real estate investment trust under the Code; (ii) to enable the General Partner or the Initial Limited Partner to qualify and continue to qualify as qualified REIT subsidiaries; (iii) could subject RAIT, the General Partner or the Initial Limited Partner to additional taxes under Code Section 857 or 4981; (iv) ensure that the Partnership will not be classified as a "publicly Page 9 traded partnership" for purposes of Code Section 7704; or (v) could violate any law or regulation of any governmental body or agency having jurisdiction over RAIT, the General Partner, the Initial Limited Partner or their securities. ARTICLE IV - CAPITAL CONTRIBUTIONS Section 4.1 Capital Contributions. (A) Simultaneously with the execution of this Agreement, the General Partner and the Limited Partner shall contribute the consideration set forth on Exhibit 1 which shall be derived from corresponding contributions made to their capital by RAIT. Exhibit 1 sets forth the initial number of Partnership Units owned by each Partner and the Percentage Interest of each Partner, which Percentage Interest shall be adjusted from time to time by the General Partner to reflect the issuance of additional Partnership Units, the redemption of Partnership Units, additional Capital Contributions and similar events having an effect on a Partner's Percentage Interest. Except as set forth in Section 4.2 (regarding issuance of additional Partnership Units) or Section 7.6 (regarding withholding obligations), no Partner shall be required under any circumstances to contribute to the capital of the Partnership any amount beyond that sum required pursuant to this Article IV. (B) Anything in the foregoing Section 4.1(A) or elsewhere in this Agreement notwithstanding, the Partnership Units held by the General Partner shall, at all times, be deemed to be general partnership units and shall constitute the General Partner Interest. Section 4.2 Additional Partnership Units. (A) The General Partner shall be authorized to issue additional limited partnership interests in the form of Partnership Units for any Partnership purpose, at any time or from time to time, to any Partner or other Person (other than the General Partner, except in accordance with Section 4.2(B) below). (B) The Partnership also may from time to time issue to the General Partner additional Partnership Units or other Partnership Interests in such classes and having such designations, preferences and relative rights (including preferences and rights senior to the existing Limited Partners' Partnership Interests) as shall be determined by the General Partner in accordance with the Act and governing law. Such units may be issued for less than fair market value if RAIT has concluded that such issuance is in the best interest of RAIT and the Partnership. The General Partner and the Initial Limited Partner must contribute the net proceeds or any future offerings of RAIT shares as additional capital to the Partnership in exchange for additional units. Except as provided in Article IX of this Agreement, any such issuance of Partnership Units or Partnership Interests to the General Partner shall be conditioned upon (i) the undertaking by RAIT of a related issuance of REIT Shares (with such shares having designations, rights and preferences such that the economic rights of the holders of such REIT Shares are substantially similar to the rights of the additional Partnership Interests issued to the General Partner) and the General Partner's making a Capital Contribution in an amount equal to the net proceeds raised in the issuance of such REIT Shares, derived from a corresponding contribution to its capital by RAIT, or (ii) the issuance by RAIT of REIT Shares under any stock option or bonus plan and the General Partner's making a Capital Contribution in an amount equal to the exercise price of the option exercised by any employee pursuant to such stock option or other bonus plan, derived from a corresponding contribution to its capital by RAIT. Page 10 (C) Except in accordance with Article IX of this Agreement, RAIT shall not issue any (i) additional REIT Shares, (ii) rights, options or warrants containing the right to subscribe for or purchase REIT Shares, or (iii) securities convertible or exchangeable into REIT Shares (collectively, "Additional REIT Securities") other than to all holders of REIT Shares, pro rata, unless (x) the Partnership issues to the General Partner (i) Partnership Interests, (ii) rights, options or warrants containing the right to subscribe for or purchase Partnership Interests or (iii) securities convertible or exchangeable into Partnership Interests such that the General Partner receives an economic interest in the Partnership substantially similar to the economic interest in RAIT represented by the Additional REIT Securities; and (y) the General Partner contributes the net proceeds from the issuance of the Additional REIT Securities and from the exercise of any rights contained in any Additional REIT Securities to the Partnership, derived from a corresponding contribution to its capital by RAIT. Section 4.3 No Third Party Beneficiaries. The foregoing provisions of this Article IV are not intended to be for the benefit of any creditor of the Partnership or other Person to whom any debts, liabilities or obligations are owed by (or who otherwise has any claim against) the Partnership or any of the Partners (except for RAIT (but only to the extent of its right to require the Partnership to comply with Sections 4.1, 4.2 and 4.6), and no such creditor or other Person shall obtain any right under any such foregoing provision against the Partnership or any of the Partners by reason of any debt, liability or obligation (or otherwise). Section 4.4 Return of Capital Account; Interest. Except as otherwise specifically provided in this Agreement, (i) no Partner shall have any right to withdraw or reduce its Capital Contributions or Capital Account, or to demand and receive property other than cash from the Partnership in return for its Capital Contributions or Capital Account; (ii) no Partner shall have any priority over any other Partners as to the return of its Capital Contributions or Capital Account; (iii) any return of Capital Contributions or Capital Accounts to the Partners shall be solely from the Partnership Assets, and no Partner shall be personally liable for any such return; and (iv) no interest shall be paid by the Partnership on Capital Contributions or on balances in Partners' Capital Accounts. Section 4.5 Preemptive Rights. No Person shall have any preemptive or similar rights with respect to the issuance or sale of additional Partnership Units. Section 4.6 REIT Share Purchases. If RAIT or the General Partner acquires additional REIT Shares pursuant to the REIT Declaration, the Partnership shall purchase from RAIT or the General Partner, as the case may be, that number of Partnership Units determined by applying the Conversion Multiple to the number of REIT Shares purchased by RAIT or the General Partner at the same price and on the same terms that RAIT or the General Partner purchased such REIT Shares. Section 4.7 Limited Liability. Except as expressly provided in this Agreement, no Limited Partner (in its capacity as a Limited Partner) shall be personally liable for losses, costs, expenses, liabilities or obligations of the Partnership in excess of its Capital Contribution required under this Article IV. The foregoing shall not affect any liability a Limited Partner may incur if such Limited Partner undertakes additional obligations to the Partnership, the Partners or to third parties in a capacity other than as a Limited Partner. Page 11 ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS Section 5.1 General. The profits of the Partnership shall be shared, and the losses of the Partnership shall be borne, by the Partners as provided in Exhibit 3 hereto. Section 5.2 Distributions of Net Cash Flow. (A) Distributions of Net Cash Flow shall be made to the Partners of record on the Record Date established by the General Partner for the distribution, without regard to the length of time the record holder has been such. Distributions shall be made within 45 days of the end of each calendar quarter (or, at the election of the General Partner on a more frequent basis) in such amounts as may be determined by the General Partner in its sole discretion. (B) Net Cash Flow will be distributed to the Partners, pro rata in accordance with their respective Percentage Interests, and the General Partner will use its best efforts to cause the Partnership to make distributions of Net Cash Flow which are sufficient to enable RAIT to (i) maintain its status as a real estate investment trust under Code Section 856, (ii) avoid the imposition of any tax under Code Section 856, and (iii) avoid the imposition of any excise tax under Code Section 4981. (C) The General Partner shall take such reasonable efforts, as determined by it in its sole and absolute discretion, to distribute Net Cash Flow to the Partners so as to