5. COMMERCIAL REAL ESTATE INVESTMENTS

In September 2015, the Company originated a $592.0 million acquisition financing with respect to a 24-building New York City multifamily apartment portfolio. As of September 30, 2015, such financing is comprised of a $480.0 million senior mortgage loan ($476.6 million, net of origination fees), and mezzanine debt with an initial principal balance of $72.0 million and a future funding component of $20.0 million. The senior mortgage loan is held for sale on the accompanying Consolidated Statements of Financial Condition as of September 30, 2015. The senior mortgage loan is held for sale on the accompanying Consolidated Statements of Financial Condition as of September 30, 2015.

At September 30, 2015 and December 31, 2014, commercial real estate investments held for investment were composed of the following:

CRE Debt and Preferred Equity Investments

	September 30, 2015							December 31, 2014
	Outstanding Principal		Carrying Value(1)		Percentage of Loan Portfolio(2)			Outstanding Principal		Carrying Value(1)		Percentage of Loan Portfolio(2)
	(dollars in thousands)
Senior mortgages		322,564		321,350		24.4	%		384,304		383,895		25.2	%
Senior securitized mortgages (3)		315,172		314,921		23.9	%		399,541		398,634		26.3	%
Mezzanine loans		560,800		558,613		42.4	%		522,474		522,731		34.4	%
Preferred equity		122,444		121,711		9.3	%		214,653		212,905		14.1	%
Total (4)	$	1,320,980	$	1,316,595		100.0	%	$	1,520,972	$	1,518,165		100.0	%

(1) Carrying value includes unamortized origination fees of $4.8 million and $3.0 million as of September 30, 2015 and December 31, 2014, respectively.
(2) Based on outstanding principal.
(3) Assets of consolidated VIEs.
(4) Excludes Loans held for sale.

	September 30, 2015
	Senior Mortgages			Senior Securitized Mortgages(1)			Mezzanine Loans			Preferred Equity			Total
	(dollars in thousands)
Beginning balance	$	383,895		$	398,634		$	522,731		$	212,905		$	1,518,165
Originations & advances (principal)		216,125			-			140,106			-			356,231
Principal payments		(230,220	)		(84,369	)		(101,781	)		(92,210	)		(508,580	)
Sales (principal)		(46,945	)		-			-			-			(46,945	)
Amortization & accretion of (premium) discounts		(107	)		-			(164	)		516			245
Net (increase) decrease in origination fees		(3,200	)		-			(2,556	)		-			(5,756	)
Amortization of net origination fees		1,802			656			277			500			3,235
Transfers		-			-			-			-			-
Allowance for loan losses		-			-			-			-			-
Net carrying value (2)	$	321,350		$	314,921		$	558,613		$	121,711		$	1,316,595

(1) Assets of consolidated VIE.
(2) Excludes Loans held for sale.

	December 31, 2014
	Senior Mortgages			Senior Securitized Mortgages(1)			Subordinate Notes			Mezzanine Loans			Preferred Equity			Total
	(dollars in thousands)
Beginning balance	$	667,299		$	-		$	41,408		$	628,102		$	247,160		$	1,583,969
Originations & advances (principal)		127,112			-			-			122,742			-			249,854
Principal payments		(12,756	)		-			(41,059	)		(227,151	)		(35,116	)		(316,082	)
Sales (principal)		-			-			-			-			-			-
Amortization & accretion of (premium) discounts		(138	)		-			(349	)		(1,093	)		108			(1,472	)
Net (increase) decrease in origination fees		(2,427	)		(116	)		-			(478	)		-			(3,021	)
Amortization of net origination fees		2,783			772			-			609			753			4,917
Transfers		(397,978	)		397,978			-			-			-			-
Allowance for loan losses		-			-			-			-			-			-
Net carrying value	$	383,895		$	398,634		$	-		$	522,731		$	212,905		$	1,518,165

(1) Assets of consolidated VIE.

