-----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, DgP6n9eduTkwTi7+WMcqnDYaCMSKATZAh2mk2L1te9+BUNjdRLHD7jizQBAbWCkG lrpssi9rYv3sMoOR4nm0uQ== 0000893220-02-001285.txt : 20021025 0000893220-02-001285.hdr.sgml : 20021025 20021025175058 ACCESSION NUMBER: 0000893220-02-001285 CONFORMED SUBMISSION TYPE: S-8 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20021025 EFFECTIVENESS DATE: 20021025 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAIT INVESTMENT TRUST CENTRAL INDEX KEY: 0001045425 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 232919819 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-8 SEC ACT: 1933 Act SEC FILE NUMBER: 333-100766 FILM NUMBER: 02799135 BUSINESS ADDRESS: STREET 1: 1818 MARKET ST STREET 2: 28TH FL CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 2155465119 MAIL ADDRESS: STREET 1: 1521 LOCUST ST STREET 2: 6TH FL CITY: PHILADELPHIA STATE: PA ZIP: 19102 FORMER COMPANY: FORMER CONFORMED NAME: RESOURCE ASSET INVESTMENT TRUST DATE OF NAME CHANGE: 19970904 S-8 1 w64578sv8.txt RAIT INVESTMENT TRUST FORM S-8 As filed with the Securities and Exchange Commission on October 25, 2002. Registration No. 333- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-8 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 RAIT INVESTMENT TRUST (Exact name of registrant as specified in its charter) Maryland 23-2919819 ------------------------------------ ----------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1818 Market Street, Philadelphia, PA 19103 - ------------------------------------------ ------------ (Address of Principal Executive Offices) (Zip Code) AMENDED AND RESTATED RAIT INVESTMENT TRUST 1997 STOCK OPTION PLAN (Full title of the plan) Ellen J. DiStefano RAIT Investment Trust 1818 Market Street, 28th Floor Philadelphia, PA 19103 ------------------------------------ (Name and address of agent for service) (215) 861-7900 ------------------------------------------------------------- (Telephone number, including area code, of agent for service) Copy to: Anders Laren, Esquire Ledgewood Law Firm, P.C. 1521 Locust Street - Eighth Floor Philadelphia, PA 19102 (215) 731-9450 CALCULATION OF REGISTRATION FEE
Proposed Proposed Title of maximum maximum securities Amount offering aggregate Amount of to be to be price per offering registration registered registered (1) share(2) price fee(3) - ----------- ------------- -------- --------- ------------ Common shares, par value $.01 per share 800,000 shares $19.86 $15,888,000 $1,462
(1) This Registration Statement also registers additional securities to be offered or issued upon adjustment or changes made to the registered securities by reason of any stock splits, stock dividends or similar transactions as permitted by Rule 416. (2) Estimated solely for purposes of determining the registration fee in accordance with Rule 457(h) under the Securities Act of 1933 based upon the average of the high and low prices of the registrant's common shares as reported on the New York Stock Exchange on October 18, 2002. (3) Pursuant to Rule 457(p) under the Securities Act of 1933, filing fees of $940 paid in connection with RAIT Investment Trust's Registration Statement on Form S-11 (Registration No. 333-53067, filed May 19, 1998), filed under its prior name (Resource Asset Investment Trust), with respect to 3,220,000 common shares, of which 388,100 common shares were not issued, are now being carried forward to this Registration Statement. An aggregate of $522 is currently being paid. EXPLANATORY NOTE RAIT Investment Trust, a Maryland real estate investment trust, previously filed its Registration Statement on Form S-8 (Registration No. 333-67452) (the "Initial Registration Statement") with the Securities and Exchange Commission on August 14, 2001, for the purpose of registering the registrant's common shares, par value $0.01 per share (the "Common Shares"), issuable upon the exercise of options granted pursuant to the registrant's Amended and Restated RAIT Investment Trust 1997 Stock Option Plan (the "Plan"). At the time of the filing of the Initial Registration Statement, 800,000 Common Shares were authorized for issuance under the Plan. On July 16, 2002, the shareholders of registrant voted to approve increasing the size of the Plan by 800,000 Common Shares. Pursuant to General Instruction E to Form S-8, this Registration Statement incorporates by reference the contents of the Initial Registration Statement, except as otherwise set forth herein. This Registration Statement brings the total number of authorized and registered shares under the Plan to 1,600,000. As permitted by Rule 429 under the Securities Act of 1933, the resale prospectus filed together with this Registration Statement shall be deemed to be a combined resale prospectus which shall also relate to the Common Shares registered on the registrant's previously filed Initial Registration Statement No. 333-67452 on Form S-8. PART I INFORMATION REQUIRED IN SECTION 10(A) PROSPECTUS ITEM 1. PLAN INFORMATION. Information required by Part I to be contained in the Section 10(a) prospectus is omitted from this Registration Statement in accordance with the Introductory Note to Part I of Form S-8. ITEM 2. REGISTRANT INFORMATION AND EMPLOYEE PLAN ANNUAL INFORMATION. Information required by Part I to be contained in the Section 10(a) prospectus is omitted from this Registration Statement in accordance with the Introductory Note to Part I of Form S-8. RESALE PROSPECTUS RAIT INVESTMENT TRUST UP TO 1,600,000 COMMON SHARES OF BENEFICIAL INTEREST This prospectus is part of a registration statement that we filed with the SEC on Form S-8. On Form S-8 we registered the common shares of beneficial interest issuable upon exercise of options granted to our employees and trustees under our Amended and Restated RAIT Investment Trust 1997 Stock Option Plan. We sometimes refer to this Stock Option Plan as the "1997 Stock Option Plan". This prospectus may be used by certain persons who may be deemed to be our "affiliates" under the securities laws to sell a maximum of 1,600,000 common shares which have been or may be purchased or acquired by them pursuant to the 1997 Stock Option Plan. These persons include those of our employees and trustees who are listed on page 28 below as "selling shareholders." We encourage our employees and trustees to invest in our company through the exercise of their options. We believe that this prospectus and the registration statement of which it is a part, which permits resales of shares acquired by our employees and trustees through option exercises, encourages these exercises by providing liquidity for their investment. Accordingly, while the selling shareholders may sell up to the number of common shares listed in the "Common Shares Registered Under This Prospectus" column opposite their names at any time or from time to time until the termination of this offering, they are not required to sell any shares. Our common shares are listed for trading on the New York Stock Exchange under the symbol "RAS." For more information on how the selling shareholders may sell these shares, please read the section of the prospectus entitled "Plan of Distribution." YOU SHOULD READ THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE BUYING OUR COMMON SHARES. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This prospectus is dated October 25, 2002. OUR COMPANY GENERAL RAIT Investment Trust is a real estate investment trust, or REIT, formed under Maryland law. We conduct our operations through RAIT Partnership, L.P., a limited partnership that owns substantially all of our assets. Our wholly-owned subsidiaries, RAIT General, Inc. and RAIT Limited, Inc., are the sole general partner and sole limited partner, respectively, of RAIT Partnership. We sometimes refer to RAIT Investment Trust and RAIT Partnership, along with RAIT General and RAIT Limited, using the words "we," "our" and "us." We have three principal business activities: - we make real estate loans directly to borrowers, - we acquire real estate loans from others, and - we acquire real properties or interests in real properties. We seek to generate income for distribution to our shareholders from a combination of interest, rents, distributions in respect of rents where we own an equity interest in a real property and proceeds from the sale of our investments. Our address is 1818 Market Street, 28th Floor, Philadelphia, Pennsylvania 19103. Our telephone number is (215) 861-7900. 2 RISK FACTORS GENERAL TRANSACTIONS WITH OUR AFFILIATES MAY RESULT IN CONFLICTS OF INTEREST. We have relationships with Resource America, Inc., Brandywine Construction & Management, Inc. and The Bancorp, Inc. which may give rise to conflicts of interest. We have in the past purchased investments from and sold investments to Resource America and we anticipate that we will do so in the future, subject to a limitation contained in our declaration of trust. Our company has in the past made loans to affiliates of Resource America and we anticipate that we and Resource America may in the future hold various interests in the same properties, subject to this limitation. Jonathan Z. Cohen, our trustee and secretary, is the chief operating officer of Resource America and currently serves as Resource America's representative on our board of trustees. Mr. Cohen is the son of Edward E. Cohen, the chairman, chief executive officer, president and a principal shareholder of Resource America, and Betsy Z. Cohen, our chairman and chief executive officer. Scott F. Schaeffer, our president and chief operating officer, is a director of Resource America. Brandywine Construction & Management, an affiliate of Resource America, provides real estate management services to our company. As part of our regular banking relationships, we place a portion of our temporary excess cash in short-term money market instruments with The Bancorp Bank, the wholly-owned banking subsidiary of The Bancorp, Inc. Betsy Z. Cohen is the chief executive officer and a director of The Bancorp, Inc. and her son, D. Gideon Cohen, is its chairman. D. Gideon Cohen is also a director of Resource America. INVESTMENT ACTIVITY RISKS FINANCING CONSIDERATIONS THE VALUE OF OUR LOANS DEPENDS ON CONDITIONS BEYOND OUR CONTROL. Loan defaults will reduce our current return on investment and may require us to become involved in expensive and time-consuming proceedings, including bankruptcy, reorganization or foreclosure proceedings. Our primary or sole source of recovery is typically the real property underlying our loans. Accordingly, the value of our loans depends upon the value of the underlying real property. This value may be affected by numerous factors outside our control, including those described elsewhere in this "Risk Factors - Investment Activity Risks" section. Our loans typically provide payment structures other than equal periodic payments that retire a loan over its specified term, including structures that defer payment of some portion of accruing interest, or defer repayment of principal, until loan maturity. Where a borrower must pay a loan balance in a large lump sum payment, its ability to satisfy this obligation may depend upon its ability to obtain suitable refinancing or otherwise to raise a substantial cash amount, which we do not control and which may be subject to the same considerations we describe elsewhere in this "Risk Factors - Investment Activity Risks" section. In addition, mortgage lenders can lose their lien priority in many jurisdictions, including those in which our existing loans are located, to persons who supply labor and materials to a property. For these and other reasons, the total amount which we may recover from one of our loans may be less than the total amount of a loan or our cost of acquisition. LONGER TERM, SUBORDINATE AND NON-CONFORMING LOANS ARE ILLIQUID AND THEIR VALUE MAY DECREASE. Our mezzanine loans generally have maturities between four and ten years and typically do not conform to standard loan underwriting criteria. Many of our loans are subordinate loans. As a result, our loans are relatively illiquid investments. We may be unable to vary our portfolio promptly in response to changing economic, financial and investment conditions. As a result, the fair market value of our portfolio may decrease in the future. INVESTMENT IN SUBORDINATE LOANS MAY INVOLVE INCREASED RISK OF LOSS. We emphasize junior lien loans and other forms of subordinated financing, including wraparound loans. Because of their subordinate position, junior lien loans carry a greater credit risk than senior lien financing, including a substantially greater risk of non-payment of 3 interest or principal. Where, as part of a financing structure, we take an equity or other unsecured position, our risk of loss may be materially increased. A decline in the real estate market could adversely affect the value of the property so that the aggregate outstanding balances of senior liens may exceed the value of the underlying property. In the event of a default on a senior loan, we may elect to make payments, if we have the right to do so, in order to prevent foreclosure on the senior loans. In the event of foreclosure, as a junior lienor we will be entitled to share in foreclosure proceeds only after satisfaction of the amounts due to senior lienors, which may result in our being unable to recover the full amount, or any, of our 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 if we foreclose, increasing our risk of loss. When we acquire a junior loan, we may not acquire the right to service senior loans. The servicers of the senior loans are responsible to the holders of those loans, whose interests will likely not coincide with ours, particularly in the event of a default. Accordingly, the senior loans may not be serviced in a manner advantageous to us. Certain of our loans may not be collateralized by recorded or perfected liens. Certain of our loans may instead be secured by deeds-in-lieu of foreclosure, also known as "pocket deeds." A deed-in-lieu of foreclosure is a deed executed in blank that the holder is entitled to record immediately upon a default in the loan. Loans that are not collateralized by recorded or perfected liens are subordinate not only to existing liens encumbering the underlying property, but also to future judgment or other liens that may arise as well as to the claims of general creditors of the borrower. Furthermore, in a bankruptcy, we will have materially fewer rights than secured creditors and, if our loan is secured by equity interests in the borrower, than the borrower's general creditors. Our rights also will be subordinate to the lien-like rights of the bankruptcy trustee. Moreover, enforcement of our loans against the underlying properties will involve a longer, more complex, and likely, more expensive legal process than enforcement of a mortgage loan. LOANS SECURED BY INTERESTS IN ENTITIES OWNING REAL PROPERTY MAY INVOLVE INCREASED RISK OF LOSS. We may originate or acquire loans secured by interests in entities that own real properties rather than by a direct security interest in the underlying properties. These loans may be illiquid or otherwise have features that may make it difficult for us to obtain a return of our investment in the event of a default. Loans secured by equity interests in any borrower will be subordinated not only to existing liens encumbering the underlying property but also to future judgment or other liens that may arise as well as to the claims of general creditors of the borrower. INVESTMENT IN NON-CONFORMING LOANS MAY INVOLVE INCREASED RISK OF LOSS. Loans we acquire generally do not conform to conventional loan criteria due to past defaults by borrowers. These defaults typically result from lack of a strong operating history for the properties underlying the loans, the borrowers' historical credit problems, the properties' underlying cash flow problems or other factors. As a result, loans we acquire may have a higher risk of default and loss than conventional loans. Any loss we incur may reduce distributions to shareholders or adversely affect the value of our securities. DISCOUNTED LOANS MAY HAVE HIGH RATES OF DEFAULT. We acquire loans at a discount from both the outstanding balances of the loans and the appraised value of the properties underlying the loans. Typically, discounted loans are in default under the original loan terms or other requirements and subject to forbearance agreements. A forbearance agreement typically requires a borrower to pay to the lender all revenue from a property after payment of the property's operating expenses in return for the lender's agreement to withhold exercising its rights under the loan documents. Acquiring loans at a discount involves a substantially higher degree of risk of non-collection than loans that conform to institutional underwriting criteria. We do not acquire a loan unless material steps have been taken toward resolving problems with the loan, or its underlying property. However, previously existing problems may recur or other problems may arise. FINANCING WITH HIGH LOAN-TO-VALUE RATIOS MAY INVOLVE INCREASED RISK OF LOSS. We anticipate that most of our financings will have loan-to-value ratios in excess of 80% and that many of our financings will have loan-to-value ratios in excess of 90%. A loan-to-value ratio is the ratio of the amount of our financing, plus the amount of any senior indebtedness, to the appraised value of the property underlying the loan. By reducing the margin available to cover fluctuations in property value, a high loan-to-value ratio increases the risk that, upon default, the amount obtainable from sale of the underlying property may be insufficient to repay the financing. 