preclude any distribution or portion thereof from being treated as part of a sale of property to the Partnership by a Partner under Section 707 of the Code or the Treasury Regulations thereunder; provided that the General Partner and the Partnership shall not have liability to a Limited Partner under any circumstances as a result of any distribution to a Partner being so treated. Section 5.3 Distributions of Capital Proceeds. Capital Proceeds will be distributed to the Partners pro rata in accordance with their respective Percentage Interests. Section 5.4 Amounts Withheld. All amounts withheld pursuant to the Code or any provision of state or local tax law and Section 7.6 of this Agreement with respect to any allocation, payment or distribution to the General Partner, Limited Partners or Assignees shall be treated as amounts distributed to such General Partner, Limited Partner or Assignees pursuant to Section 5.3 of this Agreement. ARTICLE VI - PARTNERSHIP MANAGEMENT Section 6.1 Management and Control of Partnership Business. (A) Except as otherwise expressly provided or limited by the provisions of this Agreement, the General Partner shall have full, exclusive and complete discretion to manage the business and affairs of the Partnership, to make all decisions affecting the business and affairs of the Partnership, and to take all such action as it deems necessary or appropriate to accomplish the purposes of the Partnership as set forth herein. If there shall be more than one (1) General Partner, the vote or determination of the General Partner owning the largest Percentage Interest shall control. Except as set forth in this Agreement, the Limited Partners shall not have any authority, right or power to bind the Partnership, or to manage, or to participate in the management of the business and affairs of the Partnership in any manner whatsoever. Such management shall in every respect be the full and complete responsibility of the General Partner alone as herein provided. Page 12 (B) In carrying out the purposes of the Partnership, the General Partner shall be authorized to take all actions it deems necessary and appropriate to carry on the business of the Partnership. Each of the Limited Partners, by execution hereof, agrees that the General Partner is authorized to execute, deliver and perform any agreement and/or transaction on behalf of the Partnership. (C) The General Partner in its capacity as such shall not directly or indirectly enter into or conduct any business other than in connection with the business of the Partnership and the ownership of its Partnership Interests therein. The General Partner and its Affiliates may acquire Limited Partner Interests as provided in Section 4.2(B). Any Limited Partner Interest acquired by the General Partner shall be added to the General Partner Interest. Upon acquisition of any Limited Partner Interest, any Affiliate of the General Partner shall have all the rights of a Limited Partner. Section 6.2 No Management by Limited Partners; Limitation of Liability. (A) The Limited Partners, in their capacity as limited partners, shall not take part in the day-to-day management, operation or control of the business and affairs of the Partnership or have any right, power or authority to act for or on behalf of or to bind the Partnership or transact any business in the name of the Partnership. The Limited Partners shall have no rights other than those specifically provided herein or granted by law where consistent with a valid provision hereof, and any of the approvals rendered or withheld by the Limited Partners pursuant to this Agreement shall be deemed as consultation or advice to the General Partner in connection with the business of the Partnership and in accordance with the Act, and shall not be deemed as participation by the Limited Partners in the business of the Partnership and are not intended to create any inference that the Limited Partners should be classified as general partners under the Act. (B) The Limited Partners shall have no liability under this Agreement except to the extent expressly provided herein (including with respect to withholding under Section 7.6) or under the Act. (C) The General Partner shall not take any action which would subject a Limited Partner (in its capacity as Limited Partner) to liability as a general partner. Section 6.3 Limitations on Partners. No Partner or Affiliate of a Partner shall have any authority to perform (i) any act in violation of any applicable law or any regulation under such law; or (ii) any act without Consent or ratification which is required to be Consented to or ratified pursuant to this Agreement. No action shall be taken by a Partner if it would cause the Partnership to be treated as an association taxable as a corporation for federal income tax purposes. Section 6.4 Business with Affiliates. (A) The General Partner, in its discretion, may cause the Partnership to transact business with RAIT, a Partner or their Affiliates or Subsidiaries for goods or services reasonably required in the conduct of the Partnership's business. (B) In furtherance of Section 6.4(A), the Partnership may lend or contribute to its Subsidiaries on terms and conditions established by the General Partner. In the case of any amount borrowed by the general partner from a financial institution or other lender to be made available to the Page 13 Partnership, the loan by the General Partner to the Partnership will be on substantially the same terms and conditions as are applicable to the General Partner's borrowing of such funds. (C) The Partners acknowledge that the Management Company may conduct the day-to-day management, operation and leasing of the Property Interests, or with respect to properties underlying loans owned by the Partnership, subject to the terms of the property management agreements ("Management Agreements") that may be entered into between the Partnership and the Management Company with respect to individual Property Interests, or (with respect to properties underlying Loans) approved by the General Partner on behalf of the Partnership. Section 6.5 Compensation; Reimbursement of Expenses. In consideration for the General Partner's services to the Partnership in its capacity as General Partner, and for RAIT's agreements hereunder the Partnership shall pay on behalf of or reimburse to RAIT or the General Partner (i) all expenses of RAIT, the General Partner or the Initial Limited Partner incurred in connection with the management of the business and affairs of the Partnership, including all executive compensation of employees of the Partnership; and (ii) all general, operating or administrative and other expenses incurred by RAIT and the General Partner. Except as otherwise set forth in this Agreement, RAIT and the General Partner shall be fully and entirely reimbursed by the Partnership for any and all direct and indirect costs and expenses incurred in connection with (a) the organization and continuation of the Partnership, the General Partner, the Initial Limited Partner and RAIT, (b) the preparation and filing of any periodic reports by RAIT, the Partnership, the General Partner or the Initial Limited Partner, (c) compliance by RAIT, the Partnership, the General Partner and the Initial Limited Partner with laws, rules and regulations promulgated by any regulatory body and (d) all other general, operating or administrative costs of RAIT, the General Partner or the Initial Limited Partner incurred in the ordinary course of their business on behalf of the Partnership. In addition, RAIT shall be reimbursed for all expenses incurred by RAIT in connection with (i) the initial offering and registration of REIT Shares by RAIT, and (ii) any other issuance of additional Partnership Interests or REIT Shares. With respect to any such reimbursement, RAIT or the General Partner, as the case may be, shall present the Partnership with such invoices or allocations as are necessary to substantiate such costs and expenses. Section 6.6 Liability for Acts and Omissions. (A) Neither RAIT, the General Partner, nor its officers, directors, employees and agents (together, the "Indemnified Parties"), shall be liable, responsible or accountable in damages or otherwise to the Partnership or any of the Partners for any act or omission performed or omitted in good faith on behalf of the Partnership which the Indemnified Party reasonably believed to be within the scope of the authority granted by this Agreement and in the best interests of the Partnership, provided such act or omission is in good faith and with such care as an ordinarily prudent person in a like position would use under similar circumstances. The Indemnified Parties shall nevertheless be liable, responsible or accountable for actual fraud, gross negligence or intentional misconduct. (B) The Partnership shall indemnify and make advances for expenses to the Indemnified Parties to the fullest extent permitted under Section 17-108 of the Act (to the extent of available assets, but without the requirement