Internal CRE Debt and Preferred Equity Investment Ratings

	September 30, 2015
						Internal Ratings
Investment Type	Outstanding Principal(1)		Percentage of CRE Debt and Preferred Equity Portfolio			Performing		Watch List		Defaulted- Recovery (2)		Impaired
	(dollars in thousands)
Senior mortgages	$	322,564		24.4	%	$	309,591	$	-	$	12,973	$	-
Senior securitized mortgages (3)		315,172		23.9	%		305,922		9,250		-		-
Mezzanine loans		560,800		42.4	%		560,800		-		-		-
Preferred equity		122,444		9.3	%		122,444		-		-		-
	$	1,320,980		100.0	%	$	1,298,757	$	9,250	$	12,973	$	-

(1) Excludes Loans held for sale.
(2) Related to one loan on non-accrual status.
(3) Assets of consolidated VIE.

	December 31, 2014
						Internal Ratings
Investment Type	Outstanding Principal		Percentage of CRE Debt and Preferred Equity Portfolio			Performing		Watch List		Defaulted- Recovery (1)		Impaired
	(dollars in thousands)
Senior mortgages	$	384,304		25.2	%	$	371,331	$	-	$	12,973	$	-
Senior securitized mortgages (2)		399,541		26.3	%		390,291		9,250		-		-
Mezzanine loans		522,474		34.4	%		522,474		-		-		-
Preferred equity		214,653		14.1	%		214,653		-		-		-
	$	1,520,972		100.0	%	$	1,498,749	$	9,250	$	12,973	$	-

(1) Related to one loan on non-accrual status.
(2) Assets of consolidated VIE.

Real Estate Acquisitions

In July 2015, a joint venture, in which the Company has a 90% interest, acquired a single tenant retail property located in Chillicothe, Ohio for a purchase price of $11.0 million. The property is leased to a major home improvement retail store through 2020 with three, five year extension options. The purchase price was funded with cash and a new $7.7 million, 10-year, 4.43% fixed rate interest-only mortgage loan. The fair value of the 10% non-controlling interest in the joint venture at the acquisition date was $0.4 million. The fair value of the acquisition and the related non-controlling interest was determined based on the purchase price.

In August 2015, a joint venture, in which the Company has a 90% interest, acquired a multi-tenant retail property located in Largo, Florida for a purchase price of $18.9 million. The purchase price was funded with cash and a new $12.75 million, 10-year, 4.28% fixed rate interest-only mortgage loan. The fair value of the 10% non-controlling interest in the joint venture at the acquisition date was $0.7 million. The fair value of the acquisition and the related non-controlling interest was determined based on the purchase price.

The following table summarizes acquisitions of real estate held for investment during 2015:


Date of Acquisition	Type	Location	Purchase Price		Remaining Lease Term (Years) (1)
(dollars in thousands)
July 2015	Multi Tenant Retail	Ohio	$	11,000		5.1
August 2015	Multi Tenant Retail	Florida	$	18,900		4.4
(1) Does not include extension options.

The aforementioned acquisitions were accounted for using the acquisition method of accounting. Real estate acquisition costs expensed during the three and nine months ended September 30, 2015 totaled $1.2 million.

In November 2014, a joint venture, in which the Company has a 90% interest, acquired eleven retail properties located in New York, Ohio and Georgia. The purchase price was funded with cash and a new $104.0 million, ten-year, 4.03% fixed-rate interest-only mortgage loan.

The following table summarizes acquisitions of real estate held for investment in 2014:


Date of Acquisition	Type	Location	Purchase Price		Remaining Lease Term (Years) (1)
(dollars in thousands)
April 2014	Single-tenant retail	Tennessee	$	19,000		8
June 2014	Multi-tenant retail	Virginia	$	17,743		7
November 2014	Multi-tenant retail	New York, Ohio, Georgia	$	154,000		4.6
(1) Does not include extension options.