4 INTEREST RATE CHANGES MAY ADVERSELY AFFECT OUR INVESTMENTS. Changes in interest rates affect the market value of our loan portfolio. In general, the market value of a loan will change in inverse relation to an interest rate change where a loan has a fixed interest rate or only limited interest rate adjustments. Accordingly, in a period of rising interest rates, the market value of such a loan will decrease. Moreover, in a period of declining interest rates, real estate loans may have less value than other fixed income securities due to possible prepayments. Interest rate changes will also affect the return we obtain on new loans. In particular, during a period of declining rates, our reinvestment of loan repayments may be at lower rates than we obtained in prior investments or on the repaid loans. Also, increases in interest on debt we incur may not be reflected in increased rates of return on the investments funded through such debt, which would adversely affect our return on those investments. Accordingly, interest rate changes may materially affect the total return on our investment portfolio, which in turn will affect the amount available for distribution to shareholders. LACK OF GEOGRAPHIC DIVERSIFICATION EXPOSES OUR INVESTMENTS TO A HIGHER RISK OF LOSS FROM REGIONAL ECONOMIC FACTORS. We emphasize financing properties located in the Philadelphia, Pennsylvania metropolitan area, the Baltimore/Washington corridor and Florida. While we have no specific geographic limitations on where we may invest, we anticipate that our loans will continue to be concentrated in the Philadelphia region, the Baltimore/Washington corridor and Florida for the foreseeable future. This lack of geographic diversification may make our loan portfolio more sensitive to economic developments of a primarily regional nature, which may result in reduced rates of return or higher rates of default than might be incurred with a more geographically diverse investment portfolio. WE MAY NOT OBTAIN APPRECIATION INTERESTS AT THE RATE WE SEEK, OR AT ALL; WE MAY NOT BENEFIT FROM APPRECIATION INTERESTS WE DO OBTAIN. In addition to an agreed upon interest rate, we seek to obtain appreciation interests from our borrowers. Appreciation interests require a borrower to pay us additional amounts based upon a property's increase in value, increase in revenues or both. While we seek appreciation interests at rates of at least 25%, we may not be able to obtain these rates. Moreover, we may not be able to negotiate appreciation interest provisions in any of our loans. In addition, while we have sought to structure the interest rates on our existing loans to maximize our current yield, we may in the future accept a lower interest rate to obtain an appreciation interest. The value of any appreciation interest depends on the performance and value of the property underlying the loan and, thus, is subject to real estate investment risks. Accordingly, we may not realize any benefits from our appreciation interests. We do not anticipate receiving significant amounts from our appreciation interests in the early years of our loans. APPRECIATION INTERESTS MAY CAUSE LOSS OF THE PRIORITY OF OUR LIEN. Because appreciation interests allow us to participate in the increase in a property's value or revenue, courts, including a court in a bankruptcy, arrangement or similar proceeding, may determine that we should be treated as a partner of, or joint venturer with, the borrower. If a court makes that determination, we could lose our lien priority in the property or lose any benefit of our lien. THE COMPETITION FOR FINANCING MAY INHIBIT OUR ABILITY TO ACHIEVE OUR OBJECTIVES. We may encounter significant competition from banks, insurance companies, savings and loan associations, mortgage bankers, pension funds, investment bankers and others, including public or private real estate investment trusts, or REITs. This competition could reduce our yields and make it more difficult to obtain appreciation interests. It may also increase the price, and thus reduce potential yields, on discounted loans we acquire. Most of our competitors have substantially greater assets than we do. As such, they have the ability to make larger loans to more creditworthy borrowers and to have a more diversified loan portfolio, which reduces the risk of loss from any one loan. An increase in the general availability of funds to lenders, or a decrease in the amount of borrowing activity, may increase competition for making loans and may reduce obtainable yields or increase the credit risk inherent in the available loans. LENGTHY LOAN COMMITMENT PERIODS MAY REDUCE OUR RETURNS. We typically issue a loan commitment to a borrower before making the loan. From the time the funds are committed until the loan is closed and the funds disbursed, we hold the funds in temporary investments, which typically do not produce substantial investment returns. If there is a substantial period between loan commitment and loan closing, or if a borrower determines not to use our financing, our investment returns will be adversely affected. USURY STATUTES MAY IMPOSE INTEREST CEILINGS AND SUBSTANTIAL PENALTIES FOR VIOLATIONS. Interest we charge on our loans, which may include amounts received from appreciation interests, may be subject to state usury laws. These laws impose maximum interest rates that may be charged on loans and penalties for violation, including repayment of excess interest and unenforceability of debt. We seek to structure our loans so that we do not violate applicable 5 usury laws, but uncertainties in determining the legality of interest rates and other borrowing charges under some statutes may result in inadvertent violations. REAL PROPERTY CONSIDERATIONS THE VALUE OF OUR PROPERTY INTERESTS DEPENDS ON CONDITIONS BEYOND OUR CONTROL. Although we emphasize originating or acquiring loans, we have acquired property interests in the past and anticipate that we will acquire more in the future. Real property investments are subject to varying degrees of risk. Yields from our real properties depend on their net income and capital appreciation. Income from, and appreciation of, our properties may be adversely affected by general and local economic conditions, neighborhood values, competitive overbuilding, weather, casualty losses and other factors beyond our control. The value of real properties may also be affected by factors such as the cost of compliance with regulations and liability under applicable environmental laws, changes in interest rates and the availability of financing. Income from a property will be adversely affected if a significant number of tenants are unable to pay rent or if available space cannot be rented on favorable terms. Operating and other expenses of our properties, particularly significant expenses such as mortgage payments, real estate taxes and maintenance costs, generally do not decrease when income decreases and, even if revenues increase, operating and other expenses may increase faster than revenues. PROPERTY INTERESTS ARE ILLIQUID AND THEIR VALUE MAY DECREASE. Real estate investments are relatively illiquid. Therefore, we may have only a limited ability to vary our portfolio of property interests quickly in response to changes in economic or other conditions. As a consequence, the fair market value of some or all of our property interests may decrease in the future. In addition, provisions in the Internal Revenue Code and related regulations impose a 100% tax on gain realized by a REIT like us from property held primarily for sale to customers in the ordinary course of business. These provisions may materially adversely affect our ability to sell property interests. For a discussion of federal income tax considerations in selling a property interest, you should read "Risk Factors - Legal and Tax Risks - Gain on disposition of assets deemed held for sale in ordinary course subject to 100% tax." UNINSURED AND UNDERINSURED LOSSES MAY AFFECT THE VALUE OF, OR OUR RETURN FROM, OUR PROPERTY INTERESTS. Our properties, and the properties underlying our loans, have comprehensive insurance in amounts we believe sufficient to permit the replacement of the properties in the event of a total loss, subject to applicable deductibles. There are, however, certain types of losses, such as earthquakes, floods and hurricanes, that may be uninsurable or not economically insurable. Also, inflation, changes in building codes and ordinances, environmental considerations and other factors might make it impractical to use insurance proceeds to replace a damaged or destroyed property. If any of these or similar events occurs, it may reduce our return from an affected property and the value of our investment. WE MAY HAVE LESS CONTROL OF OUR INVESTMENT WHEN WE INVEST IN JOINT VENTURES, PARTNERSHIPS OR SIMILAR REAL PROPERTY INTERESTS. Our acquisition of equity interests in entities which own real property provides risks not present in real property loans or direct property ownership. For example, the other equity owners in the entity holding the property might have economic or business interests or goals which are inconsistent with our business interests or goals and may be in a position to take action contrary to our instructions or to our policies and objectives. Moreover, if we are a limited partner in a limited partnership and have rights allowing us control over the partnership or its property, we may be deemed to be a general partner and liable for the debts of the partnership beyond the amount of our investment. REAL PROPERTIES WITH ENVIRONMENTAL PROBLEMS MAY CREATE LIABILITY FOR US. The existence of hazardous or toxic substances on a property will adversely affect its value and our ability to sell or borrow against the property. Contamination of a real property by hazardous substances or toxic wastes not only may give rise to a lien on that property to assure payment of the cost of remediation, but also can result in liability to us, as owner, operator or lender, for that cost. Many environmental laws can impose liability whether we know of, or are responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses, may materially limit our use of our properties and may adversely affect our ability to make distributions to our shareholders. In addition, future or amended laws, or more stringent interpretations or enforcement policies with respect to existing environmental requirements, may increase our exposure to environmental liability. 6 COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION. Under the Americans with Disabilities Act of 1990, all public accommodations must meet federal requirements for access and use by disabled persons. We believe that our properties, and those underlying our loans, substantially comply with the requirements of the Americans with Disabilities Act. However, a determination that these properties do not comply with the Americans with Disabilities Act could result in liability for both governmental fines and damages to private parties. If we or our borrowers were required to make unanticipated major modifications to comply with the Americans with Disabilities Act, it could adversely affect our ability to make distributions to our shareholders. OTHER INVESTMENT ACTIVITY CONSIDERATIONS LEVERAGE CAN REDUCE INCOME AVAILABLE FOR DISTRIBUTION AND CAUSE LOSSES. Our declaration of trust does not limit the amount of indebtedness we may incur. Using leverage, whether with recourse to us generally or only with respect to a particular property, to acquire investments creates an opportunity for increased net income, but at the same time creates risks. For example, leverage can reduce the net income available for distributions to shareholders in periods of rising interest rates where interest rate increases are greater than increases in the rates of return on our investments. We use leverage to acquire investments only when we believe it will enhance our returns. However, we cannot be sure that our use of leverage will prove to be beneficial. Moreover, when our debt is secured by our assets, we can lose some or all or our assets through foreclosure if we do not meet our debt service obligations. LACK OF DIVERSIFICATION IN NUMBER OF OUR INVESTMENTS INCREASES OUR DEPENDENCE ON INDIVIDUAL INVESTMENTS. Although we generally invest between $2.0 million and $30.0 million in a loan or property interest, our declaration of trust does not limit the size of our investments. If we acquire larger loans or property interests, our portfolio will be concentrated in a smaller number of assets, increasing the risk of loss to shareholders if a default or other problem arises. LEGAL AND TAX RISKS WE WILL BE TAXED AS A REGULAR CORPORATION IF WE FAIL TO MAINTAIN OUR REIT STATUS. We have operated and intend to continue to operate in a manner that permits us to qualify as a REIT for federal income tax purposes. However, the federal income tax laws governing REITs are complex, and we have not obtained a ruling from the Internal Revenue Service about our status as a REIT. We have received an opinion of counsel that we qualify as a REIT based on our current operations and on certain assumptions and representations concerning future operations. Opinions of counsel are not binding on the Internal Revenue Service or any court. The opinion only represents the view of counsel based on counsel's review and analysis of existing law. Furthermore, our continued qualification as a REIT will depend on our satisfaction of the asset, income, organizational, distribution and shareholder ownership requirements of the Internal Revenue Code on a continuing basis. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to shareholders would not be deductible in computing our taxable income. Corporate tax liability will reduce the amount of cash available for distribution to our shareholders which, in turn, may reduce the trading prices of our common shares. Unless entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. "PHANTOM INCOME" MAY REQUIRE US TO BORROW OR SELL ASSETS TO MEET REIT DISTRIBUTION REQUIREMENTS. We must distribute at least 90% of our annual net taxable income, excluding any net capital gain or retained capital gain, in order to maintain our REIT status. For years before 2001, we were required to distribute 95% of this income. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of: - 85% of our ordinary income for that year, - 95% of our capital gain net income for that year, and - 100% of our undistributed taxable income from prior years. 7 We have complied and intend to continue to comply with these distribution requirements. However, in some instances, the structure of our loans may require us to recognize income for federal income tax purposes even though we do not receive corresponding cash payments. This income recognition, in turn, increases the amount that we must distribute in order to avoid corporate income tax for that year unless there is an equivalent amount of deductions that do not require expenditures of cash, such as depreciation on owned real estate. The four principal ways in which this "phantom income" may arise for us are: - Origination or acquisition of loans, including loans with appreciation interests, that may be deemed to have original issue discount for federal income tax purposes. Original issue discount is generally equal to the difference between an obligation's issue price and its stated redemption price at maturity. We must recognize as income in each year the portion of the original issue discount that accrues during that year, even though we do not receive cash in that year in the amount of the original issue discount. - Accruing interest with respect to a loan at a rate greater than the rate at which we receive interest. In particular, this may happen where the rate at which interest is paid on a loan is less than the stated rate. - Origination or acquisition of wraparound loans under which we receive payments of principal and interest that do not coincide with the payments of principal and interest on underlying senior loans. Even if, as expected, we obtain positive cash flow from the transaction, the amount of principal we pay on the senior obligations may exceed the amount of principal we receive from the obligor on the wraparound loan, and the amount of interest we may receive from the obligor may exceed the amount of interest we pay on the senior obligations. This could create a situation where our taxable income exceeds our cash flow from the wraparound loan. - REIT taxable income in excess of cash received may also arise in connection with some property sales and where a significant modification is made to a loan. In addition, we may purchase loans relating to our property interests. To the extent we purchase these loans at a discount, the purchase may give rise to phantom income without any related receipt of cash. If any of the above circumstances occur, it could require us, in order to avoid corporate income tax and the nondeductible excise tax, to borrow funds, sell assets at times which may not be advantageous to us, distribute amounts that represent a return of capital, or distribute amounts that would otherwise be spent on future acquisitions, unanticipated capital expenditures or repayment of debt. To offset these risks, we have invested and intend to continue to invest, as appropriate, in property interests so that the non-cash depreciation deductions associated with these investments may help offset our non-cash income. ORIGINATION FEES WE RECEIVE WILL NOT BE REIT QUALIFYING INCOME. Any origination fees we receive will not be qualifying income for purposes of the 75% or 95% gross income tests applicable to REITs under the Internal Revenue Code. For a description of these tests, you should read the prospectus section "Federal Income Tax Consequences of Our Status as a REIT - Income Tests." We typically receive initial payments, or "points," from borrowers as commitment fees or additional interest. So long as the payment is for the use of money, rather than for services provided by us, we believe that this income should not be classified as non-qualifying origination fees. However, the Internal Revenue Service may seek to reclassify this income as origination fees instead of commitment fees or interest. If we cannot satisfy the Internal Revenue Code's income tests as a result of a successful challenge of our classification of this income, we may not qualify as a REIT. INCOME FROM CERTAIN LOANS MAY NOT BE REIT QUALIFYING INCOME. Certain of our loans may only be indirectly secured by real property. We may acquire or originate similar loans in the future. We may also originate junior loans where a senior loan does not permit us to record a mortgage against the underlying property or substantially restricts our rights as a junior secured lender. In these situations, the Internal Revenue Service may conclude that interest on our loans does not constitute interest from obligations "secured by mortgages on real property or on interests in real property." As a result, interest from these sources would not in those circumstances qualify for purposes of the 75% gross income test. For a description of this test, you should read the prospectus section "Federal Income Tax Consequences of Our Status as a REIT - Income Tests." 8 GAIN ON DISPOSITION OF ASSETS DEEMED HELD FOR SALE IN ORDINARY COURSE SUBJECT TO 100% TAX. If we sell any of our assets, the Internal Revenue Service may determine that the sale is a disposition of an asset held primarily for sale to customers in the ordinary course of a trade or business. Gain from this kind of sale 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 particular facts and circumstances of the sale. Although we will attempt to comply with the terms of safe-harbor provisions in the Internal Revenue Code prescribing when asset sales will not be so characterized, we cannot assure you that we will be able to do so. LOSS OF OUR INVESTMENT COMPANY ACT EXEMPTION WOULD AFFECT US ADVERSELY. We believe that we are not an investment company under the Investment Company Act and intend to conduct our operations so that we do not become an investment company. The Investment Company Act exempts from its registration requirements entities that, directly or through majority-owned subsidiaries, are "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." Under current SEC interpretations, in order to qualify for a "no-action" position from the SEC with respect to the availability of this exemption, at least 55% of our assets must be invested in these liens and interests and we may be required to invest an additional 25% in these types of liens and interests or in other "real estate type" assets. We believe that, generally, a loan will be considered to be a mortgage or other lien on real estate if we obtain foreclosure rights. We typically seek to obtain these rights in our loans. We have not, however, obtained an exemptive order, no-action letter or other form of interpretive guidance from the SEC on this position. If the SEC takes a different position, our portfolio may not have a composition that allows us to qualify under the exemption we claim. If we do not qualify, we must either change our operations and our asset composition to claim the exemption or register as an investment company. Either alternative could adversely affect us and the market price of our shares. OUR BOARD OF TRUSTEES MAY CHANGE OUR POLICIES WITHOUT SHAREHOLDER CONSENT. Our board of trustees determines our policies and, in particular, our investment policies. Our board of trustees may amend or revise our policies or approve transactions that deviate from these policies without a vote of or notice to the shareholders. Policy changes could adversely affect the market price of our shares and our ability to make distributions. Our board of trustees cannot take any action to disqualify us as a REIT or to otherwise revoke our election to be taxed as a REIT without the approval of a majority of the number of our shares of beneficial interest entitled to vote on such matter. OUR OWNERSHIP LIMITATION MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES. To qualify as a REIT under the Internal Revenue Code, no more than 50% in value of our outstanding capital shares may be owned, directly or indirectly, by five or fewer individuals during the last half of each taxable year. To preserve our REIT qualification, our declaration of trust generally prohibits any person from owning more than 8.3% or, with respect to Resource America, 15%, of our outstanding common shares and provides that: - A transfer that violates the limitation is void. - A transferee gets no rights to the shares that violate the limitation. - Shares acquired that violate the limitation transfer automatically to a trust whose trustee has all voting and other rights. - Shares in the trust will be sold and the record holder will receive the net proceeds of the sale. The ownership limitation may discourage a takeover or other transaction that our shareholders believe to be desirable. PREFERRED SHARES MAY PREVENT CHANGE IN CONTROL. Our declaration of trust authorizes our board of trustees to issue 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, without shareholder approval. The issuance of preferred shares could delay or prevent a change in control, apart from the ownership limitation, even if a majority of our shareholders want control to change. 9 MARYLAND ANTI-TAKEOVER STATUTES MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES. As a Maryland REIT, we are subject to various provisions of Maryland law which impose restrictions and require that specified procedures be followed with respect to the acquisition of "control shares" representing at least ten percent of our aggregate voting power and certain takeover offers and business combinations, including, but not limited to, combinations with persons who own one-tenth or more of our outstanding shares. While we have elected to "opt out" of the control share acquisition statute, our board of trustees has the right to rescind the election at any time without notice to the shareholders. 