that any Partner make additional Capital Contributions for this purpose) against any loss or damage incurred by the General Partner by reason of any act or omission performed or omitted by it or any Indemnified Party which is consistent with the first sentence of Section 6.6(A) above. Page 14 (C) RAIT and the General Partner shall indemnify and hold harmless the Partnership and the Partners against any damage or loss incurred by the Partnership or Partners by reason of its fraud, gross negligence or intentional misconduct with respect to the Partnership or the Property Interests. ARTICLE VII - ADMINISTRATIVE, FINANCIAL AND TAX MATTERS Section 7.1 Books and Records. The General Partner shall maintain at the principal office of the Partnership full and accurate books of the Partnership showing all receipts and expenditures, assets and liabilities, profits and losses, names and current addresses of Partners, and all other records necessary for recording the Partnership's business and affairs. All Partners and their duly authorized representatives shall have the right to inspect and copy any or all of the Partnership's books and records, including books and records necessary to enable a Partner to defend any tax audit or related proceeding, during reasonable hours upon three (3) business days Notice to the General Partner. The Limited Partners shall have, upon written demand and at such Limited Partner's expense, the right to receive true and complete information regarding Partnership matters to the extent required under (and subject to the limitations of) Delaware law. Section 7.2 Annual Audit and Accounting. The books and records of the Partnership shall be kept for financial and tax reporting purposes on the accrual basis of accounting in accordance with generally accepted accounting principles ("GAAP"). The accounts of the Partnership shall be reviewed or compiled annually by a nationally recognized accounting firm of independent public accountants selected by the General Partner (the "Independent Accountants"). Section 7.3 Partnership Funds. The General Partner shall have responsibility for the safekeeping and use of all funds and assets of the Partnership, whether or not in its direct or indirect possession or control. All funds of the Partnership not otherwise invested shall be deposited in one or more accounts maintained in such banking institutions as the General Partner shall determine, and withdrawals shall be made only in the regular course of Partnership business on such signatures as the General Partner may, from time to time, determine. Section 7.4 Reports and Notices. The General Partner shall provide all Partners with the following reports no later than the dates indicated or as soon thereafter as circumstances permit: (A) By March 31 of each year, IRS Form 1065 and Schedule K-1, or similar forms as may be required by the IRS, stating each Partner's allocable share of income, gain, loss, deduction or credit for the prior Fiscal Year; (B) Within ninety (90) days after the end of each of the first three (3) fiscal quarters, as of the last day of the fiscal quarter, a report containing unaudited financial statements of the Partnership, or of RAIT if such statements are prepared solely on a consolidated basis with RAIT, and such other information as may be legally required or determined to be appropriate by RAIT; and (C) Within one hundred twenty (120) days after the end of each Fiscal Year, as of the close of the Fiscal Year, an annual report containing the financial statements of the Partnership, or of RAIT if such statements are prepared solely on a consolidated basis with RAIT, presented in accordance with GAAP by the Independent Accountants. Page 15 Section 7.5 Tax Matters. (A) The General Partner shall be designated the Tax Matters Partner of the Partnership for federal income tax matters pursuant to Code Section 6223(c)(3). The Tax Matters Partner is authorized and required to represent the Partnership (at the expense of the Partnership) in connection with all examinations of the affairs of the Partnership by any federal, state or local tax authorities, including any resulting administrative and judicial proceedings, and to expend funds of the Partnership for professional services and costs associated therewith. The Tax Matters Partner shall deliver to the Limited Partners within ten (10) business days of the receipt thereof a copy of any notice or other communication with respect to the Partnership received from the IRS (or other governmental tax authority), or any court, in each case with respect to any administrative or judicial proceeding involving the Partnership. The Partners agree to cooperate with each other in connection with the conduct of all proceedings pursuant to this Section 7.5(A). (B) The Tax Matters Partner shall receive no compensation for its services in such capacity. If the Partnership incurs any costs related to any tax audit, declaration of any tax deficiency or any administrative proceeding or litigation involving any Partnership tax matter, such amount shall be an expense of the Partnership and the Tax Matters Partner shall be entitled to full reimbursement therefor. (C) The General Partner shall cause to be prepared all federal, state and local income tax returns required of the Partnership at the Partnership's expense. (D) Except as set forth herein, the General Partner shall determine whether to make (and, if necessary, revoke) any tax election available to the Partnership under the Code or any state tax law; provided, however, upon the request of any Partner, the General Partner shall make the election under Code Section 754 and the Treasury Regulations promulgated thereunder. The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership in accordance with the provisions of Code Section 709. Section 7.6 Withholding. Each Partner hereby authorizes the Partnership to withhold from or pay to any taxing authority on behalf of such Partner any tax that the General Partner determines the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Partner. Any amount paid to any taxing authority which does not constitute a reduction in the amount otherwise distributable to such Partner shall be treated as a loan from the Partnership to such Partner, which loan shall bear interest at the "prime rate" as published from time to time in The Wall Street Journal plus two (2) percentage points, and shall be repaid within ten (10) business days after request for repayment from the General Partner. The obligation to repay any such loan shall be secured by such Partner's Partnership Interest and each Partner hereby grants the Partnership a security interest in his Partnership Interest for the purposes set forth in this Section 7.6, this Section 7.6 intending to serve as a security agreement for purposes of the Uniform Commercial Code. Each Partner agrees to take such reasonable actions as the General Partner may request to perfect the security interest granted hereby. In the event any Partner fails to repay any deemed loan pursuant to this Section 7.6, the Partnership shall be entitled to avail itself of any rights and remedies it may have. Furthermore, upon the expiration of ten (10) business days after demand for payment, the General Partner shall have the right to make the payment to the Partnership on behalf of the defaulting Partner and thereupon be subrogated to the rights of the Partnership with respect to such defaulting Partner. Page 16 ARTICLE VIII - TRANSFER OF INTERESTS; ADMISSION OF PARTNERS Section 8.1 Transfer by General Partner. The General Partner may not voluntarily withdraw or Transfer all or any portion of its General Partner Interest. Section 8.2 Obligations of a Prior General Partner. Upon an Involuntary Withdrawal of the General Partner and the subsequent Transfer of the General Partner Interest, such General Partner shall (i) remain liable for all obligations and liabilities (other than Partnership liabilities payable solely from Partnership Assets) incurred by it as General Partner before the effective date of such event, and (ii) pay all costs associated with the admission of its Successor General Partner. However, such General Partner who withdraws shall be free of and held harmless by the Partnership against any obligation or liability incurred on account of the activities of the Partnership from and after the effective date of such event, except as provided in this Agreement. Section 8.3 Additional or Successor General Partner. A successor to all of a General Partner's Interest who is proposed to be admitted to the Partnership as a Successor General Partner shall be admitted as the General Partner, effective upon the Transfer, with the Consent of the General Partner, or if there is no remaining General Partner, with the Consent of a majority in interest of the remaining Partners (measured by the relative number of Partnership Units owned by each). Any such additional or successor general partner shall carry on the business of the Partnership without dissolution. In