The following table presents the aggregate preliminary allocation of the purchase price for acquisitions during the nine months ended September 30, 2015:

	Location
	Ohio			Florida		Total
	(dollars in thousands)
Purchase Price Allocation:
Land	$	2,282		$	3,780	$	6,062
Buildings		8,256			15,120		23,376
Site improvements		639			-		639
Tenant Improvements		671			-		671
Real estate held for investment		11,848			18,900		30,748

Intangible assets (liabilities):
Leasehold intangible assets		1,269			-		1,269
Above market lease		-			-		-
Below market lease value		(2,117	)		-		(2,117	)
Total purchase price	$	11,000		$	18,900	$	29,900

The purchase price allocations for the acquisitions completed during the three months ended September 30, 2015 are preliminary pending the receipt of information necessary to complete the valuation of certain tangible and intangible assets and liabilities and therefore are subject to change.

The following table presents the aggregate final allocation of the purchase price for 2014 acquisitions:

	Location
	Tennessee			Virginia			Joint Venture			Total
	(dollars in thousands)
Purchase Price Allocation:
Land	$	3,503		$	6,394		$	21,441		$	31,338
Buildings		11,960			10,862			97,680			120,502
Site improvements		1,349			1,184			12,705			15,238
Tenant Improvements		-			-			9,365			9,365
Real estate held for investment		16,812			18,440			141,191			176,443

Intangible assets (liabilities):
Leasehold intangible assets		4,288			3,218			22,297			29,803
Above market lease		-			-			5,458			5,458
Below market lease value		(2,100	)		(3,915	)		(14,946	)		(20,961	)
Total purchase price	$	19,000		$	17,743		$	154,000		$	190,743

The weighted average amortization period for intangible assets and liabilities as of September 30, 2015 and December 31, 2014 is 8.9 years and 12.0 years, respectively. Above market leases and leasehold intangible assets are included in Other assets and below market leases are included in Accounts payable and other liabilities in the Consolidated Statements of Financial Condition.

Refer to Equity Method Investments below for details related to real estate investment activity during the quarter ended September 30, 2015.

Investments in Commercial Real Estate

	September 30, 2015			December 31, 2014
	(dollars in thousands)
Real estate held for investment, at amortized cost
Land	$	44,039		$	38,117
Buildings and improvements		200,218			176,139
Subtotal		244,257			214,256
Less: accumulated depreciation		(12,997	)		(4,224	)
Total real estate held for investment, at amortized cost, net		231,260			210,032
Equity in unconsolidated joint venture		70,187			-
Investments in commercial real estate, net	$	301,447		$	210,032

Depreciation expense was $3.1 million and $8.8 million for the quarter and nine months ended September 30, 2015, respectively. Depreciation expense was $0.4 million and $0.7 million for the quarter and nine months ended September 30, 2014, respectively. Depreciation expense is included in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

Rental Income

The minimum rental amounts due under the leases are generally either subject to scheduled fixed increases or adjustments. The leases generally also require that the tenants reimburse us for certain operating costs. Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at September 30, 2015 for the consolidated properties, including consolidated joint venture properties are as follows:

	September 30, 2015
	(dollars in thousands)
2015 (remaining)	$	5,672
2016		20,529
2017		17,713
2018		15,333
2019		12,998
Later years		52,875
	$	125,120

Mortgage loans payable as of September 30, 2015 and December 31, 2014, were as follows:

September 30, 2015
Property	Mortgage Carrying Value		Mortgage Principal		Interest Rate			Fixed/Floating Rate	Maturity Date	Priority
	(dollars in thousands)
Joint Ventures	$	124,400	$	124,400	4.03% to 4.44%			Fixed	2024 and 2025	First liens
Tennessee		12,350		12,350		4.01	%	Fixed	6/6/2019	First liens
Virginia		11,025		11,025		3.58	%	Fixed	9/6/2019	First liens
Arizona		16,460		16,389		3.50	%	Fixed	1/1/2017	First liens
Nevada		2,462		2,453		3.45	%	Floating (1)	3/29/2017	First liens
	$	166,697	$	166,617

(1) Rate is fixed via an interest rate swap (pay fixed 3.45%, receive floating rate of L+200).