10 CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR DECLARATION OF TRUST AND BYLAWS BOARD OF TRUSTEES Our declaration of trust requires that we have no fewer than three nor more than nine trustees. A majority of our trustees must be "independent trustees." The declaration of trust defines an independent trustee as one who, during the preceding two years, has not - been an affiliate of Resource America, Brandywine Construction & Management or their affiliates, - been one of our officers, or - had a material business or professional relationship with us, Resource America, Brandywine Construction & Management or their affiliates. We currently have seven trustees, of whom four are independent trustees. The trustees may increase or decrease the number of trustees by a majority vote; however, the number of trustees may be increased above nine or decreased below three only by a vote of at least 75% of the trustees then in office, and the term of office of a trustee may not be affected by a decrease in the authorized number of trustees. Any vacancy, including one created by an increase in the number of trustees, may be filled by a majority of the remaining trustees, except that independent trustees must nominate replacements for vacancies in independent trustee positions. Our declaration of trust provides that a trustee may be removed by a two-thirds vote of our outstanding voting shares. This provision may operate to make it impractical for shareholders to remove incumbent trustees and fill the vacancies created by such removal with their own nominees. BUSINESS COMBINATIONS Under Maryland law, certain "business combinations" between us and any person who beneficially owns, directly or indirectly, 10% or more of the voting power of our shares, an affiliate of ours who, at any time within the previous two years was the beneficial owner of 10% or more of the voting power of our shares, whom the statute terms an "interested shareholder," or an affiliate of an interested shareholder, are prohibited for five years after the most recent date on which an "interested shareholder" became an interested shareholder. The business combinations subject to this law include principally mergers, consolidations, share exchanges or, in certain circumstances, asset transfers or issuances or reclassifications of equity securities. After the five year period has elapsed, a proposed business combination must be recommended by the board of trustees and approved by the affirmative vote of at least - 80% of our outstanding voting shares, and - two-thirds of our outstanding voting shares, excluding shares held by the interested shareholder unless, among other conditions, the shareholders receive a minimum price, as defined by Maryland law, 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 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. CONTROL SHARE ACQUISITIONS Maryland law provides that "control shares" acquired in a "control share acquisition" have no voting rights unless approved by a vote of two-thirds of our outstanding voting shares, excluding shares owned by the acquiror or by officers or trustees who are employees of ours. "Control shares" are voting shares which, if aggregated with all other shares previously acquired by the acquiring person, or in respect of which the acquiring person is able to exercise or direct the exercise of voting power, except solely by virtue of a revocable proxy, would entitle the acquiring person to exercise voting power in electing trustees within one of the following ranges of voting power: 11 - one-tenth or more but less than one-third; - one-third or more but less than a majority; or - 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 our 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, we may 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 Maryland law, then, subject to certain conditions and limitations, we may redeem any or all of the control shares, except those for which voting rights have previously been approved, for fair value. Fair value is determined without regard to the absence of voting rights for the control shares and as of the date of the last control share acquisition or of any meeting of shareholders at which the voting rights of such shares were considered and not approved. If voting rights for control shares are approved at a shareholders' meeting, and the acquiror may then vote a majority of the shares entitled to vote, all other shareholders may exercise appraisal rights. The fair value of the shares for purposes of these 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 we are a party to the transaction, nor does it apply to acquisitions approved or exempted by our declaration of trust or bylaws from the Maryland control share acquisition statute. Our bylaws exempt from the Maryland control share acquisition statute any and all acquisitions of our common or preferred shares by any person. The board of trustees has the right, however, to amend or eliminate this exemption at any time in the future. AMENDMENT OF OUR DECLARATION OF TRUST AND BYLAWS Our declaration of trust may be amended by a majority vote of our outstanding voting shares except that provisions relating to the trustees, the ownership limitation, amendments to the declaration of trust and our dissolution and termination may only be amended by a two-thirds vote of our outstanding voting shares. The board of trustees may amend the declaration of trust by a two-thirds vote, without any action by our shareholders, to allow us to qualify, or continue our qualification, as a REIT and, by a majority vote, to increase or decrease the aggregate number of our authorized shares, to establish any series of our shares or to decrease or increase the number of shares in any class that we have authority to issue. Our bylaws may be amended only by the board of trustees. MEETINGS OF SHAREHOLDERS Our declaration of trust provides for annual shareholder meetings to elect trustees. Special shareholder meetings may be called by our chairman, chief executive officer, president or board of trustees and must be called at the written request of persons holding 50% or more of our outstanding voting shares. ADVANCE NOTICE OF NOMINATIONS OF TRUSTEES AND NEW BUSINESS At any annual meeting of shareholders, the nomination of trustees for election and business proposed to be considered may be made only by the board of trustees or by a shareholder who has complied with the advance notice procedures set forth in the bylaws. At any special meeting of shareholders, only the business specified in the notice of meeting may be brought before the meeting. 12 DISSOLUTION Shareholders may elect to dissolve our company by a vote of two-thirds of our outstanding voting shares. INDEMNIFICATION; LIMITATIONS OF TRUSTEES' AND OFFICERS' LIABILITY Our declaration of trust limits the liability of our trustees and officers for money damages, except for liability resulting from - actual receipt of an improper benefit or profit in money, property or services; or - a final judgment based upon a finding of active and deliberate dishonesty by the trustee that was material to the cause of action adjudicated. Our declaration of trust authorizes us, to the maximum extent permitted by Maryland law, to indemnify, and to pay or reimburse reasonable expenses to, any of our present or former shareholders, trustees or officers or any individual who, while a trustee, and at our request, 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. The indemnification covers any claim or liability against the person. Maryland law permits a Maryland REIT to indemnify and advance expenses to its trustees, officers, employees and agents to the same extent Maryland law permits corporations to indemnify and reimburse the expenses of their directors and officers. Maryland law permits a corporation to indemnify its present and former directors and officers against liabilities and reasonable expenses actually incurred by them in any proceeding unless - the act or omission of the director or officer was material to the matter giving rise to the proceeding, and - was committed in bad faith or - was the result of active and deliberate dishonesty; or - in a 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 derivative action. Our bylaws require us, as a condition to advancing expenses, to obtain - a written affirmation by the trustee or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification, and - a written undertaking to repay the amount reimbursed if the standard of conduct was not met. INDEMNIFICATION AGREEMENTS We have indemnification agreements with each of our executive officers and trustees. The indemnification agreements require us to indemnify our executive officers and trustees to the fullest extent permitted by law and to advance all related expenses, subject to reimbursement if it is subsequently determined that indemnification is not permitted. Under the agreements, we must also indemnify and advance all expenses incurred by executive officers and trustees seeking to enforce their rights under the indemnification agreements and may cover executive 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 Maryland law, it provides greater assurance to trustees and executive 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. 13 POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR DECLARATION OF TRUST AND BYLAWS The provisions of our declaration of trust regarding the removal of trustees and the restrictions on the transfer of shares, the advance notice provisions of the bylaws and the business combination provisions of Maryland law, could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for shareholders or that they otherwise may believe to be desirable. Also, if the board of trustees rescinds the provisions of the bylaws electing not to be governed by the control share acquisition statute, that statute could have a similar effect. FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT This section summarizes the federal income tax issues that an investor in our common shares may consider relevant. Because this section is a summary, it does not address all of the tax issues that may be important to you. In addition, except to the extent discussed in "--Taxation of Tax-Exempt Shareholders," and "--Taxation of Non-U.S. Shareholders," below, this section does not address tax issues that may be important to certain types of investors that are subject to special treatment under the federal income tax laws, such as insurance companies, tax-exempt organizations, financial institutions or broker-dealers, and non-U.S. individuals and foreign corporations. The statements in this section are based on current federal income tax laws governing qualification as a REIT. We cannot assure you that new laws, interpretations of law or court decisions, any of which may take effect retroactively, will not cause any statement in this section to be inaccurate. We urge you to consult your own tax advisor regarding the specific tax consequences to you of investing in our common shares and of our election to be taxed as a REIT. Specifically, you should consult your own tax advisor regarding the federal, state, local, foreign, and other tax consequences of an investment and our election, and regarding potential changes in applicable tax laws. TAXATION We elected to be taxed as a REIT under the federal income tax laws commencing with our short taxable year ended December 31, 1998. We believe that we have operated in a manner qualifying us as a REIT since our election to be a REIT and we intend to continue so to operate. This section discusses the laws governing the federal income tax treatment of a REIT and its shareholders. These laws are highly technical and complex. Our qualification as a REIT depends on our ability to meet on a continuing basis qualification tests set forth in the federal tax laws. Those qualification tests involve the percentage of income that we earn from specified sources, the percentages of our assets that fall within specified categories, the diversity of our share ownership, and the percentage of our earnings that we distribute. We describe the REIT qualification tests in more detail below. For a discussion of our tax treatment and the tax treatment of our shareholders if we fail to qualify as a REIT, see "--Failure to Qualify." If we qualify as a REIT, we generally will not be subject to federal income tax on the taxable income that we distribute to our shareholders. The benefit of that tax treatment is that it avoids the "double taxation," or taxation at both the corporate and stockholder levels, that generally results from owning stock in a corporation. However, we will be subject to federal tax in the following circumstances: - We will pay federal income tax on taxable income, including net capital gain, that we do not distribute to our shareholders during, or within a specified time period after, the calendar year in which the income is earned. - We may be subject to the "alternative minimum tax" on any items of tax preference that we do not distribute or allocate to our shareholders. - We will pay income tax at the highest corporate rate on 14 -- net income from the sale or other disposition of property acquired through foreclosure ("foreclosure property") that we hold primarily for sale to customers in the ordinary course of business, and -- other non-qualifying income from foreclosure property. - We will pay a 100% tax on net income from sales or other dispositions of property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business. - If we fail to satisfy the 75% gross income test or the 95% gross income test, as described below under "--Requirements for Qualification--Income Tests," and nonetheless continue to qualify as a REIT because we meet other requirements, we will pay a 100% tax on: -- the gross income attributable to the greater of the amounts by which we fail the 75% and 95% gross income tests, multiplied by -- a fraction intended to reflect our profitability. - If we fail to distribute during a calendar year at least the sum of -- 85% of our REIT ordinary income for such year, -- 95% of our REIT capital gain net income for such year, and -- any undistributed taxable income from prior periods, we will pay a 4% excise tax on the excess of such required distribution over the amount we actually distributed. - We may elect to retain and pay income tax on our net long-term capital gain. - If we acquire any asset from a C corporation, or a corporation that generally is subject to full corporate-level tax, in a merger or other transaction in which we acquire a basis in the asset that is determined by reference either to the C corporation's basis in the asset or to another asset, we will pay tax at the highest regular corporate rate applicable if we recognize gain on the sale or disposition of the asset during the 10-year period after we acquire the asset. The amount of gain on which we will pay tax is the lesser of: -- the amount of gain that we recognize at the time of the sale or disposition, and -- the amount of gain that we would have recognized if we had sold the asset at the time we acquired it. REQUIREMENTS FOR QUALIFICATION A REIT is a corporation, trust or association that meets the following requirements: - It is managed by one or more trustees or directors. - Its beneficial ownership is evidenced by transferable shares, or by transferable certificates of beneficial interest. - It would be taxable as a domestic corporation, but for the REIT provisions of the federal income tax laws. - It is neither a financial institution nor an insurance company subject to special provisions of the federal income tax laws. - At least 100 persons are beneficial owners of its shares or ownership certificates. 15 - Not more than 50% in value of its outstanding shares or ownership certificates is owned, directly or indirectly, by five or fewer individuals, which the federal income tax laws define to include certain entities, during the last half of any taxable year. - It elects 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 Internal Revenue Service that must be met to elect and maintain REIT status. - It uses a calendar year for federal income tax purposes and complies with the record keeping requirements of the federal income tax laws. - It meets certain other qualification tests, described below, regarding the nature of its income and assets. We must meet the first four requirements during our entire taxable year and must meet the fifth requirement 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. If we comply with all the requirements for ascertaining the ownership of our outstanding shares in a taxable year and have no reason to know that we violated the sixth requirement, we will be deemed to have satisfied the sixth requirement for that taxable year. For purposes of determining share ownership under the sixth requirement, an "individual" generally includes a supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes. An "individual," however, generally does not include a trust that is a qualified employee pension or profit sharing trust under the federal income tax laws, and beneficiaries of such a trust will be treated as holding our shares in proportion to their actuarial interests in the trust for purposes of the sixth requirement. We have issued sufficient common shares with sufficient diversity of ownership to satisfy the fifth and sixth requirements. In addition, our declaration of trust restricts the ownership and transfer of our common shares so that we should continue to satisfy the fifth and sixth requirements. A corporation that is a "qualified REIT subsidiary" is not treated as a corporation separate from its parent REIT. All assets, liabilities and items of income, deduction and credit of a "qualified REIT subsidiary" are 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. We have two direct subsidiaries, RAIT General and RAIT Limited, and we own all of their capital stock. RAIT General is the sole general partner of RAIT Partnership and RAIT Limited is the sole limited partner of RAIT Partnership. RAIT Partnership owns all of the capital stock in 16 other corporations involved in the ownership of certain of our portfolio assets. Thus, RAIT General, RAIT Limited and the other 16 subsidiaries will be ignored as separate entities, and all of their assets, liabilities, and items of income, deduction, and credit will be treated as our assets, liabilities and items of income, deduction and credit. An unincorporated entity that is beneficially owned by a single parent entity is not treated as an entity separate from its parent. We own all of RAIT General and RAIT Limited which, in turn, own all of RAIT Partnership, the entity that holds all of our investment assets. RAIT Partnership beneficially owns all of the membership interests in four limited liability companies and five limited partnerships involved in the ownership of certain of our portfolio assets. These limited liability companies are treated as partnerships for federal income tax purposes. Thus, RAIT Partnership and the limited liability companies and limited partnerships it owns will not be treated as entities separate from us for so long as RAIT Partnership's only partners are RAIT General and RAIT Limited, we own all of their capital stock, and RAIT Partnership beneficially owns all of the membership interests and partnership interests of these limited liability companies and limited partnerships. In the case of a REIT that is a partner in a partnership that has other partners, the REIT is treated as owning its proportionate share of the assets of the partnership and as earning its allocable share of the gross income of the partnership for purposes of the applicable REIT qualification tests. Thus, when RAIT Partnership admits a partner other than us, or a qualified REIT subsidiary of us, our proportionate share of the assets, liabilities and items of income of RAIT Partnership, and those of any other partnership, joint venture or limited liability company that is treated as a partnership for federal income tax purposes in which we have acquired or will acquire an interest, directly or indirectly (a "subsidiary partnership") will be treated as our assets and gross income for purposes of applying the various REIT qualification requirements. 16 A REIT is allowed to own up to 100% of the stock of a "taxable REIT subsidiary," or TRS. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A TRS will pay income tax at regular corporate rates on any income that it earns. In addition, the new rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. Further, the rules impose a 100% excise tax on transactions between a TRS and its parent REIT or the REIT's tenants that are not conducted on an arm's-length basis. We do not currently have any TRSs, but may form one or more TRSs in the future. INCOME TESTS We must satisfy two gross income tests annually to maintain qualification as a REIT. First, at least 75% of our gross income for each taxable year must consist of defined types of income that we derive, directly or indirectly, from investments relating to real property or mortgages on real property or temporary investment income. Qualifying income for purposes of that 75% gross income test generally includes: - rents from real property, - interest on debt secured by mortgages on real property or on interests in real property, and - dividends or other distributions on and gain from the sale of shares in other REITs. Second, in general, at least 95% of our gross income for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test, dividends, other types of interest, gain from the sale or disposition of stock or securities, income from certain interest rate hedging contracts, or any combination of the foregoing. Gross income from any origination fees we obtain or from our sale of property that we hold primarily for sale to customers in the ordinary course of business is excluded from both income tests. The following paragraphs discuss the specific application of the gross income tests to us. Where the principal amount of mortgages on a property exceeds the property's fair market value, the Internal Revenue Service may contend that the lender is actually the owner of the property for tax purposes. Since we have acquired and may continue to acquire loans whose principal amount exceeds the fair market value of the underlying property, a recharacterization may occur although the existence of forbearance or other workout arrangements would make it less likely. If we are found to be the owner of real property rather than a mortgagee, our income would consist of the rent from the property rather than interest on our loan. We 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 our qualification under the asset tests, income tests or distribution requirements, except as discussed below. The term "interest," generally does not include any amount that depends in whole or in part on the income or profits of any person. However, an amount generally will not be excluded from the term "interest" solely because it is based on a fixed percentage or percentages of receipts or sales. In addition, an amount generally will not be excluded from the term "interest" solely because it is based on the income or profits of a debtor if substantially all of the debtor's gross income from the property qualifies as rents from real property if received by a REIT. Furthermore, interest from an appreciation interest based on the sale price of a property will be treated as gain from the sale of the property, which generally is qualifying income for purposes of the 75% and 95% gross income tests. Interest, original issue discount and market discount income from our loans generally will be qualifying interest income for purposes of both the 75% and 95% gross income tests. However, if the highest principal amount of a loan outstanding during a taxable year exceeds the value of the property securing the loan on the date we originated or acquired the loan, the portion of the income from the loan derived from the excess principal amount will be qualifying income for purposes of the 95% gross income test, but not for purposes of the 75% gross income test. In addition, if interest income from a loan is based in part on the borrower's profits or net income, it generally will be disqualified for purposes of both the 75% and 95% gross income tests. 17 We have purchased and originated loans that are only indirectly secured by real property and may do so in the future. If a senior loan prevents us from recording a mortgage against the property, the junior note held by us 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 arrangement. Interest as well as any original issue discount and market discount income derived from such loans should be qualifying interest income for purposes of both the 75% and 95% gross income tests. It is possible, however, that the Internal Revenue Service would conclude that interest on these loans does not constitute interest from a loan "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. In that event, we believe that the amount of our income from these loans is currently a low enough percentage of our gross income so that compliance with the 75% gross income test would nevertheless be maintained. In the case of wraparound loans, there is authority for the position that only the interest attributable to the amounts advanced by the REIT or a person from whom it acquired the loan will constitute income to the REIT. Under this interpretation, amounts we receive from the borrower that are used to pay debt service on the underlying senior debt would be treated as having been paid directly by the borrower to the senior lender and thus excluded from our gross income. We believe that we have satisfied the income tests regardless of whether all of the interest on our wraparound loans is treated as income or only the interest attributable to the amounts advanced by us is treated as income. We may originate or acquire mortgage loans that have appreciation interests. We may be required to recognize income from an appreciation interest over the term of the related loan using a method that generally will result in our recognizing at least some taxable income in advance of the related cash flow. A REIT will incur a 100% tax on the net income derived from any sale or other disposition of property, other than foreclosure property, that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We believe that none of our assets is held for sale to customers and that a sale of any of our assets would not be in the ordinary course of our business. Whether a REIT holds an asset "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, we will attempt to comply with the terms of safe-harbor provisions in the federal income tax laws prescribing when an asset sale will not be characterized as a prohibited transaction. We cannot assure you, however, that we can comply with the safe-harbor provisions or that we will avoid owning property that may be characterized as property that we hold "primarily for sale to customers in the ordinary course of a trade or business." We will be subject to tax at the maximum corporate rate on any income from foreclosure property, other than income that would be qualifying income for purposes of the 75% gross income test, less expenses directly connected with the production of such income. However, gross income from a foreclosure property will qualify under the 75% and 95% gross income tests. "Foreclosure property" is any real property, including interests in real property, and any personal property incident to such real property: - that is acquired by a REIT as the result of the 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 that such property secured; - for which the related loan was acquired by the REIT at a time when the default was not imminent or anticipated; and - for which such REIT makes a proper election to treat such property as foreclosure property. We have no foreclosure property as of the date of this prospectus. However, a REIT will not be considered to have foreclosed on a property where the REIT takes control of the property as a mortgagee-in-possession and cannot receive any profit or sustain any loss except as a creditor of the mortgagor. Property generally ceases to be foreclosure property with respect to a REIT at the end of the third taxable year following the taxable year in which the REIT acquired such property, or longer if an extension is granted by the 18 Secretary of the Treasury. The foregoing grace period is terminated and foreclosure property ceases to be foreclosure property on the first day: - on which a lease is entered into with respect to the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day that will give rise to income that does not qualify for purposes of the 75% gross income test; - on which any construction takes place on the property, other than completion of a building or other improvement, where more than 10% of the construction of such building or other improvement was completed before default became imminent; or - which is more than 90 days after the day on which such property was acquired by the REIT and the property is used in a trade or business which is conducted by the REIT, other than through an independent contractor from whom the REIT itself does not derive or receive any income. Rent that we receive from real property that we own and lease to tenants will qualify as "rents from real property," which is qualifying income for purposes of the 75% and 95% gross income tests, only if we meet each of the following conditions: - The rent must not be based, in whole or in part, on the income or profits of any person, but may be based on a fixed percentage or percentages of receipts or sales. - Neither we nor a direct or indirect owner of 10% or more of our shares may own, actually or constructively, 10% or more of a tenant from whom we receive rent, other than a TRS. Rent we receive from a TRS will qualify as "rents from real property" if at least 90% of the leased space of the property is rented to persons other than TRSs and 10%-owned tenants and the amount of rent paid by the TRS is substantially comparable to rent paid by the other tenants of the property for comparable space. - All of the rent received under a lease of real property will not qualify as "rents from real property" unless the rent attributable to the personal property leased in connection with such lease is no more than 15% of the total rent received under the lease. The allocation of rent between real and personal property is based on the relative fair market values of the real and personal property. - We generally must not operate or manage our real property or furnish or render services to our tenants other than through an independent contractor who is adequately compensated and from whom we do not derive revenue. However, we need not provide services through an independent contractor, but instead may provide services directly, if the services are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not considered to be provided for the tenants' convenience. In addition, we may provide a minimal amount of "non-customary" services to the tenants of a property, other than through an independent contractor, as long as our income from the services does not exceed 1% of our income from the related property. Further, a TRS can provide customary and noncustomary services to our tenants without tainting our rental income. We believe that the rents we receive meet all of these conditions. If we fail to satisfy one or both of the gross income tests for any taxable year, we nevertheless may qualify as a REIT for such year if we qualify for relief under certain provisions of the federal income tax laws. Those relief provisions generally will be available if: - our failure to meet such tests is due to reasonable cause and not due to willful neglect, - we attach a schedule of the sources of our income to our tax return, and - any incorrect information on the schedule was not due to fraud with intent to evade tax. 19 We cannot predict, however, whether in all circumstances we would qualify for the relief provisions. In addition, as discussed above in "--Taxation" even if the relief provisions apply, we would incur a 100% tax on the gross income attributable to the greater of the amounts by which we fail the 75% and 95% gross income tests, multiplied by a fraction intended to reflect our profitability. ASSET TESTS To maintain our qualification as a REIT, we also must satisfy two asset tests at the end of each quarter of each taxable year. First, at least 75% of the value of our total assets must consist of: - cash or cash items, including certain receivables; - government securities; - interests in real property, including leaseholds and options to acquire real property and leaseholds; - interests in mortgages on real property; - stock in other REITs; and - investments in stock or debt instruments during the one-year period following our receipt of new capital that we raise through equity offerings or offerings of debt with at least a five-year term. Under the second asset test, except for securities in the 75% asset class, securities in a TRS or qualified REIT subsidiary, and certain partnership interests and debt obligations: - not more than 5% of the value of our total assets may be represented by the securities of any one issuer, - we may not own securities that possess more than 10% of the total voting power of outstanding voting securities of any one issuer, and - we may not own securities that have a value of more than 10% of the total value of the outstanding securities of any one issuer (the "10% value test"). In addition, not more than 20% of the value of our total assets may be represented by securities of one or more TRSs. Under a special transaction provision, the 10% value test described above will not apply to securities we held on July 12, 1999, provided that the issuer of those securities does not engage in a substantial new line of business or acquire substantial new assets after that date, and provided that we do not acquire additional securities of the issuer after that date. Existing taxable subsidiaries can be converted into TRSs on a tax-free basis at any time before January 1, 2004. If 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 be a qualifying asset. However, if the outstanding principal balance of a mortgage loan exceeds the fair market value of the real property securing the loan, the excess amount may not be a qualifying asset, 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 partnerships or limited liability companies that are taxed as partnerships 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. We have purchased and originated loans that are only indirectly secured by real estate, and we may continue to do so in the future. We expect that any loans, real properties and temporary investments that we acquire 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 20 of our investment that is in excess of the principal amount of the underlying loans will be considered our asset. We will monitor the status of our acquired assets for purposes of the various asset tests and will manage our portfolio in order to comply at all times with such tests. If we fail to satisfy the asset tests at the end of a calendar quarter, we would not lose our REIT status if: - we satisfied the asset tests at the close of the preceding calendar quarter and - the discrepancy between the value of our assets and the asset test requirements arose from changes in the market values of our assets and was not wholly or partly caused by the acquisition of one or more non-qualifying assets. If we did not satisfy the condition described in the first item, above, we still may avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose. As described above, we may own up to 100% of the stock of TRSs. TRSs can perform activities unrelated to our tenants, such as third-party management, development, and other independent business activities, as well as provide services to our tenants. We and a taxable subsidiary must elect for the subsidiary to be treated as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. The deductibility of interest paid or accrued by a TRS to us is limited to assure that the TRS is subject to an appropriate level of corporate taxation. Further, there is a 100% excise tax on transactions between a TRS and us or our tenants that are not conducted on an arm's-length basis. We may not own more than 10% of the voting power or value of the stock of a taxable subsidiary that is not treated as a TRS. Overall, no more than 20% of our assets can consist of securities of TRSs. We do not currently have any TRSs, but may form one or more TRSs in the future. DISTRIBUTION REQUIREMENTS Each taxable year, we must distribute dividends, other than capital gain dividends and deemed distributions of retained capital gain, to our shareholders in an aggregate amount at least equal to: - the sum of -- 90% of our "REIT taxable income," computed without regard to the dividends paid deduction and our net capital gain or loss, and -- 90% of our after-tax net income, if any, from foreclosure property; minus - the sum of certain items of non-cash income. We must pay such distributions in the taxable year to which they relate, or in the following taxable year if we declare the distribution before we timely file our federal income tax return for the year and pay the distribution on or before the first regular dividend payment date after such declaration. Although the distribution requirement was reduced from 95% to 90% for taxable years beginning after December 31, 2000, we intend to continue to attempt to distribute 100% of our REIT taxable income. We will pay federal income tax on taxable income, including net capital gain, that we do not distribute to shareholders. Furthermore, if we fail to distribute during a calendar year, or by the end of January following such calendar year in the case of distributions with declaration and record dates falling in the last three months of the calendar year, at least the sum of: - 85% of our REIT ordinary income for such year, - 95% of our REIT capital gain income for such year, and - any undistributed taxable income from prior periods, 21 we will incur a 4% nondeductible excise tax on the excess of such required distribution over the amounts we actually distribute. We may elect to retain and pay income tax on the net long-term capital gain we receive in a taxable year. See "--Taxation of Taxable U.S. Shareholders." If we so elect, we will be treated as having distributed any such retained amount for purposes of the 4% excise tax described above. We have made, and we intend to continue to make, timely distributions sufficient to satisfy the annual distribution requirements. It is possible that, from time to time, we may experience timing differences between: - the actual receipt of income and actual payment of deductible expenses, and - the inclusion of that income and deduction of those expenses in arriving at our REIT taxable income. For example, we will recognize taxable income in excess of our cash receipts when original issue discount accrues with respect to a loan. Original issue discount generally will accrue taking into account projected prepayments, such as those arising from appreciation interests, but not allowing credit losses to be reflected until they are actually incurred. Also, we may recognize as income taxable market discount income from the proceeds of the sale of, or principal payments from, loans that are "market discount bonds," although such proceeds often will be used to make non-deductible principal payments on related borrowings. "Market discount bonds" are obligations with a stated redemption price at maturity that is greater than our tax basis in such obligations. We also may recognize income in excess of cash receipts if we make wraparound loans where the payments of nondeductible principal we must make on the underlying loans exceed the amount of nontaxable principal we receive 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. In addition, we may recognize net capital gain attributable to the sale of depreciated property that exceeds our cash receipts from the sale. We also may recognize taxable income without receiving a corresponding cash distribution if we foreclose on or make a "significant modification" 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 our basis in the original loan. Finally, we cannot deduct from our REIT taxable income capital losses recognized by us. As a result of these considerations, we may have less cash than is necessary to distribute all of our taxable income and thereby avoid corporate income tax and the excise tax imposed on certain undistributed income. In such a situation, we may need to borrow funds or issue preferred stock or additional common shares. Under certain circumstances, we may be able to correct a failure to meet the distribution requirement for a year by paying "deficiency dividends" to our shareholders in a later year. We may include such deficiency dividends in our deduction for dividends paid for the earlier year. Although we may be able to avoid income tax on amounts distributed as deficiency dividends, we will be required to pay interest to the Internal Revenue Service based upon the amount of any deduction we take for deficiency dividends. RECORDKEEPING REQUIREMENTS We must maintain certain records in order to qualify as a REIT. In addition, to avoid a monetary penalty, we must request on an annual basis information from our shareholders designed to disclose the actual ownership of our outstanding shares. We have complied, and we intend to continue to comply, with such requirements. FAILURE TO QUALIFY If we fail to qualify as a REIT in any taxable year, and no relief provision applies, we will be subject to federal income tax and any applicable alternative minimum tax on our taxable income at regular corporate rates. In calculating our taxable income in a year in which we failed to qualify as a REIT, we would not be able to deduct amounts paid out to shareholders. In fact, we would not be required to distribute any amounts to shareholders in such year. In such event, to the extent of our current and accumulated earnings and profits, all distributions to shareholders would be taxable as ordinary income. Subject to certain limitations of the federal income tax laws, corporate shareholders might be eligible for the dividends received deduction. Unless we qualified for relief under specific statutory provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. We cannot predict whether in all circumstances we would qualify for such statutory relief. 