addition, the following conditions must be satisfied: (A) The Person shall have accepted and agreed to be bound by all the terms and provisions of this Agreement, by executing a counterpart thereof and such other documents or instruments as may be required or appropriate in order to effect the admission of such Person as a General Partner; and (B) An amendment to this Agreement evidencing the admission of such Person as a General Partner shall have been executed by all General Partners and an amendment to the Certificate shall have been filed for recordation as required by the Act. Section 8.4 Restrictions on Transfer and Withdrawal by Limited Partner. (A) Subject to the provisions of Section 8.4(D), no Limited Partner may Transfer all or any portion of his Partnership Interest without first obtaining the Consent of the General Partner, which Consent may be granted or withheld in the sole and absolute discretion of the General Partner. Any such purported transfer undertaken without such Consent shall be considered to be null and void ab initio and shall not be given effect. (B) No Limited Partner may withdraw from the Partnership other than as a result of a permitted Transfer of all of his Partnership Units pursuant to this Article VIII or pursuant to a redemption of all of his Partnership Units pursuant to Article IX of this Agreement. Upon the permitted Transfer or redemption of all of a Limited Partner's Partnership Units, such Limited Partner shall cease to be a Limited Partner. (C) Upon the Involuntary Withdrawal of any Limited Partner (which shall under no circumstance cause the dissolution of the Partnership), the executor, administrator, trustee, guardian, receiver or conservator of such Limited Partner's estate shall succeed to those rights of the Limited Page 17 Partner prior to such Involuntary Withdrawal for the purpose of settling the affairs of the Limited Partner subject to the Involuntarily Withdrawal. Any Transfer of Partnership Units, including Transfers by operation of law, shall be effective only upon receiving Consent or the General Partner. (D) A Limited Partner may Transfer, with the Consent of the General Partner, all or a portion of his Partnership Units to (a) a parent or parents, spouse, natural or adopted descendant or descendants, spouse of such a descendant, or brother or sister; (b) a corporation controlled by a Person or Persons named in (a) above; or (c) if the Limited Partner is an entity, its beneficial owners; and the General Partner shall grant its Consent to any Transfer pursuant to this Section 8.4(D) unless such Transfer, in the reasonable judgment of the General Partner, would cause (or have the potential to cause) RAIT to (i) have more than fifty percent (50%) in value of its outstanding stock owned, directly or indirectly, by or for not more than five (5) Persons; (ii) have its outstanding stock held by less than 100 persons (determined without reference to rules of attribution); (iii) be deemed to be "closely held' within the meaning of Code Section 856(h); or (iv) own, actually or constructively, 10% or more of the ownership interests in a tenant of RAIT, in which case the General Partner shall have the absolute right to refuse to permit such Transfer, and any purported Transfer in violation of this Section 8.4(D) shall be null and void ab initio. (E) No Transfer of any Limited Partner's Partnership Units shall be made if such Transfer would (i) in the opinion of Partnership counsel, cause the Partnership to be terminated for federal income tax purposes or to be treated as an association taxable as a corporation (rather than a partnership) for federal income tax purposes; (ii) be effected through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Code Section 7704; (iii) in the opinion of Partnership counsel, such Transfer would violate the provisions of applicable securities laws; or (iv) violate the terms of (or result in a default or acceleration under) any law, rule, regulation, agreement or commitment binding on the Partnership. Section 8.5 Substituted Limited Partner. (A) No transferee shall become a Limited Partner in place of his assignor unless and until the following conditions have been satisfied: (1) The assignor and transferee file a Notice or other evidence of Transfer and such other information reasonably required by the General Partner, including without limitation, names, addresses and telephone numbers of the assignor and transferee; (2) The transferee executes, adopts and acknowledges this Agreement, or a counterpart hereto, and such other documents as may be reasonably requested by the General Partner, including without limitation, all documents necessary to comply with applicable tax and/or securities rules and regulations; (3) The assignor or transferee pays all costs and fees incurred or charged by the Partnership to effect the Transfer and substitution; and (4) The assignor or transferee obtains the written Consent of the General Partner, which may be given or withheld in its sole and absolute discretion. Page 18 (B) If a transferee of a Limited Partner does not become a Limited Partner pursuant to Section 8.5(A), such transferee shall be an Assignee and shall not have any rights to require any information on account of the Partnership's business, to inspect the Partnership's books, to participate in the management or operation of the Partnership, or to vote or otherwise take part in the affairs of the Partnership (such Partnership Units being deemed to have been voted in the same proportion as all other Partnership Units held by Limited Partners have been voted). Such Assignee shall be entitled, however, to all the rights of an assignee of a limited partnership interest under the Act. Any Assignee wishing to Transfer the Partnership Units acquired shall be subject to the restrictions set forth in this Article VIII. Section 8.6 Timing and Effect of Transfers. Unless the General Partner agrees otherwise, Transfers under this Article VIII may only be made as of the first day of a fiscal quarter of the Partnership. Upon any Transfer of a Partnership Interest in accordance with this Article VIII or redemption of a Partnership Interest in accordance with Article IX of this Agreement, the Partnership shall allocate all items of profit and loss between the transferor Partner and the transferee Partner in accordance with Code Section 706(d). The transferor Partner shall have the right to receive all distributions as to which the Record Date precedes the date of Transfer and the transferee Partner shall have the right to receive all distributions thereafter. Section 8.7 Additional Limited Partners. Other than in accordance with the transactions specified in the Contribution Agreement, after the initial execution of this Agreement and the admission to the Partnership of the initial Limited Partners, any Person making a Capital Contribution to the Partnership in accordance herewith shall be admitted as an Additional Limited Partner only (i) with the Consent of the General Partner, and (ii) upon execution, adoption and acknowledgment of this Agreement, or a counterpart hereto, and such other documents as may be reasonably requested by the General Partner, including without limitation, the power of attorney required under Section 12.3. Upon satisfaction of the foregoing requirements, such Person shall be admitted as an Additional Limited Partner effective on the date upon which the name of such Person is recorded on the books of the Partnership. Section 8.8 Amendment of Agreement and Certificate. Upon any admission of a Person as a Partner to the Partnership, the General Partner shall take all necessary steps to amend this Agreement to reflect such admission and, if required by the Act, to cause to be filed an amendment to the Certificate. ARTICLE IX - REDEMPTION Section 9.1 Right of Redemption. (A) Subject to any restriction on RAIT, which restriction may be in the REIT Declaration, the laws governing RAIT or otherwise (a "Redemption Restriction"), beginning on the Redemption Effective Date, during the four 30-day periods immediately following the filing with the Securities and Exchange Commission by RAIT of its annual report on Form 10-K or quarterly reports on Form 10-Q or during such periods as the Partnership may otherwise determine, each Redeeming Party shall have the right to require the Partnership to redeem all or a portion of the Partnership Units held by such Redeeming Party by providing the General Partner with a Redemption Notice. A Limited Partner may not invoke its rights under this Article IX with respect to fewer than 100 Partnership Units or an integral multiple thereof or, if such Limited Partner holds fewer than 100 Partnership Units, all of the Partnership Units held by such Limited Partner. Upon the General Partner's receipt of a Redemption Notice from a Redeeming Party, the Partnership shall be obligated (subject to the existence of any Page 19 Redemption Restriction) to redeem the Partnership Units from such Redeeming Party (the "Redemption