December 31, 2014
Property	Mortgage Carrying Value		Mortgage Principal		Interest Rate			Fixed/Floating Rate	Maturity Date	Priority
	(dollars in thousands)
Joint Venture	$	103,950	$	103,950		4.03	%	Fixed	12/6/2024	First liens
Tennessee		12,350		12,350		4.01	%	Fixed	6/6/2019	First liens
Virginia		11,025		11,025		3.58	%	Fixed	9/6/2019	First liens
Arizona		16,709		16,600		3.50	%	Fixed	1/1/2017	First liens
Nevada		2,519		2,505		3.45	%	Floating (1)	3/29/2017	First liens
	$	146,553	$	146,430

(1) Rate is fixed via an interest rate swap (pay fixed 3.45%, receive floating rate of L+200).

The following table details future mortgage loan principal payments as of September 30, 2015:

	Mortgage Loan Principal Payments
	(dollars in thousands)
2015 (remaining)	$	98
2016		400
2017		18,344
2018		-
2019		23,375
Later years		124,400
	$	166,617

Equity Method Investments

In August 2015, the Company acquired a portfolio of six retail properties located in New York, Indiana, Kentucky, and Illinois through a newly formed joint venture partnership and contributed approximately $57.7 million of capital. The Company has an eighty five percent interest in the joint venture, but as all major decisions require unanimous consent by the joint venture partners, the Company is not considered to have a controlling financial interest and accounts for its investment under the equity method of accounting.

In May 2015, the Company acquired a multifamily property located in Florida through a joint venture partnership and contributed approximately $12 million of capital. The Company has a seventy-five percent interest in the joint venture, but as all major decisions require unanimous consent by the joint venture partners, the Company is not considered to have a controlling financial interest and accounts for its investment under the equity method of accounting.

VIEs

Securitizations

In January 2014, the Company closed NLY Commercial Mortgage Trust 2014-FL1 (the “Trust”), a $399.5 million securitization financing transaction which provides permanent, non-recourse financing collateralized by floating-rate first mortgage debt investments originated or co-originated by the Company and is not subject to margin calls. A total of $260.7 million of investment grade bonds were issued by the Trust, representing an advance rate of 65.3% at a weighted average coupon of LIBOR plus 1.74% at closing. The Company used the proceeds to originate commercial real estate investments. The Company retained bonds rated below investment grade and the interest-only bond issued by the Trust, which are referred to as the subordinate bonds.

The Company incurred approximately $4.3 million of costs in connection with the securitization that have been capitalized and are being amortized to interest expense. Deferred financing costs are included in Other assets in the accompanying Consolidated Statements of Financial Condition.

As of September 30, 2015 the carrying value of the Trust’s assets was $314.9 million, net of $0.2 million of unamortized origination fees, which are included in Commercial real estate debt and preferred equity in the accompanying Consolidated Statements of Financial Condition. As of September 30, 2015, the carrying value of the Trust’s liabilities was $176.3 million, classified as Securitized debt of consolidated VIEs in the accompanying Consolidated Statements of Financial Condition.

In February 2015, the Company purchased the junior-most tranche, Class C Certificate of the Freddie Mac securitization, FREMF Mortgage Trust 2015-KLSF (“FREMF 2015-KLSF”) for $102.1 million. The underlying portfolio is a pool of 11 floating rate multifamily mortgage loans with a cut-off principal balance of $1.4 billion. The Company was required to consolidate the FREMF 2015-KLSF Trust’s assets and liabilities of $1.4 billion and $1.3 billion, respectively, at September 30, 2015.

In April 2015, the Company purchased the junior-most tranche, Class C Certificate of the Freddie Mac securitization, FREMF Mortgage Trust 2015-KF07 (“FREMF 2015-KF07”) for $89.4 million. The underlying portfolio is a pool of 40 floating rate multifamily mortgage loans with a cut-off principal balance of $1.2 billion. The Company was required to consolidate the FREMF 2015-KF07 Trust’s assets and liabilities of $1.2 billion and $1.1 billion, respectively, at September 30, 2015. FREMF 2015-KLSF and FREMF 2015-KF07 are collectively referred to herein as the FREMF Trusts.