22 TAXATION OF TAXABLE U.S. SHAREHOLDERS As long as we qualify as a REIT, a taxable "U.S. shareholder" must take into account as ordinary income distributions made out of our current or accumulated earnings and profits that we do not designate as capital gain dividends or retained long-term capital gain. A U.S. shareholder will not qualify for the dividends received deduction generally available to corporations. The term "U.S. shareholder" means a holder of common shares that for United States federal income tax purposes is: - a citizen or resident of the United States; - a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any political subdivision thereof; - 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 - any trust with respect to which -- a United States court is able to exercise primary supervision over its administration, and -- one or more United States persons have the authority to control all of its substantial decisions. A U.S. shareholder generally will recognize distributions that we designate as capital gain dividends as long-term capital gain without regard to the period for which the U.S. shareholder has held our common shares. A corporate U.S. shareholder, however, may be required to treat up to 20% of certain capital gain dividends as ordinary income. We may elect to retain and pay income tax on the net long-term capital gain that we receive in a taxable year. In that case, a U.S. shareholder would be taxed on his or her proportionate share of our undistributed long-term capital gain. The U.S. shareholder would receive a credit or refund for his or her proportionate share of the tax we paid. The U.S. shareholder would increase his or her basis in our shares by the amount of his or her proportionate share of our undistributed long-term capital gain, minus his or her share of the tax we paid. A U.S. shareholder will not incur tax on a distribution in excess of our current and accumulated earnings and profits if such distribution does not exceed the adjusted basis of the U.S. shareholder's common shares. Instead, such distribution will reduce the adjusted basis of such common shares. A U.S. shareholder will recognize a distribution in excess of both our current and accumulated earnings and profits and the U.S. shareholder's adjusted basis in his or her common shares as long-term capital gain, or short-term capital gain if the common shares have been held for one year or less, assuming the common shares are a capital asset in the hands of the U.S. shareholder. In addition, if we declare a distribution in October, November, or December of any year that is payable to a U.S. shareholder of record on a specified date in any of these months, the distribution will be treated as both paid by us and received by the U.S. shareholder on December 31 of such year, provided that we actually pay the distribution during January of the following calendar year. Shareholders may not include in their individual income tax returns any of our net operating losses or capital losses. Instead, these losses are generally carried over by us for potential offset against our future income. Taxable distributions from us 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 the shareholder is a limited partner, against such income. In addition, taxable distributions from us and gain from the disposition of common shares generally will be treated as investment income for purposes of the investment interest limitations. We will notify shareholders after the close of our taxable year as to the portions of the distributions attributable to that year that constitute ordinary income, return of capital, and capital gain. 23 We may recognize taxable income in excess of our economic income, known as "phantom income," in the first years we hold certain investments, and experience an offsetting excess of economic income over our taxable income in later years. As a result, shareholders at times may pay federal income tax on distributions that economically represent a return of capital, rather than a dividend. These 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. Taking into account the time value of money, this acceleration of federal income tax liabilities may reduce a shareholder's after-tax return on his or her investment in us to an amount less than the after-tax return on an investment with an identical before-tax rate of return that did not generate phantom income. For example, if an investor with a 30% tax rate purchases a taxable bond with an annual interest rate of 10% on its face value, the investor's before-tax return on the investment would be 10% and the investor's after-tax return would be 7%. However, if the same investor purchased our shares at a time when the before-tax rate of return was 10%, the investor's after-tax rate of return on the shares might be somewhat less than 7% as a result of our phantom income. In general, as the ratio of our phantom income to our total income increases, the after-tax rate of return received by a taxable shareholder will decrease. We will consider the potential effects of phantom income on our taxable shareholders in managing our investments. TAXATION OF U.S. SHAREHOLDERS ON THE DISPOSITION OF SHARES In general, a U.S. shareholder who is not a dealer in securities must treat any gain or loss realized upon a taxable disposition of his or her common shares as long-term capital gain or loss if the U.S. shareholder has held the common shares for more than one year. However, a U.S. shareholder must treat any loss upon a sale or exchange of common shares held by such shareholder for six months or less as a long-term capital loss to the extent of capital gain dividends and other distributions from us that such U.S. shareholder treats as long-term capital gain. All or a portion of any loss that a U.S. shareholder realizes upon a taxable disposition of the common shares may be disallowed if the U.S. shareholder purchases other common shares within 30 days before or after the disposition. CAPITAL GAINS AND LOSSES The tax rate differential between capital gain and ordinary income for non-corporate taxpayers may be significant. A taxpayer generally must hold a capital asset for more than one year for gain or loss derived from its sale or exchange to be treated as long-term capital gain or loss. Under the Economic Growth and Tax Relief Reconciliation Act of 2001(the "2001 Act"), the maximum marginal individual income tax rate is 38.6% for all of 2002 and 2003, 37.6% for 2004 and 2005, and 35% for 2006 to 2011. The maximum tax rate on long-term capital gain applicable to non-corporate taxpayers, which was not affected by the 2001 Act, is 20% for sales and exchanges of assets held for more than one year. The maximum tax rate on long-term capital gain from the sale or exchange of "section 1250 property," or depreciable real property, is 25% to the extent that such gain would have been treated as ordinary income if the property were "section 1245 property." With respect to distributions that we designate as capital gain dividends and any retained capital gain that we are deemed to distribute, we generally may designate whether such a distribution is taxable to our non-corporate shareholders at a 20% or 25% rate. In addition, the characterization of income as capital gain or ordinary income may affect the deductibility of capital losses. A non-corporate taxpayer may deduct capital losses not offset by capital gains against its ordinary income only up to a maximum annual amount of $3,000. A non-corporate taxpayer may carry forward unused capital losses indefinitely. A corporate taxpayer must pay tax on its net capital gain 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 We will report to our shareholders and to the Internal Revenue Service the amount of distributions we pay during each calendar year, and the amount of tax we withhold, if any. Under the backup withholding rules, a shareholder may be subject to backup withholding at the rate of 27.5% with respect to distributions unless the holder: - is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or - 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. 24 A shareholder who does not provide us with his or her correct taxpayer identification number also may be subject to penalties imposed by the Internal Revenue Service. Any amount paid as backup withholding will be creditable against the shareholder's income tax liability. In addition, we may be required to withhold a portion of capital gain distributions to any shareholders who fail to certify their non-foreign status to us. For a discussion of the backup withholding rules as applied to non-U.S. shareholders, see "--Taxation of Non-U.S. Shareholders." TAXATION OF TAX-EXEMPT SHAREHOLDERS Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income. While many investments in real estate generate unrelated business taxable income, the Internal Revenue Service has issued a published ruling that dividend distributions from a REIT to an exempt employee pension trust do not constitute unrelated business taxable income, so long as the exempt employee pension trust does not otherwise use the shares of the REIT in an unrelated trade or business of the pension trust. Based on that ruling, amounts that we distribute to tax-exempt shareholders generally should not constitute unrelated business taxable income. However, if a tax-exempt shareholder were to finance its acquisition of our common shares with debt, a portion of the income that it receives from us would constitute unrelated business taxable income 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 special provisions of the federal income tax laws are subject to different unrelated business taxable income rules, which generally will require them to characterize distributions that they receive from us as unrelated business taxable income. Finally, in certain circumstances, a qualified employee pension or profit sharing trust that owns more than 10% of our shares must treat a percentage of the dividends that it receives from us as unrelated business taxable income. Such percentage is equal to the gross income we derive from an unrelated trade or business, determined as if we were a pension trust, divided by our total gross income for the year in which we pay the dividends. That rule applies to a pension trust holding more than 10% of our shares only if: - the percentage of our dividends that the tax-exempt trust must treat as unrelated business taxable income is at least 5%; - we qualify as a REIT by reason of the modification of the rule requiring that no more than 50% of our shares be owned by five or fewer individuals that allows the beneficiaries of the pension trust to be treated as holding our shares in proportion to their actuarial interests in the pension trust; and either: -- one pension trust owns more than 25% of the value of our shares or -- a group of pension trusts individually holding more than 10% of the value of our shares collectively owns more than 50% of the value of our shares. TAXATION OF NON-U.S. SHAREHOLDERS The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships, and other foreign shareholders are complex. This section is only a summary of such rules. We urge non-U.S. shareholders to consult their own tax advisors to determine the impact of federal, state and local income tax laws on ownership of our common shares, including any reporting requirements. A non-U.S. shareholder that receives a distribution that is not attributable to gain from our sale or exchange of U.S. real property interests, as defined below, and that we do not designate as a capital gain dividend or retained capital gain will recognize ordinary income to the extent that we pay such distribution out of our current or accumulated earnings and profits. A withholding tax equal to 30% of the gross amount of the distribution ordinarily will apply to such distribution unless an applicable tax treaty reduces or eliminates the tax. However, if a distribution is treated as effectively connected with the non-U.S. shareholder's conduct of a U.S. trade or business, the non-U.S. shareholder generally will be subject to federal income tax on the distribution 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 25 case of a non-U.S. shareholder that is a non-U.S. corporation. We plan to withhold U.S. income tax at the rate of 30% on the gross amount of any such distribution paid to a non-U.S. shareholder unless either: - a lower treaty rate applies and the non-U.S. shareholder files the required form evidencing eligibility for that reduced rate with us; or - the non-U.S. shareholder files an IRS Form W-8ECI with us claiming that the distribution is effectively connected income. A non-U.S. shareholder will not incur tax on a distribution in excess of our current and accumulated earnings and profits if such distribution does not exceed the adjusted basis of our common shares. Instead, such a distribution will reduce the adjusted basis of those common shares. A non-U.S. shareholder will be subject to tax on a distribution that exceeds both our current and accumulated earnings and profits and the adjusted basis of our common shares, if the non-U.S. shareholder otherwise would be subject to tax on gain from the sale or disposition of our common shares, as described below. Because we generally cannot determine at the time we make a distribution whether or not the distribution will exceed our current and accumulated earnings and profits, we normally will withhold tax on the entire amount of any distribution at the same rate as we would withhold on a dividend. However, a non-U.S. shareholder may obtain a refund of amounts that we withhold if we later determine that a distribution in fact exceeded our current and accumulated earnings and profits. We must withhold 10% of any distribution that exceeds our current and accumulated earnings and profits. Consequently, although we intend to withhold at a rate of 30% on the entire amount of any distribution, to the extent that we do not do so, we will withhold at a rate of 10% on any portion of a distribution not subject to withholding at a rate of 30%. For any year in which we qualify as a REIT, a non-U.S. shareholder will incur tax on distributions that are attributable to gain from the sale or exchange of "U.S. real property interests" under special provisions of the federal income tax laws known as "FIRPTA." The term "U.S. real property interests" includes certain interests in real property and shares in corporations at least 50% of whose assets consist of interests in real property. Under those rules, a non-U.S. shareholder is taxed on distributions attributable to gain from sales of U.S. real property interests as if such gain were effectively connected with a U.S. business of the non-U.S. shareholder. A non-U.S. shareholder thus would be taxed on such a distribution 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 a nonresident alien individual. A non-U.S. corporate shareholder not entitled to treaty relief or exemption also may be subject to the 30% branch profits tax on such a distribution. We must withhold 35% of any distribution that we could designate as a capital gain dividend. A non-U.S. shareholder may receive a credit against its tax liability for the amount we withhold. A non-U.S. shareholder generally will not incur tax under FIRPTA as long as at all times non-U.S. persons hold, directly or indirectly, less than 50% in value of our shares. We cannot assure you that this test will be met. However, a non-U.S. shareholder that owned, actually or constructively, 5% or less of the common shares at all times during a specified testing period will not incur tax under FIRPTA if the common shares are "regularly traded" on an established securities market. If the gain on the sale of the shares were taxed under FIRPTA, a non-U.S. shareholder would be taxed in the same manner 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. Furthermore, a non-U.S. shareholder will incur tax on gain not subject to FIRPTA if: - the gain 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 U.S. shareholders with respect to such gain, or - the non-U.S. shareholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a "tax home" in the United States, in which case the non-U.S. shareholder will incur a 30% tax on his capital gains. 26 STATE AND LOCAL TAXES We and/or our shareholders may be subject to taxation by various states and localities, including those in which we or such shareholders transact business, own property or reside. The state and local tax treatment may differ from the federal income tax treatment described above. Consequently, shareholders should consult their own tax advisors regarding the effect of state and local tax laws upon an investment in our common shares. 27 SELLING SHAREHOLDERS The selling shareholders listed below acquired or may acquire the shares listed in the column "Common Shares Registered Under This Prospectus" upon the exercise of options granted under the 1997 Stock Option Plan. The table shows, as of October 24, 2002, certain information regarding the selling shareholders' ownership of our common shares. We encourage our employees and trustees to invest in our company through the exercise of their options. We believe that this prospectus and the registration statement of which it is a part, which permits resales of shares acquired by our employees and trustees through option exercises, encourages these exercises by providing liquidity for their investment. Accordingly, while the number of shares set forth in the column "Common Shares To Be Owned After The Offering" assumes that all common shares acquired by a selling shareholder through exercise of his or her options will be offered or sold, the selling shareholders are not required to sell any shares. Employees and trustees, their family members, trusts for their benefit, or entities that they own, that acquire common shares under the 1997 Stock Option Plan may be added to the selling shareholder list below by a prospectus supplement filed with the SEC. The number of common shares to be sold by any selling shareholder under this prospectus also may be increased or decreased by a prospectus supplement. Although a person's name is included in the table below, neither that person nor we are making an admission that the named person is our "affiliate." Betsy Z. Cohen has served as our Chairman, Chief Executive Officer and one of our trustees since our founding in August 1997. S. Peter Albert has served as one of our trustees since May 2000. Edward S. Brown has served as one of our trustees since June 1999. Jonathan Z. Cohen has served as our Secretary since February 1998 and as one of our trustees since September 1997. Arthur Makadon has served as one of our trustees since July 2002. Joel R. Mesznik has served as one of our trustees since our founding in August 1997. Daniel Promislo has served as one of our trustees since our founding in August 1997. Scott F. Schaeffer was elected in September 2000 to serve as our President and Chief Operating Officer. Jay R. Cohen was elected in October 1997 to serve as one of our Executive Vice Presidents. Ellen J. DiStefano was elected in October 1997 to serve as our Chief Financial Officer and also has served as one of our Executive Vice Presidents since December 1998. Kenneth Frappier was elected in April 2002 to serve as our Senior Vice President-Portfolio and Risk Management.