Obligation"). (B) Upon receipt of a Redemption Notice from a Redeeming Party, the General Partner shall either (i) cause the Partnership to redeem the Partnership Units tendered in the Redemption Notice, (ii) assume the Redemption obligation, as set forth in Section 9.4, or (iii) provide written Notice to the Redeeming Party of any Redemption Restriction. Section 9.2 Timing of Redemption. The Redemption Obligation (or the obligation to provide Notice of a Redemption Restriction if one exists) shall mature on the date which is seven (7) business days after the receipt by the General Partner of a Redemption Notice from the Redeeming Party (the "Redemption Date"). Section 9.3 Redemption Price. On or before the Redemption Date, the Partnership (or the General Partner if it elects pursuant to Section 9.4) shall deliver to the Redeeming Party, in the sole and absolute discretion of the General Partner either (i) a Share Payment or (ii) a Cash Payment. In order to enable the Partnership to effect a redemption by making a Share Payment pursuant to this Section 9.3, the General Partner in its sole and absolute discretion may direct RAIT to issue additional REIT Shares to the Partnership in exchange for the issuance to the General Partner of Partnership Units determined by applying the Conversion Multiple to the number of REIT Shares issued. Section 9.4 Assumption of Redemption Obligation. Upon receipt of a Redemption Notice, the General Partner, in its sole and absolute discretion, shall have the right to assume the Redemption Obligation of the Partnership. In such case, the General Partner shall be substituted for the Partnership for all purposes of this Article IX, and, upon acquisition of the Partnership Units tendered by the Redeeming Party pursuant to the Redemption Notice shall be treated for all purposes of this Agreement as the owner of such Partnership Units. In such case, the transaction shall be treated for federal income tax purposes by the Partnership, the General Partner and the Redeeming Party as a sale by the Redeeming Party as seller to the General Partner as purchaser. Section 9.5 Further Assurances. Each party to this Agreement agrees to execute any documents deemed reasonably necessary by the General Partner to evidence the issuance of any Share Payment to a Redeeming Party. Section 9.6 Effect of Redemption. Upon the satisfaction of the Redemption Obligation by the Partnership or the General Partner, as the case may be, the Redeeming Party shall have no further right to receive any Partnership distributions in respect of the Partnership Units so redeemed. ARTICLE X - DISSOLUTION AND LIQUIDATION Section 10.1 Term and Dissolution. The Partnership commenced as of the date of filing of the Certificate, and shall continue until December 31, 2050, or until dissolution occurs prior to that date for any one of the following reasons: (A) An Involuntary Withdrawal of a sole remaining General Partner unless, within ninety (90) days after such event of withdrawal, a majority in interest of the remaining Partners Page 20 (measured by the relative number of Partnership Units owned by each) agree in writing to the continuation of the Partnership and to the appointment of a Successor General Partner; (B) Entry of a decree of judicial dissolution of the Partnership under the Act; or (C) The sale, exchange or other disposition of all or substantially all of the Partnership Assets. Section 10.2 Liquidation of Partnership Assets. (D) In the event of dissolution pursuant to Section 10.1, the Partnership shall continue solely for purposes of winding up the affairs of, achieving a final termination of and satisfaction of the creditors of the Partnership. The General Partner (or, if there is no General Partner remaining, any Person elected by a majority in interest of the Limited Partners (the "Liquidator")) shall be responsible for oversight of the winding up and dissolution of the Partnership. The Liquidator shall obtain a full accounting of the assets and liabilities of the Partnership, and such Partnership Assets shall be liquidated (including, at the discretion of the Liquidator, in exchange, in whole or in part, for REIT Shares) as promptly as the Liquidator is able to do so without any undue loss in value, with the proceeds therefrom applied and distributed in the following order: (1) First, to the discharge of Partnership debts and liabilities to creditors other than Partners; (2) Second, to the discharge of Partnership debts and liabilities to the Partners; and (3) The balance, if any, to the Partners in accordance with their positive Capital Accounts after giving effect to all contributions, distributions and allocations for all periods. (E) In accordance with Section 10.2(A), the Liquidator shall proceed without any unnecessary delay to sell and otherwise liquidate the Partnership Assets; provided, however, that if the Liquidator shall determine that an immediate sale of part or all of the Partnership Assets would cause undue loss to the Partners, the Liquidator may defer the liquidation except (i) to the extent provided by the Act or (ii) as may be necessary to satisfy the debts and liabilities of the Partnership to Persons other than the Partners. (F) If, in the sole and absolute discretion of the Liquidator, there are Partnership Assets that the Liquidator will not be able to liquidate, or if the liquidation of such assets would result in undue loss to the Partners, the Liquidator may distribute such Partnership Assets to the Partners in kind, in lieu of cash, as tenants-in-common in accordance with the provisions of Section 10.2(A). The foregoing notwithstanding, such in-kind distributions shall only be made if in the Liquidator's good faith judgment that is in the best interest of the Partners. (G) Upon the complete liquidation and distribution of the Partnership Assets, the Partners shall cease to be Partners of the Partnership, and the Liquidator shall execute, acknowledge and cause to be filed all certificates and notices required by law to terminate the Partnership. Upon the dissolution of the Partnership pursuant to Section 10.1, the Liquidator shall cause to be prepared, and shall furnish to each Partner, a statement setting forth the assets and liabilities of the Partnership. Page 21 Promptly following the complete liquidation and distribution of the Partnership Assets, the Liquidator shall furnish to each Partner a statement showing the manner in which the Partnership Assets were liquidated and distributed. Section 10.3 Effect of Treasury Regulations. (A) In the event the Partnership is "liquidated" within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article X to the General Partner and the Limited Partners who have positive Capital Accounts in compliance with Treasury Regulations Section 1.704-1(b)(2)(ii)(b)(2). If any Partner has a deficit balance in his Capital Account (after giving effect to all contributions, distributions and allocations), such Partner shall be obligated to contribute such amount to the capital of the Partnership. (B) In the event the Partnership is "liquidated" within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g) but there has been no dissolution of the Partnership under Section 10.1 hereof, then the Partnership Assets shall not be liquidated, the Partnerships liabilities shall not be paid or discharged and the Partnership's affairs shall not be wound up. In the event of such a liquidation there shall be deemed to have been a distribution of Partnership Assets in kind to the Partners in accordance with their respective Capital Accounts followed by a recontribution of the Partnership Assets by the Partners also in accordance with their respective Capital Accounts. Section 10.4 Time for Winding Up. Anything in this Article X notwithstanding, a reasonable time shall be allowed for the orderly winding up of the business and affairs of the Partnership and the liquidation of the Partnership Assets in order to minimize any potential for losses as a result of such process. During the period of winding up, this Agreement shall remain in full force and effect and shall govern the rights and relationships of the Partners inter se. ARTICLE XI - AMENDMENTS AND MEETINGS Section 11.1 Amendment Procedure. (A) Amendments to this Agreement may be proposed by the General Partner. A proposed amendment will be adopted and become effective only if it receives the Consent of a majority in interest of the Limited Partners (measured by the relative number of Partnership Units owned by each); provided, however, no such amendment shall be adopted if it would (i) convert a Limited Partner's Interest in the Partnership into a General Partner Interest; (ii) increase the liability of a Limited Partner under this Agreement; (iii) except as otherwise permitted in this Agreement, alter the Partners' rights to distributions set forth in Article V; (iv) alter or modify any aspect of the Partners' rights with respect to redemption of Partnership Units; (v) cause the early termination of the Partnership (other than