The FREMF Trusts are structured as pass-through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The FREMF Trusts are VIEs and the Company is considered to be the primary beneficiary as a result of its ability to replace the special servicer without cause through its ownership of the Class C Certificates and its current designation as the directing certificate holder. The Company’s exposure to the obligations of the VIEs is generally limited to the Company’s investment in the FREMF Trusts of $188.8 million. Assets of the FREMF Trusts may only be used to settle obligations of the FREMF Trusts. Creditors of the FREMF Trusts have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the FREMF Trusts. No gain or loss was recognized upon initial consolidation of the FREMF Trusts, but $0.8 million of related costs were expensed. The FREMF Trusts’ assets are included in Commercial real estate debt investments and the FREMF Trusts’ liabilities are included in Securitized debt of consolidated VIEs in the accompanying Consolidated Statements of Financial Condition.

Upon consolidation, the Company elected the fair value option for the financial assets and liabilities of the FREMF Trusts in order to avoid an accounting mismatch, and to more faithfully represent the economics of its interest in the entities. The fair value option requires that changes in fair value be reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss). The Company has early adopted ASU 2014-13 and applied the practical expedient fair value measurement whereby the Company determines whether the fair value of the financial assets or financial liabilities is more observable as a basis for measuring the less observable financial instruments. The Company has determined that the fair value of the financial liabilities of the FREMF Trusts are more observable, since the prices for these liabilities are primarily available from third-party pricing services utilized for multifamily mortgage-backed securities, while the individual assets of the trusts are inherently less capable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Given that the Company’s methodology for valuing the financial assets of the FREMF Trusts are an aggregate fair value derived from the fair value of the financial liabilities, the Company has determined that the fair value of each of the financial assets in their entirety should be classified in Level 2 of the fair value measurement hierarchy.

The statement of financial condition of the FREMF Trusts, that is reflected in the Company’s Consolidated Statements of Financial Condition at September 30, 2015 is as follows:

	September 30, 2015
	(dollars in thousands)

Senior securitized commercial mortgages carried at fair value	$	2,565,909
Accrued interest receivable		4,703

Total assets	$	2,570,612

Liabilities and equity
Securitized debt (non-recourse) at fair value	$	2,377,067
Accrued interest payable		4,068
	$	2,381,135

Equity		189,477
Total liabilities and equity	$	2,570,612

The FREMF Trust mortgage loans had an unpaid principal balance of $2.6 billion at September 30, 2015. As of September 30, 2015 there are no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable to instrument-specific credit risk of the underlying loans or securitized debt securities as of September 30, 2015 based upon the Company’s process of monitoring events of default on the underlying mortgage loans.

The statement of comprehensive income (loss) of the FREMF Trusts that is reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss) at September 30, 2015 is as follows:

	For the period February 25, 2015 to September 30, 2015
	(dollars in thousands)
Net interest income:
Interest income	$	26,634
Interest expense		9,051
Net interest income		17,583

Other income (loss):
Unrealized gain (loss) on financial instruments at fair value (1)		(2,691	)
Guarantee fees and servicing costs		9,579
Other income (loss)		(12,270	)
General and administration expenses		58
Net income	$	5,255

(1) Included in Net unrealized gains (losses) on financial instruments measured at fair value through earnings.

The geographic concentrations of credit risk exceeding 5% of the total loan balances related to the FREMF Trusts as of September 30, 2015 are as follows:

Securitized Loans at Fair Value Geographic Concentration of Credit Risk
Property Location	Principal Balance		% of Balance
	(dollars in thousands)
Texas	$	749,569		29.4	%
North Carolina		537,375		21.0	%
Florida		391,215		15.3	%
Ohio		197,455		7.7	%