Amount and Nature Common Shares Common Shares Percentage of Class to be Of Shares Owned Registered Under To be Owned After Beneficially Owned Name Prior to Offering(1) This Prospectus (1) The Offering (2) After Offering(3) - ---- -------------------- ------------------- ---------------- ----------------- Betsy Z. Cohen 471,185(4) 321,526 149,659 * S. Peter Albert 22,000 12,000 10,000 * Edward S. Brown 13,000 13,000 0 * Jonathan Z. Cohen 33,606(5) 7,913 25,693 * Arthur Makadon 11,000(6) 11,000 0 * Joel R. Mesznik 17,500(7) 14,500 3,000 * Daniel Promislo 15,500 14,500 1,000 * Scott F. Schaeffer 92,572(8) 80,000 12,572 * Jay R. Cohen 101,416(9) 65,271 36,145 * Ellen J. DiStefano 73,549(10) 66,682 6,867 * Kenneth R. Frappier 27,370(11) 27,000 370 *
- ---------------------- * Less than 1%. (1) Includes all common shares acquired and not previously sold by the relevant selling shareholder pursuant to the exercise of options granted under the 1997 Stock Option Plan and all common shares which the relevant selling shareholder has the right to acquire through the exercise of options granted under the 1997 Stock Option Plan, whether or not such right has yet become exercisable or will become exercisable within 60 days 28 after the date hereof. (2) Assumes all common shares registered pursuant hereto will be sold, although there can be no assurance that any of the selling shareholders will offer for sale or sell any or all of the common shares offered by them pursuant to this prospectus. Also assumes that no other common shares are acquired or transferred by the relevant selling shareholder. (3) Based on 18,180,611 common shares outstanding as of October 24, 2002. Common shares issuable upon the exercise of options exercisable by the relevant selling shareholder within 60 days are deemed to be outstanding with respect to the calculation of that selling shareholder's percent of class. (4) Includes 96,626 common shares directly held by Mrs. Cohen; 5,022 common shares held in our Cash and Deferred Savings Plan (the "401(k) Plan") for the benefit of Mrs. Cohen; 40,446 common shares held by an individual retirement account ("IRA") for the benefit of Mrs. Cohen; 66,801 common shares held as trustee of a charitable foundation; 37,290 common shares held in an IRA account for the benefit of Mrs. Cohen's spouse, Edward E. Cohen and 225,000 common shares issuable upon exercise of options granted under the 1997 Stock Option Plan (the options exercisable for all these 225,000 common shares are vested). Excludes 57,432 common shares to be deposited in the RAIT Investment Trust Pension Plan established in connection with the supplemental executive retirement plan established pursuant to Mrs. Cohen's employment agreement with us (no rights to which are vested as of the date of this prospectus or will vest within sixty days). Excludes common shares held by Resource America, of which Edward E. Cohen is Chairman, Chief Executive Officer and President. (5) Includes 32,440 common shares held directly by Mr. Cohen, 666 common shares held in a 401(k) Plan account for his benefit and 500 common shares issuable upon exercise of options granted under the 1997 Stock Option Plan (the options exercisable for all these 500 common shares are vested). Excludes common shares held by Resource America of which Mr. Cohen is Chief Operating Officer. (6) Including 11,000 common shares issuable upon exercise of options granted under the 1997 Stock Option Plan (of the options exercisable for these 11,000 common shares, 1,000 are subject to early exercise rights as of the date of this prospectus and none will vest within 60 days). (7) Includes 7,000 common shares held directly by Mr. Mesznik and 10,500 Common Shares issuable upon exercise of options granted under the 1997 Stock Option Plan (the options exercisable for all these 10,500 common shares are vested. (8) Includes 50,000 common shares directly held by Mr. Schaeffer, 2,072 common shares held in a 401(k) Plan account for the benefit of Mr. Schaeffer, 3,000 common shares held by an IRA for the benefit of Mr. Schaeffer and 37,500 common shares issuable upon exercise of options granted under the 1997 Stock Option Plan (of the options exercisable for these 37,500 commons shares, none are vested as of the date of this prospectus and 18,750 will vest within sixty days). (9) Includes 4,208 common shares held in an IRA account for the benefit of Mr. Cohen; 32,271 common shares held jointly by Mr. Cohen and his spouse; 8,341 common shares held in an IRA account for the benefit of Mr. Cohen's spouse; 6,596 common shares held in Mr. Cohen's 401(k) Plan account; and 50,000 common shares issuable upon exercise of options granted under the 1997 Stock Option Plan (the options exercisable for all these 50,000 common shares are vested). (10) Includes 6,000 common shares directly held by Mrs. DiStefano, 1,002 common shares held by Mrs. DiStefano jointly with her spouse; 1,000 common shares held in an IRA account for the benefit of Mrs. DiStefano, 1,000 common shares held in an IRA account for the benefit of Mrs. DiStefano's spouse, 64 common shares held in an Education IRA for the benefit of Mrs. DiStefano's children, 3,801 common shares held in a 401(k) Plan account for the benefit of Mrs. DiStefano; and 60,682 common shares issuable upon exercise of options granted under the 1997 Stock Option Plan (the options exercisable for all these 60,682 common shares are vested). 29 (11) Includes 370 common shares held in a 401(k) Plan account for the benefit of Mr. Frappier, 12,000 common shares directly held by Mr. Frappier and 15,000 common shares issuable upon exercise of options granted under the 1997 Stock Option Plan (of the options exercisable for these 15,000 common shares, 2,500 are subject to early exercise rights as of the date of this prospectus and none will vest within sixty days). PLAN OF DISTRIBUTION The selling shareholders may sell the common shares for their own accounts from time to time, in one or more transactions on the New York Stock Exchange or otherwise, in special offerings, secondary distributions pursuant to and in accordance with applicable rules and regulations of the SEC and the New York Stock Exchange, in negotiated transactions or otherwise, at market prices prevailing at the time of the sale, at prices related to such market prices or at negotiated prices. The selling shareholders may effect such transactions by selling shares to or through broker-dealers, and such broker-dealers may receive compensation in the form of underwriting discounts, concessions or commissions from the selling shareholders and/or purchasers of the common shares for whom they may act as agent, which broker-dealer compensation may be in excess of customary commissions. We have no basis for estimating either the number of common shares, if any, that will ultimately be sold by the selling shareholders or the prices at which the selling shareholders may sell shares. All selling and other expenses incurred by individual selling shareholders will be borne by those selling shareholders. USE OF PROCEEDS We will not realize any proceeds from the sale of the common shares which may be sold pursuant to this prospectus for the respective accounts of the selling shareholders. We, however, may derive proceeds upon the exercise of the options granted to selling stockholders pursuant to the 1997 Stock Option Plan. All such proceeds will be available to us for working capital and general corporate purposes. We cannot predict the timing or the amount of any option exercises. EXPERTS Our consolidated financial statements as of December 31, 2001 and 2000 and for each of the three years ended December 31, 2001 appearing in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2001, which are incorporated by reference in this prospectus, have been audited by Grant Thornton LLP, whose report is incorporated by such reference in this prospectus and given upon their authority as experts in accounting and auditing. LEGAL OPINIONS Certain matters of Maryland law will be passed upon for us by Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland. In addition, the description of federal income tax consequences in "Federal Income Tax Consequences of Our Status as a REIT" is based upon an opinion of Ledgewood Law Firm, P.C. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information that we filed with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may request copies of these documents, upon payment of a copying fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for information on the operation of the Public Reference Room. Our SEC filings are also available to the public on the SEC internet site at http://www.sec.gov. The SEC allows us to "incorporate by reference" the information we file with it, which means that we can disclose important information to you by referring you to documents we have filed with the SEC which are not included in this prospectus. The information incorporated by reference is considered part of this prospectus, and later information that we file with the SEC will automatically update and replace this information. We incorporate by 30 reference the documents listed below and any future filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934: - - Annual Report on Form 10-K, as amended, for the year ended December 31, 2001. - - Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002. - - Current Reports on Form 8-K filed January 4, 2002, March 7, 2002, March 15, 2002, April 25, 2002 and May 2, 2002. - - The description of our common shares contained in Form 8-A/A dated January 2, 1998. - - You may request a copy of these filings, at no cost, by writing or telephoning us at the following address: RAIT Investment Trust ATTN: Ellen J. DiStefano Executive Vice President and Chief Financial Officer 1818 Marker Street, 28th Floor Philadelphia, Pennsylvania 19103 Telephone: (215) 861-7900 You should rely only on the information incorporated by reference or provided in this prospectus or any supplement to this prospectus. We have not authorized anyone else to provide you with different information. We are not making an offer of our securities in any state where the offer or solicitation is not authorized. You should not assume that the information in this prospectus or any supplement is accurate as of any date other than the date on the front of those documents. The statements that we make in this prospectus about the contents of any other documents are not necessarily complete, and are qualified in their entirety by referring you to the copy of that document, which is filed as an exhibit to the registration statement. You can obtain copies of these documents from the SEC or from us, as described above. FORWARD-LOOKING STATEMENTS This prospectus and any prospectus supplement accompanying this prospectus contain or incorporate by reference certain forward-looking statements. When used, statements which are not historical in nature, including those prefaced by the words "anticipate," "estimate," "should," "expect," "believe," "intend" and similar expressions, are intended to identify forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties, including, among other things: - business conditions and the general economy, especially as they affect interest rates; - defaults by borrowers in paying debt service on our loans, particularly our subordinated and discounted loans; - illiquidity of our portfolio of loans and property interests; - our inability to originate or acquire loans or property interests on favorable terms; and - our inability to maintain our REIT qualification. Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected are discussed in the "Risk Factors" section of the prospectus, as well as in reports filed by us from time to time with the SEC, including Forms 10-K, 10-Q and 8-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In 31 light of these risks, uncertainties, and assumptions, the forward-looking events discussed in or incorporated by reference into this prospectus and any prospectus supplement accompanying this prospectus might not occur. 32 No person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized representations or information. This prospectus is an offer to sell only the common shares offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. TABLE OF CONTENTS
Page ---- Our Company......................................... 2 Risk Factors........................................ 3 Certain Provisions of Maryland Law and of our Declaration of Trust and Bylaws................................. 11 Federal Income Tax Consequences of our Status as a REIT.......................... 14 Selling Shareholders................................ 28 Plan of Distribution................................ 30 Use of Proceeds..................................... 30 Experts............................................. 30 Legal Opinions...................................... 30 Where You Can Find More Information...................................... 30 Forward Looking Statements.......................... 30
1,600,000 Shares COMMON SHARES --------------------- RESALE PROSPECTUS --------------------- October 25, 2002 33 PART II INFORMATION REQUIRED IN THE REGISTRATION STATEMENT ITEM 3. INCORPORATION OF DOCUMENTS BY REFERENCE. The registrant hereby files this Registration Statement on Form S-8 for the purpose of registering an additional 800,000 of the registrant's common shares, par value $0.01 per share, issuable upon the exercise of options granted pursuant to the registrant's Amended and Restated RAIT Investment Trust 1997 Stock Option and Awards Plan. In accordance with General Instruction E to Form S-8, the registrant incorporates by reference the contents of the registrant's Registration Statement on Form S-8, Registration No. 333-67452, filed on August 14, 2001, including the information incorporated therein by reference. The following documents of the registrant filed with the Securities and Exchange Commission (the "SEC"), are also incorporated by reference in this Registration Statement: - Annual Report on Form 10-K, as amended, for the year ended December 31, 2001. - Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002. - Current Reports on Form 8-K filed January 4, 2002, March 7, 2002, March 15, 2002, April 25, 2002, May 2, 2002 and July 9, 2002 - The description of the registrant's common shares contained in Form 8-A/A dated January 2, 1998. All documents subsequently filed by the registrant pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934, prior to the filing of a post-effective amendment to this registration statement which indicates that all securities offered pursuant to this registration statement have been sold or which deregisters all securities then remaining unsold, shall be deemed to be incorporated by reference herein and to be part hereof from the date of filing of such documents. ITEM 4. DESCRIPTION OF SECURITIES. Not applicable. ITEM 5. INTERESTS OF NAMED EXPERTS AND COUNSEL. Not applicable. ITEM 6. INDEMNIFICATION OF TRUSTEES AND OFFICERS. Maryland law permits a Maryland REIT to include in its trust agreement a provision limiting the liability of its trustees and officers to the trust and its shareholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Declaration of Trust of RAIT Investment Trust ("RAIT") contains such a provision which eliminates such liability to the maximum extent permitted by Maryland law. The Declaration of Trust of RAIT authorizes RAIT, 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 RAIT and at the request of RAIT, serves or has served 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 34 former trustee or officer of RAIT. RAIT's Declaration of Trust permits RAIT, 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 RAIT, and at the request of RAIT, serves or has served as a director, officer, partner, trustee, employee or agent of 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 permits a Maryland 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 a Maryland REIT, 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 a Maryland REIT, and (2) a written statement by or on his behalf to repay the amount paid or reimbursed by a Maryland REIT if it shall ultimately be determined that the standard of conduct was not met. In addition, RAIT has entered into Indemnity Agreements with its executive officers and trustees. ITEM 7. EXEMPTION FROM REGISTRATION CLAIMED. Not applicable. ITEM 8. EXHIBITS. The Exhibits furnished as part of this registration statement on Form S-8 are identified in the Exhibit Index immediately following the signature pages of this registration statement. Such Exhibit Index is incorporated herein by reference. ITEM 9. UNDERTAKINGS. Undertakings required by Item 512(a)of Regulation S-K The undersigned registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) to include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; 35 (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Undertakings required by Item 512(b) of Regulation S-K The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to the initial bona fide offering thereof. Undertakings required by Item 512(h) of Regulation S-K Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted for trustees, officers and controlling persons of the registrant, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 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 an action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, 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 Act and will be governed by the final adjudication of such issue. 36 SIGNATURES THE REGISTRANT. 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-8 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 October 24, 2002. RAIT INVESTMENT TRUST By: Betsy Z. Cohen --------------------------------- Betsy Z. Cohen Chairman, Chief Executive Officer And Trustee(Chief Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Betsy Z. Cohen, Scott F. Schaeffer and Ellen J. DiStefano, or any of them, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or of his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 37 SIGNATURES 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 date indicated. /s/ Betsy Z. Cohen Date: October 24, 2002 - -------------------------------------- BETSY Z., COHEN, Chairman, Chief Executive Officer and Trustee /s/ Scott F. Schaeffer Date: October 24, 2002 - --------------------------------------- SCOTT F. SCHAEFFER, President and Chief Operating Officer s/ Ellen J. DiStefano Date: October 24, 2002 - --------------------------------------- ELLEN J. DISTEFANO, Executive Vice President and Chief Financial Officer /s/ Jonathan Z. Cohen Date: October 24, 2002 - --------------------------------------- JONATHAN Z. COHEN, Secretary and Trustee s/ S. Peter Albert Date: October 24, 2002 - --------------------------------------- S. PETER ALBERT, Trustee /s/ Edward Brown Date: October 24, 2002 - --------------------------------------- EDWARD BROWN, Trustee /s/ Arthur Makadon Date: October 24, 2002 - --------------------------------------- ARTHUR MAKADON, Trustee /s/ Joel R. Mesznik Date: October 24, 2002 - -------------------------------------- JOEL R. MESZNIK, Trustee /s/ Daniel Promislo Date: October 24, 2002 - -------------------------------------- DANIEL PROMISLO, Trustee