pursuant to the terms hereof); or (vi) amend this Section 11.1(A), in each case without the Consent of each Partner adversely affected thereby. In connection with any proposed amendment of this Agreement requiring Consent, the General Partner shall either call a meeting to solicit the vote of the Partners or seek the written vote of the Partners to such amendment. In the case of a request for a written vote, the General Partner shall be authorized to impose such reasonable time limitations for response, but in no event less than ten (10) days, with the failure to respond being deemed a vote consistent with the vote of the General Partner. Page 22 (B) Subject to the foregoing, amendments may be made to this Agreement by the General Partner, without the Consent of any Limited Partner, to (i) add to the representations, duties or obligations of the General Partner or surrender any right or power granted to the General Partner herein; (ii) cure any ambiguity, correct or supplement any provision herein which may be inconsistent with any other provision herein or make any other provisions with respect to matters or questions arising hereunder which will not be inconsistent with any other provision hereof; (iii) reflect the admission, substitution, termination or withdrawal of Partners in accordance with this Agreement; or (iv) satisfy any requirements, conditions or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or court or contained in federal or state law. The General Partner shall notify the Limited Partners whenever it exercises its authority pursuant to this Section 11.1(B). (C) Within ten (10) days of the making of any proposal to amend this Agreement, the General Partner shall give all Partners Notice of such proposal (along with the text of the proposed amendment and a statement of its purposes). Section 11.2 Meetings and Voting. (A) Meetings of Partners may be called by the General Partner. The General Partner shall give all Partners Notice of the purpose of such proposed meeting not less than three (3) days nor more than thirty (30) days prior to the date of the meeting. Meetings shall be held at a reasonable time and place selected by the General Partner. Whenever the vote or Consent of Partners is permitted or required hereunder, such vote or Consent shall be requested by the General Partner and may be given by the Partners in the same manner as set forth for a vote with respect to an amendment to this Agreement in Section 11.1(A). (B) Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a Consent setting forth the action to be taken is signed by the Partners owning Percentage Interests required to vote in favor of such action, which Consent may be evidenced in one or more instruments. Consents need not be solicited from any other Partner if the Consent of a sufficient number of Partners has been obtained to take the action for which such solicitation was required. (C) Each Limited Partner may authorize any Person(s) to act for him by proxy on all matters on which a Limited Partner may participate. Every proxy (i) must be signed by the Limited Partner or his attorney-in-fact; (ii) shall expire eleven (11) months from the date thereof unless the proxy provides otherwise; and (iii) shall be revocable at the discretion of the Limited Partner granting such proxy. ARTICLE XII - MISCELLANEOUS PROVISIONS Section 12.1 Title to Property. All property owned by the Partnership, whether real or personal, tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually, shall have any ownership of such property. The Partnership may hold any of its assets in its own name or in the name of its nominee, which nominee may be one or more individuals, corporations, partnerships, trusts or other entities. Section 12.2 Other Activities of Limited Partners. Except as expressly provided otherwise in this Agreement or in any other agreement entered into by a Limited Partner or any Affiliate of a Page 23 Limited Partner and the Partnership, the General Partner or any Subsidiary of the Partnership or the General Partner, any Affiliate of the General Partner, any Limited Partner or any Affiliate of any Limited Partner may engage in, or possess an interest in, other business ventures of every nature and description, independently or with others, including without limitation, real estate business ventures, whether or not such other enterprises shall be in competition with any activities of the Partnership, the General Partner or the Subsidiary, and neither the Partnership, the General Partner, such Subsidiary nor the other Partners shall have any right by virtue of this Agreement in and to such independent ventures or to the income or profits derived therefrom. Section 12.3 Power of Attorney. (A) Each Limited Partner hereby irrevocably appoints and empowers the General Partner (which term shall include the Liquidator, in the event of a liquidation, for purposes of this Section 12.3) and each of its authorized officers and attorneys-in-fact with full power of substitution as his true and lawful agent and attorney-in-fact, with full power and authority in his name, place and stead to: (1) Make, execute, acknowledge, publish and file in the appropriate public offices (a) any duly approved amendments to the Certificate pursuant to the Act and to the laws of any state in which such documents are required to be filed; (b) any certificates, instruments or documents as may be required by, or may be appropriate under, the laws of any state or other jurisdiction in which the Partnership is doing or intends to do business; (c) any other instrument which may be required to be filed by the Partnership under the laws of any state or by any governmental agency, or which the General Partner deems advisable to file; (d) any documents which may be required to effect the continuation of the Partnership, the admission, withdrawal or substitution of any Partner pursuant to Article VIII of this Agreement, the dissolution and termination of the Partnership pursuant to Article X of this Agreement, or the surrender of any rights or the assumption of any additional responsibilities by the General Partner; (e) any document which may be required to effect an amendment to this Agreement to correct any mistake, omission or inconsistency, or to cure any ambiguity herein, to the extent such amendment is permitted by Section 11.1(B) of this Agreement; and (f) all instruments (including this Agreement and amendments and restatements hereof) relating to the determination of the rights, preferences and privileges of any class or series of Partnership Units issued pursuant to Section 4.2(B) of this Agreement; and (2) Sign, execute, swear to and acknowledge all voting ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole discretion of the General Partner, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this Agreement and/or appropriate or necessary, in the sole discretion of the General Partner, to effectuate the terms or intent of this Agreement. (B) Nothing herein contained shall be construed as authorizing the General Partner to amend this Agreement except in accordance with Article XI of this Agreement or as may be otherwise expressly provided for in this Agreement. (C) The foregoing grant of authority (i) is a special power of attorney, coupled with an interest, and shall survive the Involuntary Withdrawal of any Partner and shall extend to such Partner's heirs, successors, assigns and personal representatives; (ii) may be exercised by the General Partner for each and every Partner acting as attorney-in-fact for each and every Partner; and (iii) shall survive the Page 24 Transfer by a Limited Partner of all or any portion of its Partnership Interest and shall be fully binding upon such transferee; except that the power of attorney shall survive such assignment with respect to the assignor Limited Partner for the sole purpose or enabling the General Partner to execute, acknowledge and file any instrument necessary to effect the admission of the transferee as a Substitute Limited Partner. Each Partner hereby agrees to be bound by any representations made by the General Partner, acting in good faith pursuant to such power of attorney. Each Partner shall execute and deliver to the General Partner, within fifteen (15) days after receipt of the General Partner's request therefor, such further designations, powers of attorney and other instruments as the General Partner deems necessary to effectuate this Agreement and the purposes of the Partnership. Section 12.4 Further Assurances. The parties agree to execute and deliver all such documents, provide all such information and take or refrain from taking any action as may be necessary or desirable to achieve the purposes of this Agreement and the Partnership. Section 12.5 Titles and Captions. All article or section titles or captions in this Agreement are solely for convenience and shall not be deemed to be part of this Agreement or otherwise define, limit or extend the scope or intent of any provision hereof. Section 12.6 Applicable