38 EXHIBIT INDEX The following exhibits are filed herewith:
Exhibit Document - ------- --------- 4.1 (1) Amended and Restated Declaration of Trust 4.2(2) Articles of Amendment to Amended and Restated Declaration of Trust 4.3(3) Articles of Amendment of Amended and Restated Declaration of Trust 4.4(4) Certificate of Correction to the Amended and Restated Declaration of Trust 4.5(1) Bylaws, as amended 4.6(1) Form of specimen certificate representing common shares 4.7 Amended and Restated RAIT Investment Trust 1997 Stock Option Plan (as amended through July 16, 2002) 5 Opinion of Ballard Spahr Andrews & Ingersoll, LLP as to the legality of Securities being registered (including consent) 8 Opinion of Ledgewood Law Firm, P.C., regarding tax matters (including consent). 23.1 Consent of Grant Thornton LLP 23.2 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in Exhibit 5) 23.3 Consent of Ledgewood Law Firm, P.C. (included in Exhibit 8) 24 Power of Attorney (included as part of signature pages to this registration statement)
(1) Incorporated herein by reference to RAIT Investment Trust's Registration Statement on Form S-11 (File No. 333-35077), as amended. (2) Incorporated herein by reference to RAIT Investment Trust's Registration Statement on Form S-11 (File No. 333-53067), as amended. (3) Incorporated herein by reference to RAIT Investment Trust's Registration Statement on Form S-2 (File No. 333-55518), as amended. (4) Incorporated herein by reference to RAIT Investment Trust's Form 10-Q for the Quarterly Period ended March 31, 2002 (File No. 1-14760). EX-4.7 3 w64578exv4w7.txt AMENDED AND RESTATED 1997 STOCK OPTION PLAN EXHIBIT 4.7 AMENDED AND RESTATED RAIT INVESTMENT TRUST 1997 STOCK OPTION PLAN (formerly the Resource Asset Investment Trust 1997 Stock Option Plan) AMENDED AND RESTATED AS OF JULY 16, 2002 ARTICLE I - GENERAL 1.01 Purpose. The purposes of this Stock Option Plan (the "Plan") are to: (1) closely associate the interests of the management and trustees of RAIT Investment Trust and its subsidiaries and affiliates (collectively referred to as the "Company") with the shareholders by reinforcing the relationship between compensation and shareholder gains; (2) provide senior management and trustees with an equity ownership in the Company commensurate with Company's performance, as reflected in increased shareholder value; (3) maintain competitive compensation levels; and (4) provide an incentive to senior management and trustees for continuous employment or service with the Company. 1.02 Definitions. In this Plan the following definitions shall apply: (a) "Affiliate" means any person or entity which directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with RAIT Investment Trust (b) "Code" means Internal Revenue Code of 1986, as amended. (c) "Committee" means the committee of disinterested trustees appointed by the Trustees of RAIT Investment Trust to administer the Plan. (d) "Common Shares" means authorized and unissued or treasury common shares of beneficial interest, par value $.01, of RAIT Investment Trust. (e) "Fair Market Value" as of the date of the initial public offering of the Common Shares shall be the offering price to the public in such offering; thereafter it means the closing price on such date or on the next business day, if such date is not a business day, of a Common Share reported by The Nasdaq Stock Market (or any stock exchange on which the Common Shares are listed), provided that, if Common Shares shall have been traded for more than 10 days immediately preceding such date or if deemed appropriate by the Committee for any other reason, the fair market value of Common Shares shall be as determined by the Committee in such other manner as it may deem appropriate. In no event shall the fair market value of any Common Share be less than its par value. (f) "Incentive Stock Option "means shares options described in Section 422 of the Code. (g) "Option" means Stock Option, Incentive Stock Option or Reload Option. (h) "Option Price" means the purchase price per Common Share deliverable upon the exercise of a Stock Option, Incentive Stock Option or Reload Option. (i) "Reload Option" means the nonqualified options awarded pursuant to Article IV. (j) "Stock Option" means the nonqualified options awarded pursuant to Article II. (k) "Subsidiary" means any corporation of which more than 50% of the shares entitled to vote generally in an election of trustees are owned directly or indirectly by RAIT Investment Trust or any subsidiary thereof. (l) "Ten Percent Shareholder" means a person who on the date the Option is granted owns ten percent (10%) or more of the total combined voting power of the Company and its subsidiaries, taking into account the attribution rules contained in Section 424(d) of the Code. 1.03 Administration. (a) The Plan shall be administered by the Committee. The Committee shall consist of at least two members of the Board of Trustees (the "Board") selected by the Board. No Committee member shall participate in any discussion or decision concerning any award to said member under the Plan or any other discretionary plan of the Company under which participants are entitled to acquire Common Shares or options or other rights with respect to Common Shares or other equity interests in the Company. (b) The Committee shall have the authority, in its sole discretion and from time to time to: (i) designate the persons or classes of persons eligible to participate in the Plan; (ii) grant awards provided in the Plan in such form and amount as the Committee shall determine; (iii) impose such limitations, restrictions and conditions upon any such award as the Committee shall deem appropriate; and (iv) interpret the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. (c) Decisions and determinations of the Committee on all matters relating to the Plan shall be in its sole discretion and shall be conclusive. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any award thereunder. 1.04 Eligibility for Participation. Participants in the Plan shall be selected by the Committee from the executive officers and other key employees of the Company who occupy responsible managerial or professional positions and who have the capability of making a substantial contribution to the success of the Company. In addition, trustees of the Company or other independent contractors performing services for the Company who have contributed to the success of the Company shall be eligible to participate in the Plan, but shall not be eligible for an award of Incentive Stock Options. In making this selection and in determining the form and amount of awards, the Committee shall consider any factors deemed relevant, including the individual's functions, responsibilities, value of services to the Company and past and potential contributions to the Company's profitability and sound growth. 1.05 Types of Awards under Plan. Awards under the Plan may be in the form of any one or more of the following: (i) Stock Options, as described in Article II; (ii) Incentive Stock Options, as described in Article III; and (iii) Reload Options, as described in Article IV. 1.06 Aggregate Limitation on Awards. (a) Shares which may be issued under the Plan shall be Common Shares. The maximum number of Common Shares which may be issued under the Plan shall be 1,600,000. 2 (b) For purposes of calculating the maximum number of Common Shares which may be issued under the Plan: (i) all the shares issued (including the shares, if any, withheld for tax withholding requirements) shall be counted when cash is used as full payment for shares issued upon exercise of a Stock Option, Incentive Stock Option or Reload Option; and (ii) only the net shares issued (including the shares, if any, withheld for tax withholding requirements) shall be counted when Common Shares are used as full or partial payment for shares issued upon exercise of a Stock Option, Incentive Stock Option or Reload Option. (c) Shares tendered by a participant as payment for shares issued upon exercise of a Stock Option, Incentive Stock Option or Reload Option shall be available for issuance under the Plan. Any Common Shares subject to a Stock Option, Incentive Stock Option or Reload Option which for any reason is terminated unexercised or expires shall again be available for issuance under the Plan. 1.07 Effective Date and Term of Plan. (a) The Plan shall become effective on the date approved by the holders of a majority of the Common Shares present in person or by proxy and entitled to vote at a meeting of shareholders of RAIT Investment Trust (b) No awards shall be made under the Plan after the tenth anniversary of the effective date of the Plan, provided, however, that the Plan and all awards made under the Plan prior to such date shall remain in effect until such awards have been satisfied or terminated in accordance with the Plan and the terms of such awards. ARTICLE II - NON-QUALIFIED STOCK OPTIONS 2.01 Award of Stock Options. The Committee may from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any participant in the Plan one or more Stock Options to purchase for cash or shares the number of Common Shares allotted by the Committee. The date a Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. 2.02 Stock Option Agreements. The grant of a Stock Option shall be evidenced by a written stock option agreement (a "Stock Option Agreement"), executed by the Company and the holder of a Stock Option (the "optionee"), stating the number of Common Shares subject to the Stock Option evidenced thereby, and in such form as the Committee may from time to time determine. 2.03 Stock Option Price. The option price per Common Share deliverable upon the exercise of a Stock Option shall be not less than 100% of the Fair Market Value of a Common Share on the date the Stock Option is granted. 2.04 Term and Exercise. Each Share shall be fully exercisable from and after the date(s) prescribed by the Committee in each Stock Option Agreement, and may be exercised during a period of ten years from the date of grant thereof (the "option term"). No Stock Option shall be exercisable after the expiration of its option term. 3 2.05 Manner of Payment. Each Stock Option Agreement shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any Common Shares subject thereto, the optionee shall pay to the Company, in full, the option price for such shares with cash or with previously owned Common Shares. 2.06 Issuance of Shares. As soon as practicable after receipt of payment, the Company shall deliver to the optionee a certificate or certificates for such Common Shares. The optionee shall become a shareholder of the Company with respect to Common Shares represented by share certificates so issued and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a shareholder. 2.07 Death of Optionee. (a) Upon the death of the optionee, any Stock Option exercisable on the date of death may be exercised by the optionee's estate, or by a person who acquires the right to exercise such Stock Option by bequest or inheritance or by reason of the death of the optionee, provided that such exercise occurs within both the remaining effective term of the Stock Option and one year after the optionee's death. (b) The provisions of this Section shall apply notwithstanding the fact that the optionee's employment may have terminated prior to death, but only to the extent of any rights exercisable on the date of death. 2.08 Retirement or Disability. Upon termination of the optionee's employment by reason of retirement or permanent disability (as each is determined by the Committee), the optionee may, within six months from the date of termination, exercise any Stock Options to the extent such options are exercisable during such six month period. 2.09 Termination for Other Reasons. Except as provided in Sections 2.07 and 2.08, or except as otherwise determined by the Committee, all Stock Options shall terminate upon the termination of the optionee's employment. ARTICLE III - INCENTIVE STOCK OPTIONS 3.01 Award of Incentive Stock Options. The Committee may, from time to time and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any participant in the Plan one or more Incentive Stock Options to purchase for cash or shares the number of Common Shares allotted by the Committee. The date an Incentive Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. 3.02 Incentive Stock Option Agreements. The grant of an Incentive Stock Option shall be evidenced by a written Incentive Stock Option Agreement (an "Incentive Stock Option Agreement"), executed by the Company and the holder of an Incentive Stock Option (the 4 "optionee"), stating the number of Common Shares subject to the Incentive Stock Option evidenced thereby, and in such form as the Committee may from time to time determine. 3.03 Incentive Stock Option Price. The option price per share of Common Shares deliverable upon the exercise of an Incentive Stock Option shall be not less than 100% of the Fair Market Value of a Common Share on the date the Incentive Stock Option is granted; provided that 110% shall be substituted for 100% in the preceding clause if the option is granted to a Ten Percent Shareholder. 3.04 Term and Exercise. Each Incentive Stock Option shall be fully exercisable from and after the date(s) prescribed by the Committee, and may be exercised during a period of ten years (five years in the case of a Ten Percent Shareholder) from the date of grant thereof (the "option term"). No Incentive Stock Option shall be exercisable after the expiration of its option term. 3.05 Maximum Amount of Incentive Stock Option Grant. The aggregate fair market value (determined on the date the option is granted) of Common Shares subject to an Incentive Stock Option which is first exercisable by an optionee in any calendar year shall not exceed $100,000. 3.06 Death of Optionee. (a) Upon the death of the optionee, any Incentive Stock Option exercisable on the date of death may be exercised by the optionee's estate or by a person who acquires the right to exercise such Incentive Stock Option by bequest or inheritance or by reason of the death of the optionee, provided that such exercise occurs within both the remaining option term of the Incentive Stock Option and one year after the optionee's death. (b) The provisions of this Section shall apply notwithstanding the fact that the optionee's employment may have terminated prior to death, but only to the extent of any Incentive Stock Options exercisable on the date of death. 3.07 Retirement or Disability. Upon the termination of the optionee's employment by reason of permanent disability or retirement (as each is determined by the Committee), the optionee may, within six months from the date of such termination of employment, exercise any Incentive Stock Options to the extent such Incentive Stock Options were exercisable at the date of such termination of employment. Notwithstanding the foregoing, the tax treatment available pursuant to Section 422 of the Code upon the exercise of an Incentive Stock Option will not be available to an optionee who exercises any Incentive Stock Options more than three months after the date of termination of employment. 3.08 Termination for Other Reasons. Except as provided in Sections 3.06 and 3.07 or except as otherwise determined by the Committee, all Incentive Stock Options shall terminate upon the termination of the optionee's employment. 3.09 Applicability of Stock Options Sections. Sections 2.05, Manner of Payment; 2.06, Issuance of Shares; and 2.10, Effect of Exercise, applicable to Stock Options, shall apply equally to Incentive Stock Options. Said Sections are incorporated by reference in this Article III as though fully set forth herein. 5 ARTICLE IV - RELOAD OPTIONS 4.01 Authorization of Reload Options. Concurrently with the award of Stock Options and/or the award of Incentive Stock Options to any participant in the Plan, the Committee may authorize Reload Options to purchase for cash or shares a number of Common Shares. The number of Reload Options shall equal (i) the number of Common Shares used to exercise the underlying Stock Options or Incentive Stock Options, and (ii) to the extent authorized by the Committee, the number of Common Shares used to satisfy any tax withholding requirement incident to the exercise of the underlying Stock Options or Incentive Stock Options. The grant of a Reload Option will become effective upon the exercise of underlying Stock Options or Incentive Stock Options through the use of Common Shares held by the optionee for at least 12 months. Notwithstanding the fact that the underlying option may be an Incentive Stock Option, a Reload Option is not intended to qualify as an Incentive Stock Option. 4.02 Reload Option Amendment. Reload Options shall be available only where the Stock Option Agreement or Incentive Stock Option Agreement specifically states that the Committee has authorized Reload Options with respect to the underlying Stock Options and/or Incentive Stock Options. Upon the exercise of an underlying Stock Option, Incentive Stock Option or other Reload Option, the Reload Option will be evidenced by an amendment to the underlying Stock Option Agreement or Incentive Stock Agreement. 4.03 Reload Option Price. The option price per Common Share deliverable upon the exercise of a Reload Option shall be the Fair Market Value of a Common Share on the date the grant of the Reload Option becomes effective. 4.04 Term and Exercise. Each Reload Option is fully exercisable six months from the effective date of grant. The term of each Reload Option shall be equal to the remaining option term of the underlying Stock Option and/or Incentive Stock Option. 4.05 Termination of Employment. No additional Reload Options shall be granted to optionees when Stock Options, Incentive Stock Options and/or Reload Options are exercised pursuant to the terms of this Plan following termination of the optionee's employment. 4.06 Applicability of Stock Options Sections. Sections 2.05, Manner of Payment; 2.06, Issuance of Shares; 2.07, Death of Optionee; 2.08, Retirement or Disability; 2.09, Termination for Other Reasons; and 2.10, Effect of Exercise, applicable to Stock Options, shall apply equally to Reload Options. Said Sections are incorporated by reference in this Article IV as though fully set forth herein. ARTICLE V - ALTERNATE APPRECIATION RIGHTS 5.01 Award of Alternate Rights. Concurrently with or subsequent to the award of any Stock Options, Incentive Stock Option or Reload Option to purchase one or more Common Shares, the Committee may, subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, award to the optionee with respect to each Common Share, a 6 related alternate appreciation right ("Alternate Right"), permitting the optionee to be paid the appreciation on the option, in cash or in Common Shares, in lieu of exercising the option. 5.02 Alternate Rights Agreement. Alternate Rights shall be evidenced by written agreements in such form as the Committee may from time to time determine. ARTICLE VI - MISCELLANEOUS 6.01 General Restriction. Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the Common Shares subject or related thereto upon any securities exchange or under any state or Federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the grantee of an award with respect to the disposition of Common Shares, is necessary or desirable as a condition of, or in connection with, the granting of such award or the issue of purchase of Common Shares thereunder, such award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 6.02 Non-Assignability. No award under the Plan shall be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution. During the life of the recipient, such award shall be exercisable only by such person or by such person's guardian or legal representative. 6.03 Withholding Taxes. Whenever the Company proposes or is required to issue or transfer Common Shares under the Plan, the Company shall have the right to require the grantee to remit to the Company an amount sufficient to satisfy any Federal, state and/or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Alternatively, the Company may issue or transfer such Common Shares net of the number of shares sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the Common Shares shall be valued on the date the withholding obligation is incurred. 6.04 Employment. (a) Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in the employment of the Company or effect any right which the Company may have to terminate the employment of such participant. (b) The terms "employ" or "employment" shall, where the context requires, be deemed to include the hiring, continuation or termination of the services of any independent contractor participating in the Plan. 6.05 Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 7 6.06 Rights as a Shareholder. The recipient of any award under the Plan shall have no rights as a shareholder with respect thereto unless and until certificates for Common Shares are issued to him. 6.07 Leaves of Absence. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and (ii) the impact, if any, of any such leave of absence on awards under the Plan theretofore made to any recipient who takes such leave of absence. 6.08 Newly Eligible Persons. The Committee shall be entitled to make such rules, regulations, determinations and awards as it deems appropriate in respect of any person who becomes eligible to participate in the Plan or any portion thereof after the commencement of an award or incentive period. 6.09 Adjustments. In the event of any change in the outstanding Common Shares by reason of a share dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Committee may appropriately adjust the number of Common Shares which may be issued under the Plan, the number of Common Shares subject to Options theretofore granted under the Plan, the option price of Options theretofore granted under the Plan, and any and all other matters deemed appropriate by the Committee. 6.10 Amendment of the Plan. (a) The Committee may, without further action by the shareholders and without receiving further consideration from the participants, amend this Plan or condition or modify awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with the rules or requirements of any stock exchange or automated quotation system (including the Nasdaq Stock Market) on which the Common Shares are listed or quoted. (b) The Committee may at any time and from time to time terminate or modify or amend the Plan in any respect, except that without shareholder approval the Committee may not (i) increase the maximum number of Common Shares which may be issued under the Plan (other than increases pursuant to Section 6.10), (ii) extend the maximum period during which any award may be granted or exercised, or (iii) extend the term of the Plan. The termination or any modification or amendment of the Plan, except as provided in subsection (a), shall not without the consent of a participant, affect his or her rights under an award previously granted to him or her. 6.11 Deferrals The Committee may permit or require that an individual granted a Stock Option described in Article II of the Plan to defer delivery of Common Shares that would otherwise be due to such individual in connection with such Stock Option. If any such deferral election is permitted or required, the Committee shall, in its sole discretion, establish rules and procedures for such deferrals. 8 EX-5 4 w64578exv5.txt OPINION OF BALLARD SPAHR ANDREWS & INGERSOLL LLP EXHIBIT 5 [LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL, LLP] October 25, 2002 RAIT Investment Trust 1818 Market Street, 28th Floor Philadelphia, Pennsylvania 19103 Re: RAIT Investment Trust, a Maryland real estate investment trust (the "Company") - Registration Statement on Form S-8 pertaining to Eight Hundred Thousand (800,000) common shares of beneficial interest of the Company, par value one cent ($.01) per share (the "Shares"), to be issued pursuant to the Company's Amended and Restated RAIT Investment Trust 1997 Stock Option Plan, as amended (the "Plan") Ladies and Gentlemen: We have acted as special Maryland counsel to the Company in connection with the registration of the Shares under the Securities Act of 1933, as amended (the "Act"), on Form S-8, filed or to be filed with the Securities and Exchange Commission (the "Commission") on or about October 25, 2002, and any amendments thereto, if any are to be filed with the Commission subsequent to the date hereof. You have requested our opinion with respect to the matters set forth below. In our capacity as special Maryland counsel to the Company and for the purposes of this opinion, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (collectively, the "Documents"): (i) the declaration of trust of the Company (the "Declaration of Trust") represented by Articles of Amendment and Restatement filed with the State Department of Assessments and Taxation of Maryland (the "Department") on November 19, 1997, Articles of Amendment filed with the Department on January 7, 1998 and September 29, 2000 and a Certificate of Correction filed with the Department on May 10, 2002; BALLARD SPAHR ANDREWS & INGERSOLL, LLP RAIT Investment Trust October 25, 2002 Page 2 (ii) the Bylaws of the Company, adopted as of August 14, 1997 (the "Bylaws"); (iii) the Organizational Action by Consent in Writing of the Sole Trustee of the Company, dated as of August 14, 1997 (the "Organizational Minutes"); (iv) resolutions adopted by the Board of Trustees of the Company on December 5, 1997, December 10, 1998, June 7, 2001, June 6, 2002 and October 24, 2002 (collectively with the Organizational Minutes, the "Trustees' Resolutions"); (v) resolutions adopted by the Sole Shareholder of the Company, dated as of December 5, 1997 (the "Shareholder's Resolutions"); (vi) the Registration Statement on Form S-8 and the related form of prospectus included therein, in substantially the form filed or to be filed with the Commission pursuant to the Act (the "Registration Statement"); (vii) the Plan; (viii) a certificate of officer of the Company, dated as of a recent date, which certifies, among other things, that the Declaration of Trust, the Bylaws, the Trustees' Resolutions and the Shareholder's Resolutions are true, correct and complete, have not been rescinded or modified and are in full force and effect; (ix) a certificate of the Department as to the good standing of the Company, dated as of a recent date; and (x) such other laws, records, documents, certificates, opinions and instruments as we have deemed necessary to render this opinion, subject to the limitations, assumptions and qualifications noted below. In reaching the opinion set forth below, we have assumed the following: (a) each person executing any of the Documents on behalf of a party (other than the Company) is duly authorized to do so; (b) each natural person executing any of the Documents is legally competent to do so; BALLARD SPAHR ANDREWS & INGERSOLL, LLP RAIT Investment Trust October 25, 2002 Page 3 (c) any of the Documents submitted to us as originals are authentic; the form and content of any Documents submitted to us as unexecuted drafts do not differ in any respect relevant to this opinion from the form and content of such documents as executed and delivered; any of the Documents submitted to us as certified or photostatic copies conform to the original documents; all signatures on all of the Documents are genuine; all public records reviewed or relied upon by us or on our behalf are true and complete; all statements and information contained in the Documents are true and complete; there has been no modification of, or amendment to, any of the Documents, and there has been no waiver of any provision of any of the Documents by action or omission of the parties or otherwise; (d) upon issuance of the Shares, the total number of common shares of beneficial interest of the Company issued and outstanding will not exceed the total number of common shares of beneficial interest that the Company is authorized to issue under the Declaration of Trust; (e) none of the Shares will be issued or transferred in violation of any restriction or limitation on ownership or transfer contained in the Declaration of Trust; and (f) none of the Shares will be issued and sold to an Interested Stockholder of the Company or an Affiliate thereof, all as defined in Subtitle 6 of Title 3 of the Maryland General Corporation Law (the "MGCL"), in violation of Section 3-602 of the MGCL. Based on the foregoing, and subject to the assumptions and qualifications set forth herein, it is our opinion that, as of the date of this letter: (1) The Company is a real estate investment trust duly formed and existing under and by virtue of the laws of the State of Maryland and is in good standing with the Department. (2) The Shares are available for issuance in connection with the Plan and when the Shares are issued as stock awards or upon the exercise of options duly authorized by the Board of Trustees, or a properly appointed committee thereof to which the Board of Trustees has delegated the requisite power and authority, in exchange for the consideration therefor, all in accordance with, and subject to, the terms and conditions of the Plan and the stock awards or options relating to such Shares, such Shares will be duly authorized, validly issued, fully paid and non-assessable. BALLARD SPAHR ANDREWS & INGERSOLL, LLP RAIT Investment Trust October 25, 2002 Page 4 The foregoing opinion is limited to the substantive laws of the State of Maryland, and we do not express any opinion herein concerning any other law. We express no opinion as to the applicability or effect of any federal or state securities laws, including the securities laws of the State of Maryland, or as to federal or state laws regarding fraudulent transfers. To the extent that any matter as to which our opinion is expressed herein would be governed by the law of any jurisdiction other than the State of Maryland, we do not express any opinion on such matter. This opinion letter is issued as of the date hereof and is necessarily limited to laws now in effect and facts and circumstances presently existing and brought to our attention. We assume no obligation to supplement this opinion letter if any applicable laws change after the date hereof, or if we become aware of any facts or circumstances that now exist or that occur or arise in the future and may change the opinions expressed herein after the date hereof. We consent to your filing this opinion as an exhibit to the Registration Statement and further consent to the filing of this opinion as an exhibit to the applications to securities commissioners for the various states of the United States for registration of the Shares. We also consent to the identification of our firm as Maryland counsel to the Company in the section of the Registration Statement entitled "Legal Matters." In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the Act. Very truly yours, /s/ BALLARD SPAHR ANDREWS & INGERSOLL, LLP EX-8 5 w64578exv8.txt OPINION OF LEDGEWOOD REGARDING TAX MATTERS Exhibit 8 [LETTERHEAD OF LEDGEWOOD LAW FIRM, P.C.] October 25, 2002 RAIT Investment Trust 1818 Market Street - 28th Floor Philadelphia, PA 19103 Ladies and Gentlemen: We have acted as counsel to RAIT Investment Trust, a Maryland real estate investment trust (the "Company"), in connection with the preparation of a Form S-8 registration statement (the "Registration Statement"), filed with the Securities and Exchange Commission, with respect to the offering and sale (the "Offering") of up to 800,000 additional common shares of beneficial interest, par value $0.01 per share, of the Company (the "Common Shares") pursuant to the Company's Amended and Restated RAIT Investment Trust 1997 Stock Option Plan. You have requested our opinion regarding certain U.S. federal income tax matters in connection with the Offering. In giving this opinion letter, we have examined the following: 1. the Registration Statement, as the same has been amended through the date hereof; 2. the Amended and Restated Declaration of Trust, ("Declaration of Trust") and bylaws ("Bylaws") of the Company, as amended through the date hereof; and 3. such other documents as we have deemed necessary or appropriate for purposes of this opinion. In connection with the opinions rendered below, we have assumed that each of the documents referred to above has been duly authorized, executed, and delivered; is authentic, if an original, or is accurate, if a copy, and has not been amended. Based on the documents and assumptions set forth above, and the discussion in the Registration Statement under the caption "Tax Consequences" (which is incorporated herein by reference), we are of the opinion that the descriptions of the law and the legal conclusions contained in the Registration Statement under the caption "Tax Consequences" are correct in all material respects, and the discussion thereunder fairly RAIT Investment Trust October 25, 2002 Page 2 summarizes the federal income tax considerations that are likely to be material to a purchaser of Common Shares in the Offering. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. We also consent to the reference to Ledgewood Law Firm, P.C. under the caption "Legal Opinions" in the Registration Statement. In giving this consent, we do not admit that we are in the category of persons whose consent is required by Section 7 of the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder by the Securities and Exchange Commission. The foregoing opinions are limited to the U.S. federal income tax matters addressed herein, and no other opinions are rendered with respect to other federal tax matters or to any issues arising under the tax laws of any other country, or any state or locality. We undertake no obligation to update the opinions expressed herein after the date of this letter. Very truly yours, /s/ Ledgewood Law Firm, P.C. EX-23.1 6 w64578exv23w1.txt CONSENT OF GRANT THORTON LLP EXHIBIT 23.1 Consent of Independent Certified Public Accountants We have issued our report dated January 23, 2002 (except for note 16(a) as to which the date is March 13, 2002 and note 16(b) as to which the date is March 18, 2002) accompanying the consolidated financial statements of RAIT Investment Trust and subsidiaries appearing in the 2001 Annual Report of the Company to its shareholders and included in Form 10-K/A for the year ended December 31, 2001 which is incorporated by reference in this Registration Statement and Prospectus. We consent to the incorporation by reference in the Registration Statement and Prospectus of the aforementioned report and to the use of our name as it appears under the caption "Experts." /s/ GRANT THORNTON LLP Philadelphia, Pennsylvania October 25, 2002 -----END PRIVACY-ENHANCED MESSAGE-----