Law. This Agreement, and the application or interpretation thereof, shall be governed exclusively by its terms and by the laws of the State of Delaware, without regard to its principles of conflicts of laws. Section 12.7 Binding Agreement. This Agreement shall be binding upon the parties hereto, their heirs, executors, personal representatives, successors and assigns. Section 12.8 Waiver of Partition. Each of the parties hereto irrevocably waives during the term of the Partnership any right that it may have to maintain any action for partition with respect to any property of the Partnership. Section 12.9 Counterparts and Effectiveness. This Agreement may be executed in several counterparts, which shall be treated as originals for all purposes, and all so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all the parties are not signatory to the original or the same counterpart. Any such counterpart shall be admissible into evidence as an original hereof against the Person who executed it. The execution of this Agreement and delivery thereof by facsimile shall be sufficient for all purposes, and shall be binding upon any party who so executes. Section 12.10 Survival of Representations. All representations and warranties herein shall survive the dissolution and final liquidation of the Partnership. Section 12.11 Entire Agreement. This Agreement (and all Exhibits hereto) contains the entire understanding among the parties hereto and supersedes all prior written or oral agreements among them respecting the within subject matter, unless otherwise provided herein. There are no representations, agreements, arrangements or understandings, oral or written, among the Partners hereto relating to the subject matter of this Agreement which are not fully expressed herein and in said Exhibits. [SIGNATURES CONTAINED ON FOLLOWING PAGE] Page 25 IN WITNESS WHEREOF, this Agreement has been executed as of the day and year first above written. General Partner: RAIT GENERAL, INC. By:_______________________________ Name:_____________________________ Title:____________________________ Limited Partner: RAIT LIMITED, INC. By:_______________________________ Name:_____________________________ Title:____________________________ For purposes of acknowledging and agreeing to be bound by and to benefit from the provisions of Section 4.2, Section 6.6 of Article IX of this Agreement only, Resource Asset Investment Trust By:_____________________________ Page 26 RAIT PARTNERSHIP, L.P. EXHIBIT 1 TO LIMITED PARTNERSHIP AGREEMENT Schedule of Partners Applicable Name and Address Number of Units Percentage Interest General Partner: RAIT GENERAL, INC. ____________ ____________% ____________________________ ____________________________ Limited Partner: RAIT LIMITED, INC. ____________% ____________% ____________________________ ____________________________ RAIT PARTNERSHIP, L.P. EXHIBIT 2 TO LIMITED PARTNERSHIP AGREEMENT Redemption Notice The undersigned hereby irrevocably (i) redeems ________ Partnership Units in RAIT Partnership, L.P., a Delaware limited partnership (the "Partnership"), in accordance with the terms and conditions of the Limited Partnership Agreement of the Partnership (the "Partnership Agreement") and the provisions regarding the redemption of Partnership Units contained in Article IX thereof; (ii) surrenders such Partnership Units and all right, title and interest therein and to the Limited Partnership Interest represented thereby; (iii) directs that the Share Payment or the REIT Shares (as determined by the General Partner) deliverable upon exercise of the redemption rights provided by Article IX of the Partnership Agreement be delivered to the address specified below, and if REIT Shares are to be delivered, such REIT Shares be registered or placed in the name(s) and at the addresses) specified below; and (iv) agrees to be bound by the terms and conditions of any registration rights agreement applicable to such REIT Shares. Dated:__________________ ___________________________________________ (Signature of Limited Partner) _________ ___________________________________________ (Street Address) ___________________________________________ (City) (State) (Zip Code) _________ Signature Guaranteed by: ___________________________________________ _________ Issue REIT Shares to: __________________________________ (name(s)) __________________________________ Taxpayer Identification Number RAIT PARTNERSHIP, L.P. EXHIBIT 3 TO LIMITED PARTNERSHIP AGREEMENT Allocation Provisions 1. Definitions. The following terms shall have the meaning ascribed to them for purposes of this Exhibit 3. Adjusted Capital Account Deficit: With respect to any Partner, the deficit balance, if any, in such Partner's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (A) Credit to such Capital Account any amounts which such Partner is obligated to restore or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Section 1.704-2(g)(1) and 1.704-2(i)(5); and (B) Debit to such Capital Account the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. Capital Account: For each Partner, the separate account established with regard to such Partner on the books of the Partnership, which account shall be credited for (i) the amount of such Partner's Capital Contributions and (ii) the amount of Profits allocated to such Partner under this Exhibit 3, and which shall be debited for (i) the Gross Asset Value of any asset distributed to such Partner and (ii) the amount of Losses allocated to such Partner under this Exhibit 3. The foregoing definition is intended to comply with Regulations Section 1.704-1(b)(2)(iv). Any transferee of a Partner's Interest transferred in accordance with this Agreement shall succeed to that transferor's Capital Account. Depreciation: For each Fiscal Year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to the beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period is zero, Depreciation for such year or other period shall be determined with reference to such beginning Gross Asset Value using any reasonable method approved by the General Partner. Nonrecourse Deductions: The meaning set forth in Regulations Sections 1.704-2(b)(1) and (c). The amount of Nonrecourse Deductions for a Fiscal Year equals the excess, if any, of the net increase, if any, in the amount of Partnership Minimum Gain during that Fiscal Year over the aggregate amount of any distributions during that Fiscal Year of proceeds of a Nonrecourse Liability that are allocable to an increase in Partnership Minimum Gain, determined according to the provisions of Regulations Section 1.704-2(c). 3-1 Nonrecourse Liability: The meaning set forth in Regulations Section 1.752-1(a)(2). Partner Minimum Gain: An amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i). Partner Nonrecourse Debt: The meaning set forth in Regulations Section 1.704-2(b)(4). Partner Nonrecourse Deductions: The meaning set forth in Regulations Section 1.704-2(i). The amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a fiscal year equals the excess, if any, of the net increase, if any, in the amount of Partner Minimum Gain attributable to such Partner Nonrecourse Debt during that fiscal year over the aggregate amount of any distributions during that fiscal year to the Partner that bears the economic risk of loss for such Partner Nonrecourse Debt to the extent such distributions are from the proceeds of such Partner Nonrecourse Debt and are allocable to an increase in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(2). Partnership Minimum Gain: The meaning set forth in Regulations Sections 1.704-2(b)(2) and (d). Profits and Losses: For each Fiscal Year or other period, an amount equal to the Partnership's taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (A) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be added to such taxable income or loss; (B) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be subtracted from such taxable income or loss; (C) In the event the Gross Asset Value of any Partnership Asset is adjusted pursuant to Clause (B) or (C) of the definition of Gross Asset Value in Section 2.1 of the Agreement, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits or Losses; (D) Gain or loss resulting from any disposition of Partnership Assets with respect to which gain or loss is recognized for federal income purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (E) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year or other period, computed in accordance with the definition of Depreciation; and 3-2 (F) Notwithstanding any other provisions of this definition, any items which are specially allocated pursuant to Section 2(C) hereof shall not be taken into account in computing Profits or Losses. Regulations: The Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time, including corresponding provisions of succeeding regulations. 2. Allocation of Profit and Loss. The income, profits, gains, losses, deductions and credits of the Partnership shall be determined in accordance with the capital accounting rules and principles established by Code Sections 702 and 704 and the Regulations thereunder and, to the extent not inconsistent therewith, in accordance with generally accepted tax accounting principles, and shall be allocated each Fiscal Year as follows and in the following order of priority: (A) Profits. After giving effect to the special allocations set forth in Section 2(C) hereof, Profits in each Fiscal Year shall be allocated in the following order: (1) First, one hundred percent (100%) to the General Partner to the extent of the excess, if any, of (i) the cumulative Losses allocated the General Partner pursuant to Section 2(B)(2) hereof for all prior Fiscal Years, over (ii) the cumulative Profits allocated to the General Partner pursuant to this Section 2(A)(1) for all prior Fiscal Years; (2) Second, one hundred percent (100%) to the Partners, in proportion to and to the extent of the excess, if any, of (i) the cumulative Losses allocated to each Partner pursuant to Section 2(B)(1)(c) hereof for all prior Fiscal Years, over (ii) the cumulative Profits allocated to each Partner pursuant to this Section 2(A)(2) for all prior Fiscal Years; (3) Third, one hundred percent (100%) to the Partners, in proportion to and to the extent of the excess, if any, of (i) the cumulative Losses allocated to each Partner pursuant to Section 2(B)(1)(b) hereof for all prior Fiscal Years, over (ii) the cumulative Profits allocated to each Partner pursuant to this Section 2(A)(3) for all prior Fiscal Years; (4) Thereafter, the balance to the Partners, pro rata in accordance with their respective Percentage Interests. (B) Losses. After giving effect to the special allocations set forth in Section 2(C) hereof, Losses in each Fiscal Year shall be allocated in the following order: (1) Losses for any Fiscal Year shall be allocated in the following order of priority: (a) First, one hundred percent (100%) to the Partners in proportion to and to the extent of the excess, if any, of (y) the cumulative Profits allocated to each such Partner pursuant to Section 2(A)(5) hereof for all prior Fiscal Years, over (z) the cumulative Losses allocated to such Partner pursuant to this Section 2(B)(1)(a) for all prior Fiscal Years; (b) Second, one hundred percent (100%) to the Partners in proportion to and to the extent of their positive Capital Accounts until all Capital Accounts have been reduced to zero; and 3-3 (c) Thereafter, the balance to the Partners, pro rata in accordance with their respective Percentage Interests. (2) The Losses allocated pursuant to Section 2(B)(1) hereof shall not exceed the maximum amount of Losses that can be so allocated without causing any Limited Partner to have an Adjusted Capital Account Deficit at the end of any Fiscal Year. In the event some but not all of the Limited Partners would have Adjusted Capital Account Deficits as a consequence of an allocation of Losses pursuant to Section 2(B)(1) hereof but for this Section 2(B)(2), the limitation set forth in this (B)(2) shall be applied on a Limited Partner by Limited Partner basis so as to allocate the maximum permissible Losses to each Limited Partner under Regulations Section 1.704-1(b)(2)(ii)(d). All Losses in excess of the limitations set forth in this Section 2(B)(2) shall be allocated to the General Partner. (C) Special Allocations. The following special allocations shall be made in the following order: (1) Minimum Gain Chargeback. Notwithstanding any other provision of the foregoing Sections 2(A) and (B), if there is a net decrease in Partnership Minimum Gain during any Fiscal Year, then, to the extent required by Regulations Section 1.704-2(f), each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Regulations Section 1.704-2(g)(2). The items to be so allocated shall be determined in accordance with Regulations Sections 1.704-2(f)(6) and 1.704-2(j). This Section 2(C)(1) is intended to comply with the minimum gain chargeback requirement in Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. (2) Partner Minimum Gain Chargeback. Notwithstanding any other provision of Sections 2(A)-(F) hereof except Section 2(C)(1), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Fiscal Year, then, to the extent required by Regulations Section 1.704-2(i)(4), each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). The items to be so allocated shall be determined in accordance with Regulations Sections 1.704-2(i)(4) and 1.704-2(j). This Section 2(C)(2) is intended to comply with the minimum gain chargeback requirement in Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith. (3) Qualified Income Offset. In the event any Limited Partner unexpectedly receives any adjustments, allocations, or distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income, and gain for such year) shall be specially allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Partner as quickly as possible, provided that an allocation pursuant to this Section 2(C)(3) shall be made if and only to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in Sections 2(A)-(F) hereof have been tentatively made as if this Section 2(C)(3) were not in the Agreement. (4) Gross Income Allocation. In the event any Limited Partner has a deficit Capital Account at the end of any Fiscal Year that is in excess of the sum of (i) the amount such Partner 3-4 is obligated to restore, and (ii) the amount such Partner is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), such Partner shall be specially allocated items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income, and gain for such year) in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 2(C)(4) shall be made if and only to the extent that such Partner would have a deficit Capital Account in excess of such sum after all other allocations provided for in Sections 2(A)-(F) hereof have been tentatively made as if Section 2(C)(3) and this Section 2(C)(4) were not in the Agreement. (5) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Year or other period shall be specially allocated to the Partners in proportion to their Percentages of Partnership Interest. (6) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Fiscal Year or other period shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1). (7) Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Partnership Asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Regulations Section. (D) Other Allocation Rules. (1) For purposes of determining the Profits, Losses or any other items allocable to any period, Profits, Losses and any such other items shall be determined on a daily, monthly, or other basis, as determined by the General Partner using any permissible method under Code Section 706 and the Regulations thereunder. (2) Except as otherwise provided in this Agreement, all items of Partnership income, gain, loss, deduction and any other allocations not otherwise provided for shall be divided among the Partners in the same proportions as they share Profits and Losses, as the case may be, for the year. (3) The Partners are aware of the income tax consequences of the allocations made by Sections 2(A)-(F) hereof and hereby agree to be bound by the provisions of Sections 2(A)-(F) hereof in reporting their shares of Partnership income and loss for income tax purposes. (4) Solely for purposes of determining a Partner's proportionate share of the "excess nonrecourse liabilities" of the Partnership within the meaning of Regulations Section 1.752-3(a)(3), the Partners' interests in Partnership profits shall be equal to their Percentages of Partnership Interest. (E) Tax Allocations - Code Section 704(c). (1) In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the Partnership 3-5 shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial Gross Asset Value (computed in accordance with the definition in Section 2.1 of the Agreement). (2) In the event the Gross Asset Value of any Partnership Asset is adjusted, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. (3) Any elections or other decisions relating to such allocations shall be made by the General Partner in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 2(E) are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Partner's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. (F) Regulatory Compliance. The foregoing provisions of this Section 2 relating to the allocation of Profits, Losses and other items for federal income tax purposes are intended to comply with Treasury Regulations Sections 1.704-1(b) and 1.704-2, and shall be interpreted and applied in a manner consistent with such Treasury Regulations. 3-6 EX-23.1 11 EXHIBIT 23.1 TO COME EX-23.2 12 EXHIBIT 23.2 TO COME EX-23.3 13 EXHIBIT 23.3 Exhibit 23.3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT We have issued our report dated August 25, 1997 accompanying the financial statement of Resource Asset Investment Trust contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts." GRANT THORNTON LLP Philadelphia, Pennsylvania September 2, 1997 -----END PRIVACY-ENHANCED MESSAGE-----